Worcester Telegram & Gazette
WORCESTER — As the pandemic enters its second year, downtown businesses are contemplating a return policy. Should they let employees continue to work remotely or slowly bring them back to the office?
Jim Umphrey, president of Kelleher & Sadowsky, estimates downtown Worcester currently sits at 15% vacancy for office space. Traditionally the vacancy percentage is around 8%, he said, but the vacant Unum space nearly doubled the amount of vacancy in the market.
Peter Kovago, president of the real estate firm Glickman Kovago and Jacobs, said he noticed a softening in the market during the past few months, with an uptick in vacancy and sublease opportunities.
Kovago said the existing office spaces are being underused because of a large portion of the business population working from home. He said the positive activity he sees in the market has come from smaller companies looking for space, while larger businesses are in a “holding pattern” right now.
Umphrey said the effects of corporate downsizing will not be seen immediately as lease terms last an average of 4½ years. He said despite employees not working in the office at the same capacity as before the pandemic, the rents of the buildings will continue to be paid, which will not damage property owners.
“The long-term question is if you looked out an average 4.5 years per term, when leases are starting to expire and get re-leased,” he said, “what is the impact on how much space they will need moving forward? That’s a question no one knows.”
Core Downtown Area
Alex Guardiola, director of government affairs and public policy at the Worcester Regional Chamber of Commerce, said he has seen most of the office vacancies in the core downtown area, where most traditional office spaces are located. He said he heard through various avenues that many companies are letting employees work remotely after seeing the benefits of working from home.
He said some downtown businesses have a staggered system, allowing 30% of employees to work in the office at a time. Guardiola said for businesses that are currently remote, such as law firms or insurance companies using a hybrid system, employees have been more productive.
Kovago said it is hard to predict what the business sector will look like in a year.
“Typically when you see slowdowns in the economy it’s economically driven. This wasn’t purely economics; we had COVID, and the government stepped in and forced businesses to slow down, so this is a first of its kind for us,” he said. “It’s really hard to predict where things will go. I think what we will see is, at least in the office sectors, when we get out of the COVID situation, businesses will still allow certain parts of their business sector employees to work from home.”
Guardiola said Tennessee-based disability insurance specialist Unum’s decision to mostly vacate its downtown Worcester CitySquare building allows its staff to be fully remote, and has seen improvements in productivity. He said Unum will be keeping that model for the foreseeable future.
Umphrey said Unum began subleasing space in the seven-floor 1 Mercantile St. building several years ago. Sullivan Insurance, United Bank and Northpoint Investments moved into the Unum building.
Currently, Umphrey estimated between 120,000 and 140,000 square feet of vacant space in the 3-year-old office building.
According to both Umphrey and Guardiola, Unum will keep a couple of floors for shared spaces and conference rooms, but plans to lease out its remaining floors.
“That’s a Class A building in the core of downtown, so it should be a lucrative office space for folks to lease,” Guardiola said.
Motivated To Find Tenants
Umphrey said Unum has about 10 years remaining on its lease agreement, motivating Unum to find tenants to sublease the space.
Umphrey said big companies across the country have already been looking for models of remote work to adapt. He used Reliant Medical Group as an example. Reliant has had office space downtown for 20 years in the Mercantile Center on Front Street, with about 70,000 square feet of space, Umphrey estimated.
He said before the pandemic the group’s lease was ending, so they decided to reassess how many employees could either fully work from home or work in a hybrid model, and designed a more accommodating space. Umphrey said Reliant gave up about 15,000 square feet of space in their offices, downsizing to 55,000 square feet.
“Even though clearly this pandemic is going to leave a mark on society in a big way, things will be far more normalized five years from now than they will be one year from now,” he said. “If every lease was rolling in a year, then I would say you would predictably see corporate downsizing. But if you look at the fact that each lease is rolling in 4.5 years, then it’s more difficult to predict what the impact will be.”
Umphrey said short-term corporate downsizing is unpredictable, but added he thinks there will be a percentage of people who will continue to work remotely.
Guardiola had similar sentiments.
“I think post-pandemic, you’re going to see some folks keep that remote model, but Worcester is still a hot city, and a lot of folks still want to move and do business here,” he said. “So I think there’s going to be still a lot of interest in doing business in Worcester.”
Reduction In Space?
Guardiola said he doubts offices will use the same amount of space post-pandemic. He said he believes Worcester will see smaller companies start looking at co-ops and shared spaces that can be rented out as conference rooms, similar to buildings in Waltham and Cambridge, he said.
Peter Staiti, first vice president and commercial lending center manager at Rockland Trust, said he feels positive about a bounce-back for commercial space in Worcester. He said the office leasing rate downtown is in about 85%, but estimated foot traffic to be about 40% compared to pre-pandemic foot traffic in the area.
Staiti said Worcester has an attractive market for office space because of its leasing costs, which tend to be less expensive than Boston.
Staiti said there are existing positive trends even during the pandemic. Manufacturing companies, one of the biggest generators in the Central Massachusetts economy, are thriving.
Staiti said the manufacturing business is “doing better than you could hope under the circumstances,” and said Worcester also has a thriving biotech industry and health care and education base.
“Overall I think you have a young population here, which certainly bodes well for the city,” Staiti said. “It’s affordable. So as you compare Worcester to more of a capital city like Boston, the market is so materially different with not only the population density, but the rental rates make it a tougher climb for a city like Boston whereas for Worcester its affordability bodes well.”
Guardiola also said some buildings are now converting from office space to residential space. He gave the example of 303 Main St., a former office building that is now rented out as affordable housing. Guardiola said 340 Main St. will also convert to a residential space.
Housing at 303 Main St. is now at 100% capacity, according to Guardiola.
In 2019 the Worcester Regional Chamber of Commerce conducted a yearlong housing study illustrating the need for housing in Worcester — both affordable and luxury — as more Boston residents migrate west.
Guardiola said the study, “Worcester for Everyone,” shed light on a necessary topic of conversation in the city.
“We need available space for people who live and work here,” he said. “I think that study really hit home for a lot of the building owners in the area who are starting to see that conversion from traditional office space to housing is probably more a lucrative endeavor for them at this time.”
Umphrey, Staiti and Guardiola each said Worcester’s business community will return to normal in time.
Hybrid And Remote Models
Guardiola said there will always be a need for in-person office work, and said some companies will devise a mix of hybrid and remote models.
“I think that (the pandemic) was kind of a crash course on if people can work remotely,” Guardiola said. “I think that it showcased that working remotely is effective for certain industries and certain employees, but I think there’s still going to be a need for some office space, especially for that entry level to mid-management world where learning hands-on is the best way to learn your industry and your positions.”
Staiti said the accountants, attorneys and bankers in Worcester he speaks with feel they lack the face-to-face meetings that create personalized connections.
“The reality for office business is you rely on your relationships to drive business. Now we’re at a loss in that you don’t get the opportunity to run into somebody in the elevator like you used to, and a lot of businesses actually develop that way from continuing to be in front of people,” he said. “So I think there is certainly going to be a lot of pent-up demand to get back to the office and that sense of normalcy.”
Staiti said it is hard to predict what office space occupancy will look like downtown in a year, but he said this lapse in in-person work is only temporary.
“Eventually we will come out the other side of it. Worcester is a very resilient market with some good corporate citizens in the city,” he said. “So I do expect this to be a temporary adjustment.”