October 10, 2022 2:59 pm

The question we are asked most these days is, “when will office space return to normal?”. To answer this question, we must try to define the word “normal” in relation to office space.

The office space model in New Jersey and across much of the United States is based upon long term decision making. Here in New Jersey, it is “normal” for a lease term to be five years. Why five years? Five years traditionally has allowed the developer sufficient time to amortize the cost of providing a new customized building installation to the tenant. In a normal lease negotiation for a formerly occupied space, the Landlord will design and construct the office to meet the program requirements of the tenant. A space program defines the number and dimensions of private offices, conference rooms, kitchens, storage, reception etc. The Landlord may do the design and construction in house, hire a general contractor or provide an allowance for the tenant to complete the work.

For the last few decades, the cost to retrofit an office was in the range of $15 to $25 per square foot UNDER a finished ceiling. If the cost of $25 per square foot is amortized over a five-year term of lease, the cost of doing this work is around $5 per square foot per year, plus interest.

So, what has changed? Well, if you have been living under a rock for the last few years, you should note the new trends of work from home and hybrid work schedules have drastically shifted many companies long term space needs. Some companies have gone completely virtual while others are on a hybrid model and still others are full time. Some companies are consolidating offices and others are even growing. There is a whole lot of change going on behind the scenes.

Another notable change is the costs to retrofit the office in 2022 have increased dramatically, mostly due to increasing materials costs, product scarcity and now shipping delays. We are now seeing today’s costs in the range of $35 per square foot to $50 per square foot for a turnkey project and construction schedules have increased from 90 days to six months or more. All these changes mean that in order for Landlords to amortize these much higher construction costs, the typical lease term has now extended to seven years or more.

So, how are companies dealing with the new normal? As we have been pointing out, the great return to the office following the pandemic is a work in progress. Some CEO’s have been able to quickly adjust to the new normal, while others are having a much harder time of it. They are just now beginning to coax their employees to return to the office. Some CEO’s are taking a much harder line and ordering all employees to return or face dismissal. Where is all this going? Stay tuned!

Lawrence Dickstein

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