Workers over workspace: How Modesto can thrive in new office, post-pandemic landscape

Originally Published at The Modesto Bee

Since the coronavirus pandemic upended nearly every facet of people’s lives in March, millions of Americans have started to work from home, many for the first time. What began as a precaution quickly turned into months of teleworking, leaving whole office parks sitting vacant not only in Modesto, but across the country.

And there’s no end in sight. Major tech companies have announced work-from-home policies that will extend into the middle of next year, and some, like Google, havegone further to implement companywide directives that will be more flexible and permanently offer a “hybrid” working model with a blend of remote and in-office time.

If COVID-19 has revealed one thing about the nature of much of the country’s office work, it’s that an actual office is no longer necessary for many people to complete their jobs. In fact, some companies are reporting their employees’ work-from-home productivity levels are the same, if not higher, than before the pandemic.

So the Herrmanns moved out of half of their space, and now, only two of their 14 employees work out of their office on a regular basis. Even when the pandemic ends, Herrmann said, their companies will most likely operate using a hybrid model, allowing employees to rotate the days they spend in the office each week.

Productivity hasn’t declined during the months spent working at home. Quite the opposite, Herrmann said, as employees find more opportunities to complete other tasks throughout their day without losing focus — whether that’s walking the dog between meetings or doing a load of laundry.

“We could not be happier with the way all of our employees, individually and (collectively), have responded to the challenge,” he said. “This is a tremendously creative business. It requires interaction between the departments, and everybody has stepped up to the plate and performed at a very very high level.”

In addition to reducing the need for square footage, these long-term effects on work culture and innovations in teleworking offer an opportunity for communities like Modesto to find new ways to attract businesses and workers to an area where traditional efforts may not be as effective. 

If Modesto leans into its strengths in terms of industry, workforce potential and affordability, local experts say the city and region can make the most of this changing economy and thrive in a post-pandemic world.

CHANGE ON THE HORIZON

The Herrmanns won’t be the only local employers to downsize during the pandemic, said Jordan Amarant, a commercial real estate broker at PMZ. Though Modesto’s commercial office space market has kept steady despite the economic downturn of the past several months, he said he expects that to change in 2021.

Modesto has most likely not yet felt the full effects of the pandemic, partially due to eviction bans in California that have made it impossible for tenants to be displaced. Gov. Gavin Newsom in September extended the commercial eviction moratorium to March 2021, further stabilizing the vacancy rates across the state.

As the long-term effects of the pandemic-induced recession become clearer, Amarant said he expects vacancy rates to rise as business owners change the way they operate and begin to downsize their offices. Data from CoStar, a national real estate database, also foresees an increase in vacancy rates from the current rate of 4.7%. By 2024, vacancy rates in Modesto could rise up to 5.3%.

“Companies are adapting and realizing that, whereas one time they needed 10,000 feet, now, they only need half of that size because they’re realizing their employees are just as productive from home,” he said.

The current vacancy rate in Modesto marks only a slight increase from 2019’s rate of 4.1%, but it’s still significantly lower than the vacancy rates during and after the 2008 financial crisis. That year, the city’s vacancy rate hit 12.5%, and after two years of recovery, it spiked at 12.7% in 2011. Modesto’s vacancy rate didn’t sink below the 10% mark again until 2015.

Meanwhile, San Francisco is hitting a peak in open office space, with end of September vacancy rates at 14.1%, the city’s highest since 2011. And according to data by Statista, national vacancy rates across the office sector increased to an average of 15% in the second quarter of 2020.

A STILL-STAGNANT MARKET

Part of Modesto’s continuing stability is due to the nature of the local market, which has a strong balance between commercial tenants that rent out offices, and owner-users, who own their buildings outright. Amarant said the large proportion of owner-users in Modesto is the result of many of the local manufacturers having their office buildings on-site. 

In the owner-user market, vacancies are rarer still than with rentals, since owners usually plan for long-term use.

Additionally, office employment constitutes only around 10% of Modesto’s workforce; as is the case in the wider Central Valley, the local economy and job growth are primarily driven by agriculture and manufacturing.

Office space was tight in Modesto even before the pandemic hit, said Joe Muratore, the co-founder of Graceada Partners, a local real estate investment firm. Few, if any, office buildings have been constructed in Modesto in the last 10 years, he said, and he doesn’t expect there to be a major increase any time soon — most likely not for five to 10 years.

In a webinar hosted by the Stanislaus Community Foundation, PMZ CEO Michael Zagaris echoed Muratore’s assessment, saying that Modesto lacks “high-quality office space; on the other hand, the cost of producing it is so high that the market will not accept it.”

City spokesperson Thomas Reeves said in an email that Modesto is working with developers to build more affordable housing and create more jobs, while focusing on mixed-use developments for office space.

This lack of new inventory, coupled with a steady demand — primarily from government and medical tenants — means that vacancies in Modesto are typically well below the national average. Even with the coronavirus pandemic’s unprecedented job losses, vacancy rates have remained largely the same.

“A lot of what’s on the market has been on the market for a while,” Amarant said, “and it’s either stayed on the market because of price or another factor like location or inferior building. There’s not a lot of new inventory coming to the market quickly.” 

