Why advancing densification of US office space is opening up a new era of opportunity and creativity for developers

by AM admin on April 25, 2016

By Scott Cuthbertson, Manager, PwC –

About a decade ago, commentators on the US real estate market began highlighting a trend among corporates toward a leaner real estate footprint for their office space. This focus on “densification”, intensified through the recession– and, without question, continuing today – brings what I believe are new and increasingly disruptive implications for developers and landlords striving to attract, retain and meet the future needs of corporate office tenants.

So, what’s happened to office space? An unprecedented array of influential drivers – dominated by technological innovation, economic pressures and radical changes in work culture – have come together to drive down the square feet allocated per person in the average corporate office, especially in urban centers with relatively high rents.

The figures tell their own story. With companies seeking out ever more innovative and efficient ways to use their office footprints, average space per employee has tightened from a typical target of around 250 to 300 sq ft 10 years ago, to around 175 sq ft today. And looking forward, it’s projected to decrease still further to 150 sq ft by 2017.[1] Combine this with figures showing office job growth outstripping office growth within the US’s 11 largest cities at a rate of nearly 8% to 3% (respectively) over the past 10 years – and continuing still post-recession – and it is evident there’s been a fundamental market shift.[2]

The drivers behind this change are also relatively clear. Widespread broadband roll-out has supported a rapid rise in people working from home or “teleworking”, reducing the need for permanent dedicated desks. The economic downturn saw companies reduce costs by “optimizing” their office space – a trend that’s since continued into the recovery. And a move towards the more collaborative and open office layouts favored by millennials has further reduced demand for space, by removing partitions and “cubicle farms”.

Beyond advising our clients on implementing these changes, we at PwC have adopted them in our own business. Many of our insights are taken from these experiences, as well as from our global capital projects practice.

As with capital projects planning more broadly, engaging stakeholders and considering adaptability to future trends are key when designing and developing office space. Even now, as companies and employees assess the impacts of recent trends, the value of some of them is being questioned. In particular, there are doubts over the extent to which teleworking from home is healthy for employees and productive for businesses. To address such concerns, there is now a move toward office providers offering co-working spaces, where people from different businesses share space to avoid the isolation of the home office or noise of the coffee shop, and make connections and generate ideas.

While, at first sight, ongoing densification might appear to present mostly challenges for office owners and developers, the need for repositioning of assets and demand for innovative office environments presents a significant opportunity for developers and opportunistic investors. Instead of a large individual footprint, today’s corporates and their employees want office space that is more flexible, open, collaborative and value-adding than ever before. At the same time, declining office demand and parallel changes in sectors such as manufacturing have contributed to a growing pool of obsolete properties.

Against this background, I believe the great opportunity for the development community is to think laterally and innovatively, both to repurpose and reimagine old space for new uses, and also to offer tenants distinctive new office space that meets the evolving demands and expectations of employers and office workers, while also boosting productivity. In my view, the real estate companies that succeed in delivering all this will gain a clear competitive edge – by securing as their tenants the demanding corporates and high-growth businesses of tomorrow.

To learn more about urban office densification in the US, please click here to read Scott’s full report.

This post originally appeared on Scott Cuthbertson‘s LinkedIn blog.  Be sure to follow him on LinkedIn for up-to-date insights and to start a conversation on this topic and more!

 

[1] CoreNet Global Corporate Real Estate 2020 Survey.

[2] REIS Metro Trends Futures and U.S. Bureau of Labor and Statistics (see full report for trend over 10 year period).

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