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National  + Office  | 
Gio Cordoves is regional president, West at KBS

Navigating the Office Leasing Waters in a Challenging Environment

From remote work to interest rates, office real estate is facing some challenges. We spoke with Giovanni “Gio” Cordoves, regional president, Western region for KBS about how office owners are meeting these obstacles and the outlook for the sector moving forward.

1. How will the Fed’s decision to again raise interest rates by 75 bps impact office leasing?

Depending on property type, class and geographic location, commercial real estate can be ideal as a viable hedge against inflation, and a strong alternative investment option in a variety of economic environments. Commercial real estate has historically fared well in both rising interest rate and inflationary economies—particularly as compared to other forms of investment. Although rising interest rates are causing some office investors to pause, companies are finding great value in leasing office space as it continues to be one of the biggest sources of team culture and camaraderie. In fact, employees in a recent poll said socialization was the number one driver for returning to the office after many months of working remotely. We anticipate this dynamic to continue to drive office leasing decisions in the current environment.

2. Which industries benefit the most from the latest return-to-office movement?

Many industries rely on personal interaction, and many have regulatory reasons for office space, including law, financial services, and real estate. These are the sectors that have been leading the return-to-office movement for the past year. As companies have discovered some of the inefficiencies of working remotely, they are increasingly calling their workforce back to the office and providing their teams with incentives to do so, including flexible work schedules, attractive compensation packages, and amenities they can’t access when working from home.

3. Will younger generations (Millennials and Gen Z) affect office occupancy rates?

As office landlords provide more options that appeal to younger workers, occupancy will continue to rise. For example, Millennials and Gen Z each desire flexibility and choice in where they work, and they both like working collaboratively. Today’s office design offers a variety of work areas on site, including nooks for heads-down work and flexible conference spaces for meetings and collaboration. Strong and fast internet connectivity is also essential, which is one reason why KBS has worked to achieve WiredScore certifications at many of our office properties.

In addition, as health and well-being become established parts of office planning and not just trends, many landlords are offering automated and touchless building systems, plenty of natural lighting, and state-of-the-art HVAC systems. As part of this goal, our company recently announced that we have successfully completed the verification of more than 14 million square feet of Class A office space in our real estate portfolios, achieving the UL Verified Healthy Building Mark for Indoor Air.

4. How is office leasing in East Coast markets faring compared to the West Coast?

The office market is facing many of the same challenges all over the country, including both coasts. In what some are considering the national barometer, office leasing volume in Manhattan posted its highest quarter of the pandemic in the face of a slow return to office. What we are seeing nationwide is a continued flight to quality as companies seek to encourage their teams back to the office and an increasing realization that office space remains essential for optimal collaboration, creativity, mentoring, culture-building, among many other factors that contribute to successful businesses.

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