How flexible office space drives sustainability

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.

Enterprises need in-between space too

Enterprises that employ more people than ever have significant influence on the commercial real estate industry. In particular, enterprises are often dictating how we consume office space. If we look at some of the largest US corporations (omitting those that largely occupy retail space) we see that many of these companies also have a unique take on office space and commercial real estate.

IBM, the fourth largest employer in the US, and the largest non-retail employer, employed more than 434,000 people in 2012, according to USA Today. And the company is taking some unprecedented steps to put all these employees into workspace. IBM made front-page news in the CRE world when they agreed to sign a membership deal for every single desk in WeWork’s 88 University Place location.

IBM’s deal with WeWork was first of its kind, but don’t expect it to be the last. The allure of coworking and serviced office is huge, especially for enterprise. For a large company to enable “plug and play” office space for its employees is a win-win. The enterprise gets to forgo the lengthy process of scouting locations, finding the right space, reviewing contracts, and building out the space. The employees get to work in an environment built for productivity and creativity. When enterprises work with tech-enabled real estate companies they can expand more rapidly and flexibly.

Not all enterprises sign deals for entire coworking locations. Plenty of large enterprises have urgent short-term workspace needs. In fact, we’ve dealt with enterprises that required on-the-go mobility for everything from meeting rooms, to coworking, and training space. One enterprise in particular, a top 20 pharmaceutical company, activated our Mobility Manager program for 400+ sales people on their team, booking thousands of hours of space in 80+ cities.

With access to mobility, the employees at this pharmaceutical company can tap into a network of thousands of venues in more than 750 cities. Individuals get the flexibility of lots of options. The enterprise gets the transparency and simplicity of handling administrative details from one centralized dashboard.

The way forward: core & flex

The commercial real-estate ecosystem is comprised of two major types of office: core and flex. For simplicity’s sake we’ll consider core as any traditional fixed assets that companies transact on for terms of 5 years or greater.

Flex is synonymous with short term spaces – from coworking, to serviced office, and buildings. Between a traditional 5-year lease and a 1-hour meeting room booking, there’s obviously a huge gap. Still, we can identify key differences in the use cases between core and flex office solutions. And by doing so, we can pave the way for the future of offices. Even more importantly, by understanding the distinctions, we can see how and why both core and flex office space must work together to fulfill the essential needs of companies.

Core: starting with the basics

Not much has changed in years about how companies find and procure their core office space. The office HQ is often still the same type of space, with the same kind of lease terms, in the same kinds of cities. Many HQs even incorporate the same design! The traditional commercial real estate industry doesn’t take to change easily. But, as tech giants pave the way forward, the core office industry is starting to adapt.

For example, we’re seeing companies move to smaller cities to benefit from rising tech talent, tax breaks, and lower costs of living. Amazon is the latest tech giant to make a statement about its core office.

They’ve opened up the doors to any US city to bid to be the home of the next Amazon headquarters. Perhaps the biggest shift in core office is the fact that it’s had to make room for more flexibility.

Flex: built for mobility

Flex office has grown immensely in the past few years. Customers have historically relied on a few space providers (e.g. Regus and WeWork) to address their flex needs. But things are changing. Enterprises are shifting portfolio allocation toward flex. This creates a greater demand for flex office, which in turn drives the flex space market to grow. Lots of space providers are offering flex solutions, including coworking spaces, serviced office, sublets, and private landlords. It’s this last category, landlords, that hold a lot of the power in shifting the tides of core and flex.

For flex solutions and short term stays, landlords don’t typically put in much or any capital outlay because the return on investment is limited. It doesn’t often make sense to build out a short term space with custom requirements. When the next tenant comes along, it’ll be on the landlord to rip out all the undesirable furnishings.

Flex office is valuable. It can fill the spaces between a long term lease; it can function as swing space in case of emergency; or it can serve as the testing grounds for the next unicorn startup. As landlords see the value in flex space, they are more prone to invest in it, like they would for a standard, core office lease. But the thing is – landlords don’t have to invest to reap the benefits of flex office.

For example, we’re one of the first companies worldwide introducing a flexible buildout solution, called altSpace, at zero or minimal cost to the landlord. This particular solution is also made to plan for growth and so incorporates modular furnishings with 3 tiers options for varying price ranges. We’ve partnered with the world-renowned BVN Architecture to handle the custom fit out.

When coworking companies rent space from a landlord, they pay a standard price per square foot. But the coworking companies can charge their tenants double or even triple the standard price per square foot. Private landlords can get in on the action by using a flexible fit-out solution like altSpace. This buildout solution is one example of flexible office taking cues from traditional CRE. Flex will continue to cement itself as an essential piece of any office solution, and in a way it already has.

Consider that 44% of corporations already use some type of flexible office, according to the Occupier Survey by commercial brokerage firm CBRE. As we approach full adoption of flexible office, expect to see more flex options, greater landlord involvement, and a large role from coworking providers and serviced offices. With fast-moving companies developing their flex office needs, the commercial real estate must adapt. And for an industry so used to the same processes and hierarchies, it’s due for new players enabling flex officeW&P

References

1. https://www.eia.gov/consumption/commercial/reports/2012/buildstock/
2. https://www.statista.com/statistics/194054/us-office-vacancy-rate-forecasts-from-2010/
3. https://www.census.gov/content/dam/Census/library/publications/2015/econ/g12-susb.pdf
4. https://www.bloomberg.com/view/articles/2016-04-20/big-companies-still-employ-lots-of-people
5. https://www.recode.net/2017/9/9/16278136/amazon-jeff-bezos-top-cities-top-new-second-headquarters
6. https://www.usatoday.com/story/money/business/2013/08/22/ten-largest-employers/2680249/
7. https://therealdeal.com/2017/04/19/ibm-to-take-entire-wework-building-in-landmark-deal/
8. https://liquidspace.com/customer-stories/pharma-top-20/

Quotes:

…It is now possible for any company to license out any portion of their space on flexible terms, without a lease…

… If we look at some of the largest US corporations we see that many these companies also have a unique take on office space and commercial real estate…

…Enterprises are shifting portfolio allocation toward flex. This creates a greater demand for flex office, which in turn drives the flex space market to grow…

 

Graphics

Figure 1 Employment by enterprise size Figure 2 Employment size term