How much office space do we need? 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.
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.
Source: CoStar Norman G. Miller and Roger J. Brown, CCIM May 5th, 2013