Muratore has a similar prediction to Amarant when it comes to the market’s future. He foresees that 15% to 20% of jobs will become permanently virtual, and companies will be able to downsize their offices accordingly.

“I believe strongly in the future of office, but this is a good chance for it to shift a little bit,” he said. 

A FOCUS ON AFFORDABILITY

As cities around the country race to become “the next Silicon Valley,” some, like Austin and Seattle, have found success in attracting large companies and building out a robust tech infrastructure and ecosystem over the course of decades, with significant support from local investors and foundations. But for most cities, an infrastructure-forward plan will likely falter.

And now, with the nature of office space and remote work actively changing, there may be a better way for cities to reap the benefits of tech workers without having to provide the square footage for them to work in. 

Historically, Modesto and the Central Valley have been commuter hubs for Bay Area workers, who account for 20% of the region’s earnings, according to data from Jeffrey Michael, the director of the Center for Business and Policy Research at the University of the Pacific.

That might soon change.

Months spent in various stages of lockdown have only heightened the importance of access to amenities like parks, as families are spending most of their time at home or where socially distant activities are possible. Others are leaving crowded urban areas altogether, searching for space that, in tightly-packed cities like San Francisco, they just can’t afford.

Centrally located communities like Modesto provide a more affordable place to live, and local leaders are seeking to advertise their prices and amenities to prospective residents.

Muratore said he expects some people to move to Modesto from the Bay Area directly, but also from Sacramento, as a “chain of displacement” occurs across the state, with the influx from the Bay Area eventually resulting in movement out of the capital, too.

This phenomenon isn’t just limited to families with children. Even among younger adults, the pandemic has shifted priorities.

“People aren’t moving to the nearest ski slope, they’re moving to the place they want to spend the rest of their lives,” Muratore said. “And that place often involves parks and quality of life and neighborhoods and affordable housing.”

He said those who move from the Bay Area to the Central Valley will bring with them “connections and knowledge and technical ability and innovation and desire to grow and that is going to change our area.”

David White, the CEO of Opportunity Stanislaus, said in his State of the Valley address that he expects the pandemic to result in a hybrid model for the future of office space, “where maybe tech will build co-working spaces and build smaller offices and spread them out around the country where their employees can have that social connection but still can work from home.”

These kinds of offices won’t be tiny, Muratore predicts, as companies will still want people to cluster in groups to be able to capitalize on the “innovation and synergy” that comes from collaboration in the same physical space. But the traditional concept of sprawling office parks may be well in the past, especially as a secondary recession — that Muratore expects to last for a number of years — looms ahead.

Still, the most important focus should be on the workers themselves, Muratore said: “Where people are, buildings will be.”

LOOKING TO WORKERS, NOT SQUARE FOOTAGE

Few people in the area believe that more than Phillip Lan, president of Bay Valley Tech, a local coding academy. 

Lan said the old adage for attracting new businesses to a city went something like this: build an office park with plenty of square footage and surrounding amenities, and the employers will come.

But this logic hasn’t worked well since the 1970s, he said. Centering the discussion on real estate is “a 40-year-old outdated way of thinking” that goes back to when manufacturing used to drive economic growth.

Since then, Lan said, it’s been so-called “innovation hubs” — the Bay Area, Seattle and Austin, to name a few — that have driven job growth, fueled primarily by the workers themselves and the talent they bring to a region. By their nature, startups can begin anywhere, from a garage to a co-working space, but they won’t need large amounts of office space until they grow.

From there, whole regions can experience economic growth and revitalization that will lead to a growth in office space. But the crucial first step, Lan said, is creating “a critical mass of talent” that attracts the big players to an area through satellite offices and similar small ventures. From there, the whole region benefits.

Schools like Lan’s own coding academy and the VOLT Institute, a Modesto-based trade school, are working to create that talent pool locally. With adaptations made in their curricula to accommodate COVID-19 restrictions, these institutions are training local workers for jobs in changing industries.

VOLT has recently acquired new equipment to teach students skills in mechatronics, said Tyler Richardson, the chief business services officer at Opportunity Stanislaus. He said the equipment will be put into use in 2021, and almost triple VOLT’s capacity.

“There’s a lot of mechanical and electrical and sort of coding that’s in manufacturing nowadays,” Richardson said. “There’s robotics and things of that nature, and that’s where we’re going. It’s more technical, more STEM related, less sort of a traditional mechanical approach.”

The most cost-effective way to initiate change is to grow talent, Lan said. Bay Area companies are increasingly receptive to conversations with the Central Valley, he said, as they look outside of their own region to expand their workforce.

“If you call a tech worker into a region, they will, over time, result in two other professional jobs being created,” he added, “and three other non-professional jobs.” 

Herrmann, the downtown Modesto business owner, said that after a drop in revenue during the first months of the pandemic, clients are “flocking” back to the branding agency, and the team, who still mainly work from home, is able to deliver results and meet their needs. 

“That’s the biggest sign, and proof that the way we’re approaching this (is working),” he said. “We’re able to respond to the challenges of their needs and (give a) great product and service to them. I think the proof is in the pudding.”