A Season of Change: Pandemic alters landscape of City Center office spaces, but area momentum still strong

When Bridgeworth Wealth Management decided to make the move from the Colonnade to its new headquarters on 25th Street North near the Red Mountain Expressway, things were looking good in Birmingham’s City Center.

Consider this from REV Birmingham: Since 2010, more than $2.5 billion had been invested in more than 75 projects downtown; just prior to the COVID-19 pandemic, more than 5 million square feet of retail, office and residential space was built or under construction.

In addition, the City Center office market was strong, having closed 2019 as one of only two out of five office sub-markets in the region with positive net absorption, REV Birmingham CEO David Fleming said. This means that more space was leased downtown than was vacated or newly created.

“We were inspired and excited to see the millions of dollars being invested in the downtown area and the revitalization of the city,” Bridgeworth CEO and co-founder DeLynn Zell said. “We feel that for the entire community to thrive, Birmingham has to thrive, and we wanted to be a part of that revitalization.”

Like other downtown areas, that revitalization came to a halt in mid-March with the onslaught of COVID-19. But while city centers across the country, including the Magic City, are facing economic head-winds, Birmingham development professionals who spoke to Iron City Ink also expressed faith in the long-term health of the City Center and its office market.

“We have not seen widespread breaking of leases or ceasing operations,” Fleming said. “Everyone is going through the same thing.”

CHANGING LANDSCAPE

When businesses began shutting down, it was a precipitous drop, Fleming said.

“By March, when social distancing and remote working went into effect, we saw a dramatic decrease in the numbers of employees present in the City Center, dropping from around 85,000 regular employees to 34,000,” he said.

Fewer employees means less foot traffic, which has a negative impact on small businesses, including bars, eateries and retail, which depend on downtown workers and other visitors.

However, the City Center is still a place where companies will want to be, said Lochrane Smith, director of leasing and business development for Sloss Real Estate.

“Tenants value having an office that makes their employees want to come to work,” Smith said. “There is even more demand for unique office space and offices large enough to accommodate social distancing. As more restaurants, coffee shops, apartments and fitness studios open in the City Center, more companies will consider the [Central Business District] an ideal location for their headquarters.”

This is true despite the pandemic and the protests, she said.

“Birmingham residents have a strong sense of pride in the city,” she said. “Following the protests, people came downtown specifically to see murals painted on commercial buildings and the ‘Black Lives Matter’ sign on First Avenue South. To comply with COVID safety protocols, downtown restaurants and bars are expanding their patio seating onto sidewalks and parking spaces. Downtown Birmingham has maintained a sense of vibrancy throughout this unprecedented time. Office tenants like working where the action is.”

In addition, “the City Center work style is infinitely more vibrant than anything in the suburbs,” said John Boone, a co-founder and principal at development firm Orchestra Partners.

“Young professionals crave activity and connections,” Boone said, citing the growing number of amenities downtown, such as bars, restaurants, gyms, galleries and outdoor recreation, as well as new residential and retail options.

DOWNTOWN VIBRANCY

That vibrancy helped attract Bridgeworth, a firm with more than $1.5 billion assets under management and one of the largest groups of certified financial planners in the Southeast, to its new headquarters.

“We saw many other businesses coming down here, and we just wanted to be apart of the community,” Zell said. “We’re excited to be here.”

The location offers Bridgeworth “ease of access, parking, visibility in the downtown business community” and proximity to many of its clients and other professionals, said Zach Ivey, Bridgeworth chief investment strategist.

Bridgeworth moved in March to 1012 5th St. N. The firm leases 18,000 square feet downstairs, and Intermark has the upstairs, Zell said.

The headquarters has 52 offices, collaborative work spaces, a flexible 90-seat meeting space with catering capabilities and nine client meeting rooms.

COVID-19 made the firm’s move more difficult than planned. It had its office equipment moved into the new space March 28, but employees had begun to work remotely March 16.

That continued until June 1 — the day after substantial protests downtown — when Bridgeworth moved half of its people into the office.

The new location is a good fit for Bridgeworth, said Robert Simon, president and CEO of Corporate Realty, which manages the building.

