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