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Do We Need Any More Office Space?

Experts Examine Far-Reaching Impact from Changing Demographics and Ever-Pervasive Technology On the Workplace of the Future
December 21, 2011
Imagine no more office parks. It's easy if you try.

Some experts now say that, as a result of dramatic changes underway in population, demographics and technology, we already have roughly all the office space (in aggregate) that we will need. Rather than expanding by millions of square feet in the future, these experts said they expect the total office market size in the U.S. to remain approximately at its current size, with significant new construction to replace obsolete buildings.

Also, they pointed out that we face an increasingly daunting challenge as a result of this tipping point -- one that will require the expertise of, and provide tremendous opportunities for, planners, architects, engineers, builders and investors for decades to come. That is the work required to re-engineer and reconfigure the vast stock of existing commercial real estate designed and built for an age that's rapidly disappearing.

In particular, these experts said, the real estate industry must transform older structures to provide the type of work environment capable of supporting an increasingly mobile, Internet-connected workforce and the new ways companies are structuring their staffs to foster more collaboration and efficiency. They must also address the values and attitudes of new generations of workers that are quite different from those of their parents. Buildings that do not or cannot keep pace with the changes needed to remain competitive for tenants run the risk of becoming obsolete.

That was the consensus of a group of experts’ convened last month by the BOMA Foundation at Georgetown University in Washington, DC. The program, "2025: A Vision for Commercial Real Estate," brought together experts from academia and industry to debate how factors such as technology, globalization, climate change and demographic shifts are expected to affect workplaces and the workforce over the next several years.

One of the biggest trends the panelists identified is how an increasingly connected, mobile workforce and widespread adoption of alternative workplace strategies (AWS) is behind the trend of companies putting more people in less space.

Martha A. O'Mara, PhD, CRE, managing director of Corporate Portfolio Analytics, whose firm advises large companies and organizations that collectively occupy 500 million square feet, said increased density in office buildings is here to stay, and she foresees radical changes in the workspace environment.

"We've been pointing out to our clients for years now that they all have about 50% too much real estate, and now [with the slow economy] they are busy doing something about it. Even if we have a big uptick in the economy and growth in jobs, I don't think we're going to see an increase in demand for real estate, except in certain markets where people want to be."

Katya Naman, CCIM, senior vice president for Lowe Enterprises and a panel moderator at the BOMA/Georgetown University symposium, pointed out that the U.S. General Services Administration (GSA) is currently undergoing a renovation to double density at its headquarters in Washington, DC. BOMA International Chair Boyd Zoccola, executive vice president of Hokanson Companies Inc., cited a major lease in Manhattan in which a large office-using tenant reduced its square feet per worker by one third.

"We already have all the space we need," stated James B. King, AIA, LEED-AP, principal of AREA Advisor LLC, who cited a recent thesis project by a student in Georgetown’s real estate program that sought to measure the impact of teleworking on demand for office space. Taking into account 1.5% growth of employment in major markets, King said the thesis concludes that demand to develop new buildings to accommodate workers will likely not emerge in the future, although much work will be required to reconfigure the space already in existence to fit future needs.

AWS: From Indictment To Endorsement
Alternative workplace strategies such as teleworking began as a corporate cost-saving measure, and cost savings remains a primary driver, but two other factors have emerged to make the trend more compelling for employers, King noted.

"Companies are focusing on two things: employee satisfaction, and productivity and teaming. They are increasingly looking at their office space to help them attract and retain the best talent," King said. One of the ways companies are changing their corporate environments is by combining the work environment with elements of a home environment preferred by new generations of workers, as opposed to baby boomers who prefer to keep the two separate.

Perkins & Will Principal Joan Blumenfeld agreed, noting that Gen-Xers and Millenials are more comfortable blending work and home life than their baby boomer parents. To appeal to key employee demographics, companies are increasingly changing their workspace design to reflect the younger worker values, incorporating more open floor plans and "common areas" with extensive seating and collaboration areas, while providing employees the technology to connect from anywhere.

Calling it the "era of the bench," Blumenfeld said the focus on spatial efficiency is all about firms using enhanced mobility in ways to untether employees from their desks and improve collaboration across departments and disciplines, as well as to achieve cost savings and increase employees' efficiency during the current downturn. "Layer on top of that the fact that all of our large corporate and institutional clients are embracing strong social responsibility and sustainability programs. Virtually all our work today is LEED accredited," which holds important implications for new and existing space, she said.

