Managers heed the call of the great outdoors

Office properties with an outdoor feel and access are gaining popularity with tenants as the industry rethinks office space use and design in the wake of the pandemic.

Real estate managers aren't taking a crowbar to all hermetically sealed windows in their buildings, but they are starting to include open spaces in their projects, such as patios on each floor, rooftop conference areas and outdoor parks.

While the trend toward "healthier buildings" predates the COVID-19 crisis, the pandemic put it top of mind with tenants and their employees. Professors at Harvard University and Massachusetts Institute of Technology are currently doing research on what constitutes a so-called healthy building in a COVID-19 world.

"There will be a process of discovery" on what types of filters, open-air access and other features are needed to give the workforce comfort that the building owner and their employers are providing a healthy environment, said Jacques Gordon, Chicago-based global head of research and strategy at real estate manager LaSalle Investment Management Inc. LaSalle Investment Management has $73 billion in assets under management.

In the meantime, some tenants are viewing outdoor access as an amenity that they would pay more for, Mr. Gordon said.

"The ability to go to an outdoor space is often highly valued by tenants," he said.

The existing trend toward open office design, envisioned as a way to bolster employee collaboration, also lends itself to incorporating outdoor areas, he said.

In the U.S., offices prices are coming back from the depths of 2020, with the RCA Commercial Property Price index for the office sector up 6% in the year ended June 30, according to a August report by real estate firm CBRE Group Inc. However, not all markets are faring the same. Manhattan prices dipped 1% in the second quarter from a year earlier, CBRE reported.

Meanwhile, global investment in commercial real estate across all sectors grew by 15% year over year to $459 billion in the first half of 2021, with the office sector accounting for the largest share, at 26% of total worldwide investment in the six months ended June 30, another CBRE report shows.

Office returns were up to 1.44% for the second quarter ended June 30, from 0.99% at the end of the first quarter and -0.50% at the end of the year-earlier quarter, according to the NCREIF Property Index.

In one project completed in 2018, LaSalle introduced outdoor features at one of its buildings in Chicago. LaSalle executives made windows on one floor openable, created an indoor/outdoor tenant lounge with 20-foot ceilings on the top floor and added a private tenant roof deck on the 28th floor.

In doing so, they created a common area for tenants to have access to outdoor air at "times in Chicago when you would want that, which is six months of the year," Mr. Gordon said.

In another project across the pond, LaSalle's 60 London Wall project, which was acquired on behalf of the $308.6 billion California State Teachers' Retirement System, West Sacramento, features terraces on five upper floors of a 10-floor building designed around a single atrium. Completed in November, the mixed-use building in downtown London also has a green roof with abundant plant life.

"The outdoor space is everyone's favorite space," Mr. Gordon said.

Some preference for open spaces is cultural, he said. In Germany, buildings are required to have windows that can be opened, Mr. Gordon said. In other parts of the world, such as the U.S. and Japan, buildings are not required to have windows that can be opened, he said. Instead, developers and real estate owners are choosing to apply for healthy-building certifications such as a BREEAM rating in the U.K. or a LEED rating in the U.S., and awards to highlight their approach and lure tenants.

Offices are being more "experiential," said Niall Gaffney, Dublin-based chief executive of real estate, Irish Property Unit Trust PLC, with a portfolio valued at €2.9 billion ($3.4 billion) as of June 30.

"The pandemic has forced the office sector, including occupiers and their employees, into a period of reflection on how workspace is used," Mr. Gaffney said. "Our view is that offices' environments must be recalibrated for many reasons, not least to ensure the long-term resilience of commercial property values."

At the end of 2020, IPUT released its Making Place research report, with testimony from various stakeholders across the industry, Mr. Gaffney said. The report said that ''while offices continue to play a critical role — not least in work culture, innovation, and career development — they cannot continue in their current form as monofunctional buildings," he said.

One innovation in the report are "mind labs," or spaces on the outside edges of buildings for employees and non-tenants to share, develop and incubate ideas that could lead to new discoveries and innovation. The so-called labs can have group tables, writing surfaces, Wi-Fi and electricity on the perimeter of the building connected to the indoors.

One example in the paper is the Melbourne office of multinational professional services firm Arup Group Ltd. that includes a Sky Park, an outdoor space accessible to employees and non-tenants of the office tower that appears to float nearly 40 feet above a busy central business district street.

Another example is a 600,000-square-foot office ''neighborhood'' that IPUT is developing for LinkedIn at its Wilton Park Dublin project in downtown Dublin, Mr. Gaffney said. That development includes four office buildings, the redevelopment of an existing park and the creation of a new, quarter-acre public square named after Irish writer Mary Lavin adjacent to one building.

Creating attractive workplaces builds resilience into real estate portfolios and it also protects "the long-term value of our assets by meeting the expectations of a more discerning occupier base, while also delivering on our commitment to a responsible investment strategy," IPUT's Mr. Gaffney said.

The move toward health and wellness in office buildings began before the pandemic but the crisis has made outdoor access more valuable.

"Even pre-COVID, incorporating nature into design was already gaining popularity for office space as people became more conscious of health and wellness," said Gregg Walker, San Francisco-based senior managing director and head of business development at DivcoWest, a real estate manager with $12.9 billion of assets under management.

"The pandemic exaggerated that trend."

A DivcoWest office project, The Sand Hill Collection in Menlo Park, Calif., on 44 acres, is weaved into the natural setting, he said.

The entire property is Wi-Fi enabled. Outside there is free coffee and places to hold meetings and interact with others. DivcoWest executives also created a number of trails for people to take walking meetings and walking calls, Mr. Walker said.

The firm is currently developing a tower in downtown Austin, Texas, that will feature small outdoor decks on every floor.

"But the real highlight is the 14th floor, which will have one of the largest outdoor spaces for tenants in a vertical office building in Austin," Mr. Walker said. The outdoor space will be Wi-Fi enabled and have areas for meetings and collaboration, he said.

Macquarie Asset Management executives agree that offices with open-air access increase property values.

"Tenants will pay slightly higher rents for amenities their employees will use" such as offices that combine indoor and outdoor spaces, said Eric Ramm, Walnut Creek, Calif.-based senior vice president at Macquarie.

"They are also more likely to remain tenants in those environments, which means increased occupancy and decreased downtime for space, which also enhances long-term value," he said.

One example is a project called CASA, a three-story office building in Phoenix that Macquarie bought in August for $56 million.

The seller, George Oliver LLC, remodeled the property and added amenities more common in a hotel or high-end residential community, Mr. Ramm said.

Features include a wellness center and yoga room, fitness center with showers, a dog park and a meditation/mother's room as well as two centralized outdoor courtyards with seating and space for relaxation or work collaboration. There is also an elevated walking trail and a nearby bike trail.

"Tenants clearly want to be there because it quickly went from 64% leased to 100% leased during the COVID-19 pandemic," Mr. Ramm said.

Macquarie executives think these are the kinds of extras that tenants will want in the future, Mr. Ramm said. "And they will add value because, frankly, those are the kinds of amenities that their employees have access to at home or when they are on the road," he said.