Finance passes tech for investment in office space, many remodel to fit modern work needs
Employees in the tech industry have long resisted returning to the office. So much so that they have led petitions, altered Silicon Valley’s landscape, and even agreed to pay cuts if it meant working from home. The latest push is from Amazon tech workers who are calling on CEO Andy Jassy to immediately cancel the return to office plan that would require corporate staffers to be in the office at least three days a week beginning in May.
Commercial real estate services company CBRE released data this February that found, for the first time since 2013, tech no longer leads in overall office-leasing activity when it comes to the highest share of the top 100 U.S. office leases. It could be an indicator that tech workers were somewhat successful last year in avoiding a return to office to some extent.
In its place, another industry rose to the top in 2022: finance and insurance. Companies in this sector claimed 25 of the largest 100 office leases of 2022 by square footage, up from 12 in 2021. Tech companies accounted for 17 of the largest 100 leases, a decline of more than half from the 36 that tech notched in 2021.
“The financial services industry was the first to put a stake in the ground to get people back to the office,” said Byron Carlock, national partner, real estate practice leader at PwC. “They’ve been much more forward pushing to have their associates back in the office. You’re really just now hearing a lot of the tech companies suggest that their folks consider more aggressively pursuing a return to office strategy.”
CBRE surveys also found that finance and insurance has generally recorded higher office attendance rates than tech. The results show that the office remains a cornerstone of hybrid work.
“Firms that are confident of their business model and understand how to balance in-person and remote work knew that 2022 presented a market opportunity for aggressive transactions in office space,” said Mary Ann Tighe, CEO, CBRE New York Tri-State in a press release. “In the midst of uncertainty, those firms saw opportunity and seized it.”
Julie Whelan, CBRE’s global head of occupier research, said she was unsurprised by these findings. “When you think about tech, they were on a run up leading up to the pandemic, they were growing in some of the hottest markets,” said Whelan. “They were using their real estate to engage the workforce. The bigger, the better, the cooler, the more they thought they’d have the leg up on competition to get the employee they wanted. They were taking any real estate they wanted, even if it was for future growth.”
That means they were sitting on a lot of empty real estate before the pandemic. At the same time, financial service organizations were doing the exact opposite.
“In recent memory, they had just lived through the financial crisis and were in efficiency mode where they were looking at every lease coming up critically, and [thinking along the lines of] ‘I’m going to plan for what I need and nothing more or less,’” said Whelan. “They were in a very efficient place headed into the pandemic.”
The two industries are moving in different directions at different times, she stressed.
Office lease renewals must come with renovations
When we look at the breakdown of top 100 office leases by industry, finance and insurance have risen to the top largely because of their increased number of office renewals, compared to tech, which had fewer. Carlock says companies are asking how much can be redeveloped to be relevant, how much is available for repurposing to new, higher standards, and what should be demolished.
“This development cycle is all about reimagining our built environment as to what we want the future state of the urban environment to be,” said Carlock.
Unlike the tech industry, finance hasn’t in many cases yet made the decision to make big employee cuts. That might well be why they’re holding onto a lot of office space they already have, stressed Darin Buelow, principal in Deloitte’s commercial real estate. KPMG became the first of the big four accounting firms to make cuts, which happened last week – but that’s yet to match the flurry of mass layoffs that have swept the tech industry throughout 2022 and into 2023.
“I think that’s another aspect here,” said Buelow. “The tech industry is potentially trying to right size the footprint a little differently than your typical finance and insurance company.”
Thomas Neltner, head of enterprise workplace services at Fifth Third Bank, an American bank holding company, said that of its office renewals in the last six years, every single one was updated to fit the future of work. The company’s headquarters in Cincinnati had a full refresh and was revealed in Spring 2021.
“What landlords are doing is throwing a lot more tenant improvement allowances to us,” said Neltner. “They want to keep their rates high and give you more tenant improvement allowances to remodel and have a new work environment. If you’re not providing a great, amenity-rich building, you’re not getting people to buy into it.”
Valerie Garrett, director of workplace design at Fifth Third Bank, said that if a lease renewal is happening without a renovation and it’s been years since a renovation has happened, those spaces aren’t supporting collaborative culture. “It’s not putting lipstick on a pig either,” said Garrett.
The upgrade could range from a full remodel to a lighter refresh. Either way, the goal is to support the various modes of work that employees shift in and out of all day long.
“It’s always how do we support the way human beings intersect with place and create a place to help us thrive as an organization and individuals,” said Garrett.