Blumenfeld also noted a distinction in workplace trends among different types of firms. Large-scale financial services, consultants and other professional services firms place increasing value on supporting their employees outside the office to encourage more client-facing time. On the other hand, technology firms and other creative process-focused companies are seeking to make their workspaces more accommodating. They want to keep employees interacting together in the same environment.

"These type of firms want their people to co-locate, they don't want them out there," a distinction that holds important implications for property owners seeking to attract such firms.

Torch Passing to a New Generation of Workers
Corporate Portfolio Analytics' O'Mara also urged the audience to consider major demographic trends in strategizing how to ensure that future buildings are places people want to work. By 2025, about half of the baby boomers will be out of the workplace, she noted.

The average age of employees at Goldman Sachs headquarters in Manhattan is 32, added King. "Half the people working there are Millenials."

The next generation values family, relationships and home life more than previous generations. Instead of desiring to own an expensive car or large house, they derive status from experiences and sharing them through social media. They don't value the big corner office and other corporate status symbols of older generations.

The lesson for companies (and the investors and building owners who want to have them as tenants) is that younger workers prefer to work in a more dynamic, experience-rich environment, such as an urban-type setting offering different entertainment, cultural and transportation options.

With technology supporting an increasingly mobile workforce, "people are not going to want to come in to a workplace unless it is an exciting environment," said O'Mara. "The ideal situation may be where you go into the office two or three days per week and work remotely the other days, which reduces our carbon footprint by 20% - 40% and has a huge impact on improved quality of life." It also makes people more productive when they do come into the office, she said.

"The lesson here is, never let anyone over 40 make a real estate decision for your business!" she joked. "They will make the wrong decision. [Younger workers] have a completely different vision of what the workplace should be compared to baby boomers."

Telework will continue to expand for certain types of jobs, such as customer support, "But I think we will continue to see demand increase for these new types of workspaces," she added. The key is to avoid the mistakes of the past, such as the early adopters of hoteling space, which eliminated personal workstations and assigned available desks or offices to employees when they came in.

"The problem was that workers didn't use them," said O'Mara. "People go to work to see and interact with other people. So just having a place available for them to work doesn't work. The location and space itself has to appeal to them."

A Mandate for Change
GSA’s Chief Asset Officer Gavin Bloch spoke about the agency’s mandate to increase teleworking among employees and dramatically increase density across the 370 million square feet occupied by 1.1 million federal employees in approximately 10,000 buildings. He said much of the space was state-of-the-art when it was built 30 years ago, but falls well short of today's newer expectations.

"As an industry, we’re going to see huge changes in the amount of space per worker in the future," he remarked. "There is an alignment of stars right now; between shifts in the workforce, ubiquitous Internet access, and mandates to reduce costs and improve efficiency, there is real impetus for change."

Bloch said GSA is developing prototypes for "professional productive environments" designed to support collaboration, reduce energy use and use real estate more effectively. A typical GSA building uses 22% less energy than a comparable private-sector tenant, he said.

Bloch believes a mobile workforce that performs a large amount of its work remotely is an inevitable trend. "We can't hold it back. People don't want to sit in their cars, companies can't afford for people to sit in their cars, and the planet can't afford for people to sit in their cars."

Other panelists agreed mobility will continue to play an increasingly important role as a driver in reducing demand for more space, but also said that different companies will pursue different workplace strategies.

"Salesforce.com is one of the most successful cloud-based computing firms today," said King. "It's all about empowering sales people to connect with customers digitally, but it wants its employees in the office at least two days a week, because it's a new company and it's still building its culture. Microsoft's policy is to get the best talent wherever they may be around the world. They have no problem with people working remotely, even teleworking from different countries. Google has a very different philosophy. It believes you never can tell when that next spark of genius will occur, that's why they want you there with your colleagues in the Googleplex, even riding on their buses there and back."

"It's clear that businesses are thinking about their physical workspaces much more deliberatively and how they can be used to achieve a competitive advantage," either through improved efficiency and cost saving, or attracting and retaining talent, said O'Mara.

"There is a lot of product currently out there that is not responsive to how people work, and perhaps isn't even worth renovating," she added. "We don't see a lot of new net demand for space," which she said are important considerations for long-term investors with big portfolios and mortgages turning over.

One area that is expected to see strong demand as a result of the trends explored during the BOMA Foundation symposium is enhanced value for effective asset managers.

"Cash is king, right now it's all about the bottom line. Asset management has a much higher profile than when cap rate compression took care of everything," noted Naman of Lowe Enterprises.

Skilled, knowledgeable asset managers are key to reducing expenses and maintaining tenant satisfaction, she added. “It’s a lot less costly to retain a tenant than to replace one, which is why it's important to keep these trends in mind when investing in and managing buildings."

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