By Mark Gilbreath
Edition 9 – December 2017 Pages 24-28
Tags: office design • facilities management • human resources
There’s a simple metaphor I like to use when talking about sustainability and the future of commercial real estate. Start with a glass. Fill it with large stones until you can no longer fill it – you might say it’s full. Fill the glass with smaller rocks and you’ll realize it wasn’t full before. And it’s still not full. You can fill it with pebbles, then gravel, then sand, and it won’t be full until you pour water into the glass. The point is – the glass isn’t completely full if you fill it only with large or medium-sized pieces. You have to fill the spaces between.
We can easily see the analogy in commercial real estate. Companies will technically occupy space, but not fill it completely. Large companies are especially prone to paying for more office space than they need.
Some companies will buy entire buildings (or lease entire floors or huge wings) anticipating growth in the coming years. In the traditional commercial real estate industry, this decision makes sense. Signing a lease was once a long-term investment, and companies had to plan for growth 5-10 years out. Things are different now.
There’s nearly 90 billion estimated sq/ft of commercial floor space in the US, with an office vacancy rate of 13.5% in Q2 2017, according to Statista. That means there’s more than 9 billion sq/ft of unused office space in the US alone.
Maximizing occupancy, beyond the numbers
When we look at vacancy rates or common commercial real estate statistics, we can’t see the full picture of occupancy. The 9 billion sq/ft of vacant commercial space in the US, is probably much greater when you consider the glass analogy. Large companies might be like the rocks, technically occupying a space, to the point where it seems full. But, saying that a company occupies a space, gives no insight into how – and to what extent – that company occupies the space.
If a company technically occupies an office space but only uses half or a quarter of that space, we still consider it occupied. In many cases, when a large company has an entire building or floor, there are whole sections that go unused or underused. Vacancy rates don’t account for those underused spaces.
The traditional CRE industry ignores these spaces between when calculating vacancy rates. So while a 13.5% vacancy rate could be worse, if we look exclusively at that number to tell the occupancy story, we’re missing the point. Occupancy might be close to 90%, but the figure of true occupancy is likely much lower for offices. When we consider the truth of underused space, we see that solving for a sustainable office future is deeper than it seems.
It is now possible for any company to license out any portion of their space on flexible terms, without a lease. From a single desk, to an entire floor – for an hour, up to three years or longer – we’re eliminating the problem of underused space, and increasing true occupancy, one space at a time. Why are we doing this? For a sustainable future for offices.
For commercial real estate to properly develop at the pace of the modern world, the future of office must be sustainable. We commonly view sustainability through the lens of environmental consciousness i.e. “going green”. But in the case of office space, sustainability means much more. It also refers to accommodating for technology, company growth, and shifting company needs.
For example, technology is already becoming critical to the office discovery and booking process. In the future, tech will only become more important. Commercial real estate players – from brokers to owners – must incorporate tech into their strategies for a sustainable office future. If they ignore tech, they’ll fall behind their counterparts who are adopting more quickly. This is not just a matter of having the latest gadgets. Crucially, technology offers access to information in aggregate that you just can’t get from personal relationships. But tech is not a threat to CRE. Technology won’t replace the traditional real estate world. In fact, if properly incorporated, technology will improve the traditional industry and help its largest players grow.
There’s a sustainability mandate behind what we’re doing at LiquidSpace. Of course that mandate includes a push to implement things like renewable energy, smart technology, and responsible resources. But, that sustainable mandate is about more than just the things we put in the offices of the future. It’s also about how people occupy those offices.
Reimagining the traditional model
A traditional commercial real estate model favors big deals, long lease terms, and large companies. But, by exclusively favoring those factors you miss half the market.
According to the British Land Survey, it’s about a 50/50 split, the number of US employees working for enterprises versus smaller firms. Dive into that data even further and you’ll find that a large portion of Americans work for small companies; 34% of US employees work at companies with fewer than 100 employees.
Bloomberg reports, that in the past twenty years the number of publicly traded corporations has halved. It went from 7,322 in 1996 to 3,659 at the end of 2015. While the truth is that large corporations employ a greater proportion of people than they did 30 years ago, we still can’t ignore the little guy. Yes, the large companies have gotten larger and fewer, but small companies still employ about half of the people in the US.
A sustainable office future must account for all companies of all sizes, and must also consider this fact of enterprise consolidation. The fact that there are half as many public companies now than in 1996 indicates a few things. First, it indicates that big companies are getting more powerful, because there are fewer of them. Second, when we consider that fewer enterprises employ a larger proportion of people than they once did, we can infer that those enterprises are getting bigger….