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October 7, 2004

Office space: Are we finally shrinking?

  • A mobile workforce, fueled by broadband Internet, is changing American companies' office space needs.
  • By JULIE BENEZET
    Business Growth Consulting

    Benezet
    Benezet

    For the past 20 years I dutifully have attended various commercial real estate conferences to get the latest on local and national trends.

    About every five years, some pundit would proclaim in a loud grave tone that downtown office demand was on the decline due to some major change in the way business was done — flight to the suburbs, increased use of cubicles over private offices, telecommuting, etc.

    Such news would inevitably send office developers, designers, property managers and brokers in the audience to their respective bunkers, briefly, to evaluate what this really meant for their bottom lines and whether it was time to go get that degree in physical therapy, computer science or animal husbandry.

    They would emerge soon after concluding that people were not about to eschew the convenience and collegiality offered by congregating at the water cooler of a nice, well appointed downtown office space.

    Until now. Fast forward to 2004 and consider the following:

  • Based on eight years of research, the International Facilities Managers Association reported in June 2004 that the average amount of office space in U.S. companies allotted to each worker has decreased continuously. Since 1994, executives and upper management have lost 17 percent of their space with averages dropping from 289 square feet/head in 1994 to 239 square feet in 2002. Senior managers have declined by 15 percent, from 200 to 169 square feet. Middle managers have gone down by 16.5 percent from 151 to 126 square feet. The list goes on.

  • The New York Lawyer reported in 2002 that attorneys — notorious for their love of large, showy offices — have adopted "efficiency" as a byword, reducing partner offices in New York from 225 to approximately 215 square feet. While the numbers vary by city and firm, consistent across all is a reduction in space.
  • Occupancy planning by corporate real estate facilities managers is regarded as highly competitive information, and getting public data on square-footage targets from specific companies is near impossible. However, I have been told in private by friends and former colleagues in the industry that all of them are charged with decreasing square feet per head significantly, in many cases to fewer than 200 square feet per head, regardless of whose head it is.

    Internet fallout

    So what's going on here? In short, the impact of the Internet is finally being felt.

    In its infancy, the commercial value of the Internet was seen as a quaint place to send emails (when you could get online), research travel plans and buy books. For the commercial real estate industry, the biggest threat was that of "disintermediation." What it meant was that the Internet threatened to make the brokerage industry obsolete as intrepid tenants would jump online to make their own deals. It didn't happen, and the fear of the Internet as a challenge to space demand disappeared.

    So what changed? Broadband.

    When the Internet rerouted itself to broadband, all the rules changed. On a connection that is over 50 times that of dialup, finally the ordinary worker, whether home- or office-based, could communicate across the street or around the world in nanoseconds, sending large amounts of data in tiny digital packets.

    So how is broadband reducing office space demand? Initially, the commercial real estate industry worried about reduction in space demand due to outsourcing.

    While outsourcing has been around for many years, its impact was neatly confined primarily to the manufacturing sector, or more recently to offshore call centers. However, with the expanded speed and capacity offered by broadband, it suddenly became possible for "real" office jobs — computer programming, tax return preparation, CADD drawings, etc. — to go offshore.

    Did that change the game?

    Well, may be. Domestically, outsourcing shifts workers around and causes havoc for corporate real estate executives who have to slough the space. However, the people have to go somewhere, and if they remain in the United States, they are reallocated to other geographies, whether it be to a lower grade office space (say, A to C), to the suburbs or other cities.

    When jobs go offshore, a different math applies. Using the data of the esteemed think tank, Forrester Research, 3.3 million jobs could go offshore by 2010. Taking 150 square feet/person as a metric, the impact nationally is approximately 500 million square feet, an amount larger that the full inventory of several CBDs in the United States.

    The problem with this analysis is that it assumes there is no additional job growth.

    At the core of offshore outsourcing is that what is going overseas are the processing jobs: routine programming, generation of drawings for designs created here, etc. What remains onshore is what is needed for competition: creative work that routinely spawns jobs — e.g., wireless applications, life sciences, etc. How many jobs result is not yet known, but in netting out the impact of outsourcing overseas and the resultant real estate demand, one has to factor in new job growth.

    In short, we don't know if outsourcing offshore will reduce office demand over time.

    The mobile workforce

    So how is broadband really reducing office space demand? What it has done is spawn the mobile workforce, a phenomenon that could only take place with broadband and a fleet of light-weight electronic devices.

    Until broadband, companies grappled with how to deal with the high cost of real estate, the lost productivity due to workers stuck in clogged transportation arterials while trying to get to work, and absenteeism of workers out dealing with child care and other personal concerns.

    CFOs, who have never been known to be romantic about real estate, would gnash their teeth in the face of such problems, but any solution that distributed the workforce outside of the office resulted in reduced productivity. Workers could not get information back and forth to each other or collaborate without being face to face. Added to the CFOs' frustrations were such findings as a study 10 years ago by Cornell University that 50 to 70 percent of seats in any office are empty any time of day in any industry.

    Nevertheless, without the means to bring information together outside of a physical space, CFOs found themselves having to hang on to thousands of unwanted square feet.

    Enter broadband. The forces that inspired interest in telecommuting, home offices, hoteling and other spaces in theory diminished the need for centralized office space. But it was not until workers could establish a fast, real time connection with their teammates that working elsewhere that a centralized office became a real alternative.

    Behavioral changes

    The heavy reliance on email for everything from the ordinary conversation to transmission of large documents and pictures has drastically changed the behavior of the workforce.

    Collaboration occurs online with multiple parties receiving information simultaneously. Web-based conference calls have replaced the meeting rooms as participants follow presentations from their respective computers, whether they are sitting at their desks, or in hotel rooms or at Starbucks. With this new opportunity, the finance people can finally get to do math they enjoy: $10,000 per head per office replaced by $1,000 to 2,000 for electronic devices.

    While the cumulative impact of broadband and the mobile workforce are not yet known, studies are starting to emerge. A tax audit agency in Canada, for example, reduced the size and number of its offices by using its resources to fund electronic devices, more technology with the department spaces and higher quality design in the spaces they retained.

    In the next year, productivity increased enormously, with department workers generating over $100 million of tax revenues gleaned from audits. They also saved about $250 million in real estate costs.

    While those tax payers who were caught may have been less than enthusiastic about these results, the agency clearly considered them a major win.

    So what happens to the fleet of office developers, designers, brokers and property managers? There is still plenty to do. It is just time to do it differently.

    Close attention to firm business goals, plans and work patterns, while always important, has taken on dramatically increased importance. Workers still meet, not everyone can work at home — executives, human resource managers and other company leaders need a centralized presence. However, focusing on how to maximize thinking, producing and how such things are facilitated by space has become a key piece of the value proposition.

    I will leave it to the real estate and design professionals to talk about the specifics of how this is done. For now, what I'd like to suggest is that a very different conversation is arising around space, and the more real estate and design professionals figure out how to integrate it into making the mobile workforce successful, the more valuable their services will be.


    Julie Benezet is a principal of Business Growth Consulting, which works with companies and their executives on the strategic growth of their businesses and senior teams. She was formerly vice president of corporate resources at Amazon.com.



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