“It is always smart for a headquarters to consider the City Center,” he said. “For a long time, they have been recognized as a leader in the city, and this building puts the firm in a great location for existing and future clients.”

REV is excited to have Bridgeworth, saying any decision to move a headquarters downtown is “a positive reflection on the attractiveness of the market.”

“It shows that forward-thinking companies like Bridgeworth recognize several things: that downtown gives off a progressive modern image; that the best location for companies to attract the future workforce is in walkable urban locations like downtown with its amenities; and that downtown is a convenient location for everyone in the region to access,” Fleming said.

REMOTE WORK VS. OFFICE SPACE

There’s been speculation in the media in recent months as to whether the sudden shift to remote work and lingering fears about the coronavirus will cause permanent changes in the U.S. office market.

“It doesn’t appear that many companies are rushing their employees back into the office,” Fleming said. “We hear from a lot of companies that they have learned how much business they can still accomplish while remote working.”

“Well-managed” remote work doesn’t reduce productivity, and there’s evidence that remote work helps boost employee morale due to increased work/life balance,” Boone said.

However, there are limits to the value of remote work.

“Employees expect the flexibility of working from places outside of the office building, but working exclusively from home hurts the spirit of collaboration and culture companies need to be successful,” Smith said.

Zell said she believes companies will continue to maintain traditional offices.

“When the pandemic hit, you started seeing articles about people not wanting office space anymore and working from home,” Zell said. “Quite frankly, I don’t believe that is going to be widespread. What we’re beginning to see is that people are getting a little fatigued working at home and having Zoom meetings.”

Zoom meetings might be productive, but they don’t allow person-to-person interaction, which can be so important, Smith said.

“The purpose of the traditional office is to create an environment where a company can be successful,” she said. “Much of that success comes from the camaraderie among employees who like where they work, whom they work with and what they do for work.”

“You can better understand how to best collaborate with your coworkers when you have consistent interpersonal communication,” Boone said.

Remote work doesn’t foster community among team members, Fleming said.

“The thing that gets sacrificed is company culture,” he said. “There is no replacement for being together sometimes and getting to know each other for more than the office functions we serve. We believe there will still be demand for office space as companies seek to build teams and culture.”

Zell agrees, saying her employees have enjoyed moving back into an office environment this summer.

“We, like others, have been able to get our jobs done, but it is harder to build and maintain culture in a remote environment,” she said. “Our best ideas come when we are together and feeding off each other’s ideas. I don’t see innovation happening in the remote environment.”

“Technology is great, but isn’t able to replicate the total in-person experience,” Ivey said.

The pandemic might result in differently designed office spaces, Fleming said.

“We believe COVID-19 is causing people to rethink how they may want to office together going forward and how to design office space,” Fleming said. “A trend had been to get more people into less space. Post-pandemic, we may see a return to designing for more distance between people and larger mass meeting spaces. This could net out to less of a reduction in actual rentable space than you might anticipate.”

“We are thankful that our space is large and designed in the way so that we can all work in the office and be socially distanced and safe,” Ivey said.

LONG-TERM PROSPECTS

There is some uncertainty built into any assessments of the downtown office market given the unknowns about the pandemic, Fleming said.

“In the short term, it has impacted office location or renewal decision-making for many until we understand the pandemic and its potential length,” he said.

Boone said there are some questions to be answered in assessing the long-term health of the downtown office market.

“We’ll have a better idea of City Center office growth once the office market in general decides what it wants to be,” he said. “Are we going to try and refill the towers or convert them to residential? Will people start working more from home after COVID? Which large firm will leave their office park for downtown in order to attract the next generation of talent?”

That said, Boone said he is “not worried” about the effects of a COVID-induced recession on the downtown office market.

“There simply isn’t a lot of office growth in the metro area for a recession to stymie,” he said.

Zell believes COVID-19 and other recent events should not have a long-term negative effect on downtown.

The pandemic “will change some things, but I think with the momentum Birmingham has had, I just don’t think everyone will turn and abandon the downtown area,” Zell said. “I think there was too much momentum to completely reverse.”

The increasing number of people living downtown is a positive factor.

“I don’t see them all picking up and moving out,” Zell said.

“We know there have been and will be more businesses closing, but we believe the demand will bring others back,” Ivey said.