Office

Office Exodus?

An increasingly mobile workforce has corporations reconsidering their real estate needs.

A t corporations across the country chairs are empty. Maybe their occupants are working in the field or out to lunch, or maybe they are never coming back. Approximately 20.7 million U.S. workers no longer report to bricks-and-mortar offices on a daily basis, according to a U.S. Department of Labor report. And an additional 30 million people are expected to work from places other than commercial office space by 2008, according to a report from In-Stat, a Scottsdale, Ariz.-based research firm.

“All of us, me included, use cell phones, personal digital assistants, and laptops to be in touch anywhere and all the time,” says Michael F. Amundson, CCIM, managing director of Integra Realty Resources in Minneapolis. “Last week I was in Kansas meeting with some business associates, but I was able to answer 12 e-mails using my PDA.” Amundson is part of the growing fleet of Americans spending less time in the office and more time on the road or working from home.

Even though 7.4 million jobs have been created in the past three-and-a-half years and businesses still are hiring, corporations are finding themselves with empty desks and shadow space. As these employees leave offices to work from their homes or other places, corporate America must reconsider the way it handles real estate.

Space Solutions
“Fifty percent of the time employees aren’t even in their cubicles. Companies don’t need offices for each employee all the time,” says Robert Renaud, CCIM, vice president of advisory and corporate services at GVA Devencore in Toronto. When looking to cut costs, companies find that vacant or infrequently used space is a good place to start.

“Implementing broadband technology and flex-time schedules has allowed corporations to eliminate these dark seats. The objective is not to cut space, but to optimize the space and use it more effectively,” says Jan Kleczewski, MAI, managing director of Integra Realty Resources in San Francisco.

Mobile workforce pioneers are learning that employees working away from the office are no less productive — and sometimes are more productive — than those working in the office. For example, Cisco Systems cut back on rent and service costs by 37 percent in 2005 by allowing some workers to telecommute and increased productivity by $2.4 billion. Sun Microsystems implemented an open work practice, which saved the company more than $300 million over five years and avoided the addition of 6,600 desks in 2006 alone. Sun estimates it saved $63.8 million in real estate costs in 2005, and annual workplace expenses for home workers were 70 percent lower than for fixed-office employees. The corporation also says virtual workers were 15 percent more productive than in-office workers.

With these early adopters showing successful results, experts predict that other companies will follow suit. Saving on real estate and workplace expenses gives corporations capital to invest back into their businesses. And executives find this solution too valuable to pass up. In fact, 85 percent of executives surveyed expect to increase the number of “location-agnostic” workers in their organizations during the next five years, according to a 2006 Boston Consulting Group survey.

An increase in mobile workers means corporations will have to reconsider leasing strategies. “Typical Fortune 100 companies in the past — before wireless technology — used to enter into long-term leases with fixed costs dependent on space,” Renaud says. But today corporations have different priorities when looking at lease terms.

The number of square feet dedicated to each worker has decreased every year for more than a decade. Between 1994 and 2004, space allotted to executives and upper management fell 17 percent, according to the International Facilities Managers Association. Further, CoreNet Global reports that 65 percent of companies surveyed have stopped providing space for at least 10 percent of their employees.

“About 20 percent to 30 percent of medical offices are going paperless and they are gaining back that file space,” says Ronnie L. Miranda, CCIM, regional portfolio manager at DBSI Discovery Real Estate Services LLC in Houston. He finds many of his clients are creatively absorbing vacant space. “I have one client that recently went paperless and turned the file room into a larger cafeteria. In other cases executive offices are becoming break rooms and gyms with trainers,” he says.

Have Reservations?
Sometimes companies actually forgo permanent space altogether. Office hoteling, which has been around since the 1990s, is resurging in conjunction with new technologies. Mobile office workers call either an outsourced or in-house office hotel reservation system and book space in a community office for only the days they plan to come in — providing the company and the workers with the ultimate short lease.

While some companies such as Deloitte & Touche run in-house hoteling systems, other companies such as the Regus Group offer hoteling at community offices in which space is rented out by different companies as needed. Rental terms range from hourly to long term, and space can be added or subtracted.

Hoteling means that companies avoid locking into multiyear leases. Regus Group has business centers in locations around the world with fully furnished offices, meeting rooms, and video conference facilities.

Employee demands for flexibility have made the concept more popular and cost-effective. “With more and more transparency into a company’s operations as well as different reporting requirements, companies are becoming increasingly focused on the true cost of owning real estate versus leasing,” says Erik Kolar, president and chief executive officer of Patriot Equities in Wayne, Pa. “Hoteling lowers redundancy and overall costs to these large corporations,” he adds. More than half of Fortune 500 companies, in addition to many small and midsize companies, currently use hoteling, according to Regus Group.

Off the Books
For corporations implementing a mobile workforce policy that still want their own offices, flexible lease terms are a must and landlords increasingly are willing to work with tenants. “It’s up to landlords to be in the 21st century. Landlords today are more interested in what works for the tenant. They used to be more inflexible, but you don’t build good will that way,” Amundson says.

