Changing Trends in Office Space Requirements:

Implications for Future Office Demand

Copyright 2013 CoStar Group, Inc. All Rights Reserved. Although CoStar makes efforts to ensure the accuracy and reliability of the information contained herein, the following information includes projections that are based on various assumptions by CoStar concerning future events and circumstances, as well as historical and current data maintained in CoStars database. Actual re sults may vary from the projections presented. The information in this presentation is provided as is and CoStar expressly disclaim s any guarantees, representations or warranties of any kind, including those of merchantability and fitness for a particular purpose.

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Todays Presenter Norm G. Miller, PhD University of San Diego Burnham-Moores Center for Real Estate nmiller@sandiego.edu

Youve Heard It Before Telecommuting will kill the office market

Time to come back to the office guys!

Marissa Mayer, CEO Yahoo

Motivation For Research We have over $1.25 trillion US Dollars of Office Stock, more than 12 billion square feet What if we only needed 80% of what we now use?
That would mean 250 Billion is Excess Office Capital

GSAs Public Building Service has a longterm goal of improving the way federal agencies use space and downsizing the federal office space footprint. GSA is leading the way in its own Washington, D.C., headquarters, where it is reshaping traditional office floor plans and shrinking the workspaces for many employees by about 50%down to nearly 82 square feet per workerin what is being promoted as a model for other federal workplaces. Source: Colliers, March 28, 2012

Large public firms like these have been moving to new space use models
Allows many workers to work anywhere and has been moving to standardized non-dedicated space. Their office work station utilization rate has moved from 60% to over 90%. Accenture has dramatically increased its utilization rate from 50% in the year 2000 into the 80% range today using various over flow office space providers. Working with CBRE advisers since 2005 . The plan is to minimize interruptions and lost productivity due to facility issues and increase productivity while using space more efficiently.

Working with CBRE since 2009 is redesigning space to be more flexible and allow more collaboration.
CISCO, again with CBRE, is moving its utilization rate from 45% to 85%.

HP is targeting 120-150 sq. ft. and 85% utilization with standardized and highly shared space.

U.S. Space Per Worker Trends In Sq Ft

Based on Property Portfolio 54 (largest 54 markets) and CoStar data
380
370 360

350
340 330

320
310

U.S. Square Feet Per Worker In 2010

Based on CoStar data and all existing leases
500 450 400 350 300 250 200 150 100 50

Median Square Feet Per Worker Mid 2012

450 400 350 300 250 200 150 100 50 0

Is It Simply Culture?
Building Space per Person Commercial Square Feet in 2007 Source: World Business Council for Sustainable Development
300

250

200

150

100

50

0 China Japan EU-15 US

Maybe The Cost To Hold The Space Available And Ready Is Not That Great Compared To Labor Costs?
U.S. Corporate Rent as Percent of Total Operation Expenses with Trend Line
3.20% 3.00% 2.80% 2.60% 2.40% 2.20% 2.00%

Source: CRSP Data

Maybe We Dont Need A Place To Keep As Much Stuff In The Office As Before

Major Trends Impacting The Office Market

Standardized Work Space Non-Dedicated Office Space (sharing) along with more amenities More tolerance, even encouragement of telecommuting and working in 3rd places More collaborative work spaces and functional project teams Greater emphasis on higher space utilization, innovation and productivity

Standardized Work Space Old Model

Large Corner Office for Sr. Officers Large Outside Office for Middle Managers Sr. Staff

New Model
CEO

Everyone

More team meeting rooms

Staff Clerical

Working Anywhere

The Past

The Future

Non-Dedicated Space Historically everyone had their own office or work desk and we had utilization rates of 50% or so. Firms that have moved to sharing space have utilization rates of 80% to 95% sometimes using conference space seats for overflow or temporary office space vendors like Liquid Space, Regus, HQ, Instant Space as well as home and 3rd places.

What Do Tenants Say They Want? Less noise and the ability to control interruptions Cleaner air and control over temperature Configurations with more collaborative space More natural light More natural ventilation (operable windows)

Pixar Front Entrance With Lots Of Natural Light

Pixar

Pixar Private Offices: One Example

Pixar: Chance Encounters

Gensler, Baltimore

Google: Flexible Space

Google, London HQ

Adidas New HQ, Berlin

Red Bull

IDEO, San Francisco

More Evidence of Down Sizing Leased space sizes have been shrinking.

As of mid 2012 the average was 185 sq ft per worker, well below the average space assumption in most office demand models and well below figures 10 years ago.

So will the downsizing trends negate the need for net new space?

Trends Often Take Longer Than Predicted

Downsizing takes time and cultural shifts. Lawyers giving up law books and files takes time. Professors giving up book cases and dedicated space? Space planning never quite works out as planned.

Impediments to Efficient Office Space Use

Long term leases especially for a growing firm Private dedicated space and hierarchies of different space types that are not substitutable Employee churn Time required to fill positions Unexpected downsizing These effects can be simulated

Growth Rates from -10% To +20% With a Target of 150 Sq Ft/Worker and No Private Space, All Standardized

What about the impact of downsizing? We will see downsizing, mostly among larger public firms, based primarily on moving to a non-dedicated sharing of space and tolerance for working anywhere. This will happen over several years. But it will more major markets with larger tenants, and it will not happen evenly in all metros. How many of these large tenants are there?

Tenant Numbers By Space Size Range and Percentage of Market

By Percentage of Space By # of Tenants

60.0%

50.0%

40.0%

About 1/3rd of all space is occupied by the large space users (50,000 plus)

30.0%

20.0%

10.0%

0.0% 75000+ 50000 25000 10000 5000 2500 Up to 2500

Illustration of What We Observe for Space Per worker

Sq Ft Per Worker Descriptors
35 30 25 20 15 10 5 0 100 or less 100-150 150-200 200-250 250-300 300 plus
Recent vintage lease with stable firm and non-dedicated standardized space and little turnover, plus some telecommuting accepted. Normal firm in a moderate to expensive market with higher paid workers or more conference and team space at the mid point of long lease. Inexpensive market or a firm with high churn or lots of hierarchy in space types.

Downsized firm stuck in a lease or fast growing firm in a soft market securing lots of extra space.

Implications Parking needs will not be 3 or 4 per 1000 sq ft but 5, 6, or 7 per 1,000 sq ft among the intense use firms (like call centers right now).

Implications Nearly all of the existing office space could be reconfigured more efficiently with better natural light, more energy efficiency, healthier better ventilation and more sound control. Great designs will try and minimize interruptions and provide flexible work space. Landlords are not selling space but productivity and more productive space will command higher rents per square foot.

Conclusions Changes in the office market are inevitable. Space needs to be improved (noise, sound, air, temp) and become more efficient. Yet the demise of the office market is not going to occur because downsizing takes time but it may catch some owners off guard. Progressive landlords and consultants will get out in front of this curve and assist in the transition rather than resist it.

Thanks If you wish to see formal papers on the topic, contact: Nmiller@sandiego.edu Thanks to Inna Panchuk, MSRE Candidate 2013, University of San Diego, for research assistance on design trends.