Technology Cutting the Need for Office Space

By Joe Sciolla

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It’s a case of the incredibly shrinking office, and technology is a prime culprit.

Here’s how it works: As technology increases productivity at the workplace, it also leads to a decreasing need for space. Thanks to automation, we need fewer employees, we use less space per employee, and we outsource more jobs overseas.

As a result, with new job growth still limited, Class A and B office vacancy rates in the technology corridor continue to be high—averaging 23% on Boston's Route 128, for example, and 27% on Route 495—and rents continue to be flat or decline.

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Indeed, technology, while it generally boosts efficiency and cuts costs, also compromises the commercial real estate recovery. This is bad news for landlords. At the same time, however, it’s good news for tenants since they have added leverage as they look to renew their leases or relocate in a “flight to quality.”

Fewer Bodies

With computers becoming more sophisticated and more ubiquitous, fewer employees are needed at the office. Today, seven employees can do the work that required ten before the dot-com boom. Moreover, laptops and wireless technology have created an environment in which anyone can work anywhere at any time.

Today’s virtual office can be a home studio, a summer cottage, a car, a plane, or a motel. While this is clearly not the best set-up for everyone, it has proved to be effective for traveling salespersons, consultants, etc. If a dedicated area in the employee’s home allows for telecommuting, corporations will often invest in off-site furniture, phones, faxes, and computers.

Another intriguing arrangement is hoteling, in which companies reserve office space on a “check-in, check-out” basis for employees who are typically on the road. These fully equipped, shared offices are effective in certain situations, but they may not work when workers are involved with team projects or need face-to-face supervision.

Fewer Square Feet

In the last 10 years, we have seen a significant reduction in the average office space per employee. In 1995, it was approximately 300 square feet; in 2000, it was 250 SF to 275 SF; and, today, it is about 225 SF or less.

A continuing trend is to place more employees in workstations rather than private offices. Today, as much as 70-to-90 percent of staff are assigned to workstations, some as small as 36 SF. Almost half of employees today occupy less than 250 SF.

Another trend is the use of collaborative space outside and inside the office. Conference rooms are getting more use, and there’s also greater use of collaborative technology such as videoconferencing, which brings people together at the workplace.

Videoconferencing as well as virtual, online meetings further reduce the need for everyone to work on-site. In the office, wireless technology means less hardware, and flat screen computers and TVs consume less space. And while the paperless office is not quite a reality, less paperwork means less space needed to store these supplies.

In Greater Boston, slow job growth among technology companies continues to hinder net absorption. Meanwhile, corporate mergers and acquisitions—the latest of which is Proctor & Gamble and Gillette—contribute to job losses and excess space. Further exacerbating job growth is the continued flow of jobs to India and other locations overseas.

Recent reports show that engineers from India perform similar tasks to their counterparts in the States for about one-fourth the salary. In this light, it gives tech companies an efficiency edge when they offshore jobs and operate 24 hours a day.

More Opportunities

How can tenants capitalize on these soft market conditions? Clearly, they can use their leverage in many ways as they negotiate with landlords anxious to limit their liability.

For companies with fewer than two years remaining on their lease, we recommend they look into early lease renewals. Chances are they will be able to negotiate much better terms as well as concessions like free rent and tenant improvement allowances. For companies thinking about relocating, they should, if appropriate, look into trading up into higher quality space.

During contract negotiations, tenants should strive for lease flexibility. This is particularly important for high-tech firms that operate in a volatile market. They should negotiate for expansion as well as contraction and termination options.

Also important during upfront negotiations is space planning and construction management. For example, if a company has downsized, it might consider “restacking” its space to maximize efficiencies. Here, a project manager can be a huge help.

In the final analysis, all of corporate America should be grateful that technology helps us become more productive. But as technology giveth, it also taketh away.

If you’re a landlord, you must deal with our shrinking offices and high vacancies. If you’re a tenant, you should study the market and then crunch some numbers on your laptop. Do your homework—whether at the corporate office or in your home office—and make the numbers work for you.

Joe Sciolla is managing director at CRESA Partners in Boston, a corporate real estate advisory firm specializing in tenant representation and corporate services, including project management. Worldwide, the firm provides services through more than 125 offices in 35 countries, including 44 North American CRESA Partners locations.