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31 MAY 2018
What next for the traditional office provider, now that their far more agile and flexible occupiers are discovering they can employ the same amount of people in far less space?
Towards the end of last year, landlords in Chicago learned that they faced an unwelcome trend. Research from CBRE confirmed what many agents in the city had suspected for some time: law firms were taking less space to house the same number of employees. Between the first quarter of 2016 and the second quarter of 2017, occupiers had reduced their leased space by, on average, 27%.
Of course, neither Chicago nor the legal sector are alone. Landlords in office markets across the world are having to get used to the fact that their tenants no longer require as much space. The most comprehensive study on the subject was conducted by occupier umbrella body CoreNet Global in 2013. The resulting report found that the average amount of space per worker had shrunk from 225 ft2 (21 m2) to 100 ft2 (9.3 m2) over a three-year period to 2013. Nearly two-thirds of the companies surveyed for the report recorded an average space per person of 150 ft2 (14 m2) or less. Furthermore, just more than half of respondents believed that 100 ft2 or less per worker would become the norm. So, what is driving the trend? And what does it mean for commercial landlords?
Companies need different space and, in many cases, that means less space because they’re seeing that their workforce isn’t coming into the office five days a week for nine hours a day.
Most obviously, the rapid rollout of digital technology in recent years has meant that work that once had to be done within an office environment can now be done effectively from anywhere in the world. However, Linda Osgood, managing director at the Building People, a US-based workspace adviser, suggests that technology is merely the enabler that is supporting wider workplace and societal changes, not least the rise in the acceptability of home working. “Companies need different space and, in many cases, that means less space because they’re seeing that their workforce isn’t coming into the office five days a week for nine hours a day like they used to,” she says. “In the past, most employees were in the office every day and supervisors felt that their staff weren’t working if they couldn’t see them.”
Osgood, who for many years worked for arms of the federal government, adds that when bosses in the Washington DC area realised that their offices were only ever at capacity 40%-50% of the time, they recognised they were wasting money.
Sam Pickering, president-elect of the UK chapter of CoreNet Global and a director at Incendium Consulting in London, agrees. “If you look at any business, profit is king and real estate tends to take up 20% of total costs,” he says. “As part of wanting to become more profitable, businesses want to take less space. Taking on a great big building is no longer that attractive.”
Managers were slow to accept change, says Osgood, but they ultimately realised that presenteeism and productivity were not inextricably linked. Indeed, as often as not, the opposite was true. “What you see is that productivity often goes up. It took a long time to teach managers how to manage a virtual workforce. [But] if people get more flexibility then you start seeing them online at 10 pm.”
CBRE published a report which concluded that the global flexible office market has been growing at an average of 13% a year for the last decade, while even mature markets such as the US and UK have recorded 10% growth.
In part, the move towards greater flexibility is being driven by the battle for talent, and younger workers in particular. “There is less desire from employees, especially the younger generation, for large hierarchical and formal office spaces, with many seeking flexible office hours and the opportunity to work from home,” says Tim Ridd, co-founder of architect Fourfoursixsix.
Interestingly, the desire for less space is accompanied by a desire for shorter leases and more flexible arrangements, something that is benefiting serviced office providers. “We have seen an increase in larger corporate occupiers taking space, many of whom are scaling down due to less need for the entire workforce to have fixed desks,” says Steve Jude, CEO of flexible office provider Citibase.
The numbers seem to bear Jude out. In November 2017, CBRE published a report, The Flexible Revolution, which concluded that the global flexible office market has been growing at an average of 13% a year for the last decade, while even mature markets such as the US and UK have recorded 10% growth. In total, the report identified more than 1,000 flexible office spaces in London alone.
Part of the reason for this is that traditional landlords have been slow to adapt to changing occupier requirements. That has furthered the interests of Citibase and market leaders such as WeWork and the Office Group.
“There has always been a disconnect between landlords and tenants in terms of landlords truly understanding and being flexible enough,” says Pickering. “The simple fact is that many [traditional landlords] aren’t responding. That’s driven by the financial models that sit behind them, which require longterm income – the longer the lease, the better the income. It is difficult, but they have never been dynamic at delivering what occupiers truly want.”
However, there is evidence that some big landlords are starting to tackle the issue head on. For instance, British Land announced its intention to enter the flexible office market in June last year with the launch of its Storey brand, which it said had been created to “fill a clear gap in the London office market”. British Land’s aim is to ensure its market share does not end up being eroded by the likes of WeWork, and Pickering says that traditional landlords who act quickly will gain an early-mover advantage. “It provides a massive opportunity,” he says. “That’s why the likes of British Land are getting stuck into that flexible office space. And it will continue because it’s what occupiers will ask for more and more.”
So, occupiers are increasingly wanting less space and are hesitant to commit to it in the long term. Old-school property companies may be reluctant to embrace the changing landscape, but at some point they will be forced to accept the new reality.