The dwindling need for office space
It has been a long 12 months since the last summer, but we survived, as did most folks. Business has been steady for us, but it involves more, smaller assignments. Transactional volume is still subdued. We are working on a municipal sewer feasibility study, valuation of a restaurant business and its real estate, a distressed sale of a small office building, advising on the purchase of medical office space for a small group practice, strategies for a potential wind energy site, a Section 1031 tax-deferred exchange and reprising of rental rates on several office buildings.So what is going on? What isn’t going on? What is ahead for commercial real estate?One word says it all — jobs. Despite all the media hype, we are not creating enough new jobs to jump-start things. It takes jobs to fill buildings and, as we will discuss shortly, corporate America is shedding office space, partly due to smaller payrolls and partly due to technology.In hindsight, many of the projections for the rebound in the second half of 2010 or the first half of 2011 were optimistic. With 8 or 9 million jobs lost since mid-2008, this is going to take a while. The time it takes to return to the pre-recession job level has been steadily increasing since the ‘70s and ‘80s. Getting the jobs back this time is hampered by a total job loss that is three times what we saw in 2000 or 2002, and the projected economic growth is anemic.If it took three years to recover from a 2 percent job loss in the last recession, it might take nine years to recover from the 6 percent job loss in this recession. Thus, it could be 2018 before we see jobs back at the 2007 level.The government does not (and cannot) create jobs — the private sector, especially small businesses, creates jobs. Excess government spending, even so-called “stimulus spending,” needs to be paid for with taxes, but more taxes are a disincentive to investment and job creation. It is a challenging dynamic. Unneeded office spaceI recently attended a presentation in Boston by Marti O’Mara, co-founder of Corporate Portfolio Analytics, who gave a fascinating presentation focused on corporate America’s shedding of office space.Currently, 60 percent of U.S. office space at any given time is not used. Bank of America sees 25 percent of its space as surplus. New accounting standards will force companies to expense lease costs and improvements (posting these commitments as liabilities). With such high internal vacancy, every renewal is an opportunity to save. The average corporate lease term is seven years, so it will take a while for this new strategic shedding of space to show up in vacancy figures.The second driving factor is technology. Several corporations have installed Skype-type video on all employees’ computers. Physical meetings are way down (just ask local hotels, the airlines, the rental car companies and restaurants). Business travel is down and not bouncing back. Two companies stated that their project teams used to all meet four times a year until 2008, then two times per year, then one time per year. Last quarter it was announced that teams do not have to meet physically to be great. Another firm set policy as of July 1, 2010, that if you are not physically in your office two days per week you will no longer have an assigned office. You can plug into a “hoteling” office or workstation when you come in.Salespeople, fully connected “mobilely” with smartphones, no longer need offices. They are not supposed to be “in” — they are supposed to be “out” in front of the customer.It is true that these trends do change from time to time, but it is likely that when we come out of this Great Recession, corporate America will be significantly leaner in terms of office space.Currently, U.S. corporations average 190 square feet per employee. There is good data that they fully intend to reduce this statistic to 150 square feet. This is possible due to 40 million home offices in the United States.O’Mara feels there is 130 million square feet of unused, or under-used, corporate office space in the United States today. This is equivalent to downtown Atlanta or Boston inside Route 128. If she is correct, it will significantly prolong the recovery of the office sector and commercial real estate.Locally, we do not see firms asking for, or taking, more space. The best-case scenario is trading up to better space at the same square-footage, but most firms are downsizing. I think she is on the mark.Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at firstname.lastname@example.org.