Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
Developers are building more office buildings today than at any point in the last decade. But could the changing nature of the work threaten long-held beliefs about the way the office market will perform in the future?
The office construction pipeline in the U.S. recently reached the highest point in this economic cycle. All the while, the number of U.S. workers who actually report to an office is dwindling. So is the average space they occupy when they get there.
Does this make sense?
This seems to be an illogical divergence in office supply and demand. And the gap figures to widen.
Millennial workers, the thinking goes, want warm, attractive offices replete with amenities. Or they want to choose where they work…from home, a coffee shop or a coworking center.
That’s one reason why office construction is continuing at such a fevered pitch…only the newest buildings have been deemed good enough to get companies to sign long-term leases.
So the question becomes…what happens to the buildings they leave behind?
By and large, America’s office stock is evenly split between prime offices (Class A) and more affordable space (Class B,C). Vacancies in both have also trended close together since 2010…Class A vacancy of 13.5% and Class B at 11.5%.
But demand has clearly shifted to Class A buildings. Absorption for Class A space from 2010 to 2019 was nearly eight times the absorption rate of Class B space.
The gap is only widening. Class B offices experienced their first two years of negative absorption since 2010…hitting -4.7M SF of absorption in 2018 and -10.1M SF in 2019.
The world has changed
An increase in teleworking, the explosion of gig workers in the economy, open office plans and coworking are all influencing how much space companies are using and will use in the future.
The gig workforce (independent contractors, freelancers) made up 34% of workers in the U.S. in 2016. In 2020, that percentage is expected to reach 43%.
Since 2005, the number of full-time employees who regularly work from home has grown by 173%, according to Global Workplace Analytics.
It’s no secret that workers are increasingly demanding flexibility which often means working from home. Workers are the ones driving this trend. Companies are slow to move toward a remote-work option.
Many argue that long-term leases on real estate make less and less sense in a world where you have a flexible workforce.
All the while, U.S. businesses have moved their office designs more toward open office plans (even if workers hate them) and coworking/flexible offices.
Employers are shuffling more employees into less real estate. The average square feet of office per employee was 194 SF, down 8.3% from a decade ago. Most large employers are trying to hit 100-140 SF per employee. Many don’t think companies can get a lot denser without creating problems.
Others argue that working from home causes reduced efficiency and productivity. They lose something in their company culture. There’s a lack of trust. They lose that personal connection with their fellow workers.
As per-employee space shrinks, it allows companies to spend on trophy office space and still save money when they leave their old, larger, inefficient spaces.
Freelance and gig workers rarely go into an office. When companies use those workers, and encourage employees to telework, their real estate costs drop to zero.
The IRS data from 2003 to 2017 shows an increase in the number of taxpayers who were claiming deductions for home offices jumped nearly 45%.
It’s all about attracting talent now
To some extent, office space still fills a need for community and interaction. Even with the growth in the gig economy, people will still want to gather around others.
Space has an impact and it can absolutely be a differentiator. But it’s not the biggest differentiator.
So if your business relies on hard-to-recruit talent…and you’re not going to let them work remotely…you better have a Class A space to put them in.
Conclusion
Total demand for office space is falling. Primarily because employees desire to work from home. And the increasing desire from businesses to use freelancers.
However, Class A office space is still in demand which is why its still getting built. Businesses can occupy less total space than they used to and get a Class A address. Businesses also see their office space as a necessary recruiting tool in the battle for talent.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com