And in a market where vacancy rates are slow to fall, this may be truer now. Nationally, office vacancy fell 1 percent between 2005 and 2006, from 14.6 percent to 13.6 percent, despite the creation of approximately 2 million jobs last year, according to Grubb & Ellis. “This trend [of mobile workers] is having a big impact on the slow recovery of the office market. We still have vacancy rates in the teens and that could be attributed to the more mobile workforce. Office space just isn’t being absorbed as quickly as in the past,” Kleczewski says.

Meanwhile, office rental rates continue to rise. In 2006, the national rental rate for class A space increased more than 10 percent for the first time since 2000, according to Grubb & Ellis. Real estate is the second-largest capital drain for most corporations and many continuously look for ways to cut back on excess space, Kleczewski says.

Selling office property and leasing back a smaller portion of the space is a popular option. “Sale-leasebacks might not end up saving a corporation money right away, but it moves real estate assets off the books. Selling the property may help a corporation increase profits down the road,” Amundson says.

Corporations currently own rather than lease 52 percent of property according to a CoreNet Global survey, but 6 percent of that will be sold in sale-
leaseback transactions during the next five years. This accounts for $72 billion of real estate being sold and leased back, says Eric Bowles, CoreNet Global’s director of global research.

The downside of sale-leasebacks is corporations are being forced to pay market rents when the lease is up, which could contribute to another mobile workforce phenomenon: corporations leaving central business districts for corporate campuses. “Some companies such as law firms that need to be near courts and other image-conscious companies will always need to be in the CBD, but if you aren’t working within that infrastructure you don’t need to be there,” Miranda says.

Today’s workforce wants easier commutes, says Amundson, whose own company recently moved from a downtown office to a suburban property. “We got a much larger space and we have easy freeway access. Our clients are all over the country so we don’t often meet face to face. The best part about it is that I shave a half-hour off my commute time,” he says. Since relocating his office’s revenues are up 15 percent in four months, which he attributes to the move. “Our clients love it. We get to spend more time in the field and are always accessible,” he says.

Happy People
Reducing commute times adds to employees’ productivity as well as their contentment. “Employees want to be mobile: Parents want to get home to their kids, baby boomers want to get to their weekend cottage by 5 p.m., and the younger generation is fickle and doesn’t want to follow suit with a traditional business environment,” Renaud says.

Allowing employees to work from home or reducing stress by moving offices away from congested areas are in corporations’ best interests, according to some experts. “Some workers can’t hack the long commute. And employees working from home often are responsive to work calls and e-mails at all hours,” Renaud says.

Companies seeking to recruit top talent will have to offer flexibility in terms of working from home to compete, Renaud says. “There’s a greater emphasis on the work/life balance today. It’s the changing demographics of the workforce that are really driving this trend.”

In anticipation of shifting workforce and corporate priorities, Forest City Enterprises is developing a 25-square-mile planned community designed for work-from-home residents. Each house in Mesa del Sol, located outside of Albuquerque, N.M., will include a home office designed for mobile workers. The community will have several business centers with support staff and high-speed Internet and video-conference hookups.

Some corporations are moving their headquarters to remote areas in hopes of finding an untapped workforce. With an educated workforce and a broadband connection, corporations can locate anywhere, Amundson says.

But other companies still want the prestige of a CBD address, even if they have a work-from-home or remotely located staff. There are some ways to achieve this without actually locating in a city, Kleczewski says. In his market, the San Francisco Bay area, several small companies have obtained prime addresses in the financial district, but have mobile workforces that operate from home or in low-cost areas. “Around the corner from my office is a store with several mailboxes and each box is called a suite,” he says. While most business is done virtually, clients and customers associate the company’s location with the CBD suite address.

A Complex Process
With so many corporations rethinking their space needs, optimizing office space is becoming an increasingly in-depth process. “Corporations have become much more systematic about space planning. It’s almost a science now. Human resources and information technology departments are
working together with advanced consultants to configure space. It’s a more complex process than it used to be,” Kleczewski says.

The need for shorter leases to allow for increased flexibility is one part of it, Kolar says. “But the rapid technology changes of our times physically impact corporate space design, technology requirements inside buildings, and the number, size, and location of offices.”

Some developers and commercial real estate pros are trying to stay ahead of the curve by pre-building smaller office space. For example, at an office plaza in Palm Beach Gardens, Fla., NAI/Merin Hunter Codman has built more than 30 speculative offices. While some developers may find this a risky endeavor, NAI/Merin leased more than 55,000 sf so quickly that it planned another development phase.

The offices are designed with flexibility in mind: a conference room, perimeter offices, a storage/data room, and open space that tenants can build out. The average office ranges from 1,000 sf to 2,500 sf and is marketed toward small companies. “Intelligent design can be tailored to fit individual tenants,” says Neil E. Merin, CCIM, chairman of NAI/Merin Hunter Codman in West Palm Beach, Fla.

In addition, there is no lag time. The space is ready to be occupied as soon as the tenant needs it, which will become increasingly important as office-user needs change quickly and frequently.

Whatever the location, size, or use, it’s clear that corporate real estate needs will evolve with changing workforce demographics and technological advances. “Technology will continue to increase dramatically and the competition to recruit the best talent is getting harder all the time. It is almost a certainty that the mobile workforce will continue to grow and expand,” Kleczewski predicts.

Carolyn Bilsky

Area report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate. Contact her at (312) 321-4507 or cbilsky@cciminstitute.com.

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