by Norman G. Miller and Roger J. Brown, CCIM
No
company ever seems to have the right amount of office space. Firms grow and
shrink throughout the years for many reasons; however, they must contract for
space over a set lease term of five, 15, or even 20 years. Typically this
situation results in about 20 percent to 25 percent more space per worker than
the stated goals of space planners. So firms with a goal of 200 square feet per
worker will likely end up closer to 250 sf per worker.
Yet,
in last year’s CoreNet Global survey, corporate executives indicated they
expect to reduce the amount of space they lease in the next five years to less
than 100 sf of dedicated space per worker. Since the current average rentable
building area in the U.S. is about 300 sf per worker, does this mean we have
three times as much office space as needed?
Current Space Trends
Looking
at square feet per worker on new leases, the U.S. national average in late 2012
was 185 sf per worker, according to CoStar lease data. This number reflects new
leases in major markets and a fairly tight economic environment. Company
executives do not want to lease too much excess space even though they may find
current rental rates are attractive. Comparing utilized space by industry (see
chart) reveals consistent differences that are reflective of an industry’s
compensation level and need for work space.
As
of 2013, on leases close to expiration, the average space per worker is often
double the estimate for new leases. This makes sense, since companies can’t
downsize until leases expire. In soft economies we expect a fair amount of
shadow space that is leased but not occupied. Since labor costs matter much
more than occupancy costs, most tenants are able to honor their leases until
they expire, so they pay for more space than they actually need. The extra
space also provides a convenient option to expand and hire more workers without
the need to move. So we expect to observe significant extra space in weaker
economies, when rents seem to be bargains.
Future Space Needs
A survey
conducted by the author suggests that everyone wants to use less space. Large
firms, representing about a third of all office space users, have increasingly
moved toward more-standardized shared, or nondedicated, office space. Based on
input from CoreNet Global members and CBRE tenants, tenants with footprints
greater than 75,000 sf are working harder to use space more efficiently. This
group tends to encourage digital storage on centralized cloud-based servers and
use nondedicated standardized space for all but the most senior of managers.
This group represents 1.8 percent of all U.S. tenants by count and 27.9 percent
of all office space.
Those
using more than 50,000 sf represent 36 percent of the total office stock. If,
using some of the space-sharing strategies described above, 36 percent of the
firms reduce their primary leased office footprint by 50 percent, moving from
250 sf to 125 sf, this would be the equivalent of 540 million sf out of some
12.25 billion office sf as of 2013. Historically this is equivalent to 3.6
years of average U.S. deliveries of net new office space to the market, which
has averaged close to 150 million sf per year since 1983. At the same time we
recognize that little space has been added from 2009 through 2012 and the
office stock has actually shrunk due to increasing obsolescence. Absorption has
been positive for the two years prior to the end of 2012.
Along
with companies’ higher space utilization rates, other factors are affecting
future office space demand. The lack of new construction inhibits space use
efficiency. Newer buildings allow for more-efficient use of space, especially
when built for a particular tenant. But as the lease ages, the amount of space
leased and the number of workers in the space generally changes, resulting in
increased space per worker. As second-generation tenants replace
first-generation tenants, it is often more difficult to use the space as
efficiently. This is generally the case for most small firms that cannot, on
their own, drive new supply in the market.
Looking
at the global market, office space per worker is much less in Europe and Asia
than in the U.S., suggesting some of U.S. demand is culturally based. Thus, as
the U.S. companies are influenced by companies and employees from other
countries, office configurations and work space allocations per worker may
change. In addition, the increasing mobility of U.S. office workers who may
work full or part-time from other locations, is causing companies to reconsider
the need for dedicated office space for every employee.
Companies
are also increasing the proportion of collaboration and team space in offices,
along with more space devoted to amenities. These flexible spaces are
offsetting some of the square footage lost to smaller dedicated work spaces. We
are also witnessing an increasing trend toward greener office space with more
natural light, better natural ventilation, and better temperature controls, all
of which may add to the comfort and productivity of office workers.
Over
a longer term, the average size of space leased has fallen by 21 percent during
the past 10 years, according to a Property Portfolio Research September 2012
report. PPR also notes that green, transit-friendly space is increasingly in
demand, suggesting that much of the existing space is obsolete and needs
retrofitting. Those buildings that are able to bring in more natural light
without extraordinary costs seem to offer the best opportunities for
retrofitting.
Decreases
in total office consumption based on more-flexible work location patterns and
higher utilization rates are underway, but they take time. The total demand for
space will grow at a slower pace for the next few decades, as firms decrease
space allocated per employee, but there will be substantial demand for better
interiors more adapted to the newer style of working.
Over
the next several years we will likely see a large spread in the space required
per worker from the most efficient space users to traditional space users, so
estimating the average sf per worker will be a challenge. The most reasonable
estimates presume a continual but slow reduction in space per worker. For now,
200 sf to 250 sf per worker is still a reasonable estimate for most traditional
firms, but at the same time, 100 to 150 sf is closer to what some of the larger
public firms are now achieving.
Moving
forward, we will see some firms achieve less than 100 sf per worker, but given
the cultural impediments and the challenges of predicting growth rates, we are
more likely to see figures average 150 sf to 185 sf per worker phasing slowly
toward even lower figures at the end of the decade. This is a significant
reduction is space per worker, but it parallels a need to retrofit much of the
existing space to provide more collaborative team space and healthier, more
productive environments.
At
the end of the day, landlords are not selling space but rather productivity.
More productive environments with better natural light, temperature and air
controls, cleaner air and controllable noise are more productive and will
command rental premiums.
Norman G. Miller is a
professor at the Burnham-Moores Center for Real Estate at the University of San
Diego. Contact him at
nmiller@sandiego.edu.
Roger
J. Brown, CCIM, is executive scholar at the
Burnham-Moores Center for Real Estate at the University of San Diego. Contact
him at
Rjb21@cox.net. The article is adapted from a longer paper, “Changing
Trends in Office Space Requirements: Implication for Future Office Demand.” Read the complete article along with other
papers from the American Real Estate Society, or ARES, at the
CCIM Foundation Library.
Space Utilization Factors
Hoteling. Not surprisingly, any firm that moves to an office
hoteling strategy with standardized space for most workers will dramatically
shrink its footprint and space per worker while increasing utilization rates —
the percent of all work spaces occupied on average. Such a move can reduce
space required by 35 percent or more and result in utilization rates of 90
percent or more versus the more typical 50 percent.
Turnover. Firms with low turnover rates — under 10 percent —
have far higher utilization rates than firms with high churn rates around 35
percent. Time to fill a position also matters but less so than turnover. Only
firms with a very stable workforce with little turnover and little need to
expand or contract over the course of a lease term will ever hit space per
worker or utilization rate targets.
Employee Age. Worker age matters with respect to the type of space
required to attract and retain workers. Older workers are more likely to
believe that office size matters and dedicated space is a signal of rank and
success. Younger workers seem more willing to accept less dedicated space in
exchange for a host of amenities and better working environments.
Parking. Higher utilization rates significantly increases the
demand for parking space. Firms with high office utilization rates require as
much as 100 percent more parking per 1,000 sf as traditional dedicated office
space, unless they happen to be located at transit stops in a city with good
public transport options.
Rick@SequoiaRealty.com 440.946.8600 x-103
http://www.ccim.com/cire-magazine/articles/310928/2013/05/how-much-space-do-we-need 
Sometimes I don’t like tenants.
