Note: this is the first in a series of four blog posts on transformations in the workplace environment.
The economy is fundamentally changing, from team structure to collaboration to freelancing. With that shift, companies risk diving into the red or becoming obsolete… unless they commit radical change. And one of the greatest costs – a hidden source of massive inefficiency – is real estate.
Traditional assumptions about the workplace no longer hold true – that each white-collar employee needs a desk, for example, and those desks need to be co-located in the same building. Real estate for traditional business is fairly straightforward. Suburban office parks, corner suites and cubicles were effective workplace strategies for hierarchical business organization: employees could be fit efficiently into a building, and window-lined offices communicated seniority. This is no longer a reality today – and continuing the same real estate portfolio strategy under these assumptions can result in overspending on ill-fit space. There is a direct link between real estate decisions and corporate strategy: each depends on the other for success.(1)
In addition to supporting corporate vision, effective real estate planning has a significant impact on the financial bottom line. Real estate is a top- three business expense, along with people and technology… and it is linked to both of those as well.(2)
Of course, real estate costs depend heavily on the city. National data across the US shows an average annual cost per employee ranging from $4,194 (Atlanta) to $14,800 (New York), assuming 200 ft2 per person.(3)
But even more important is where in a metro area an office is located. That $14,800 number for New York is an average across all boroughs – and downtown Manhattan is certainly not comparable to parts of the Bronx. The contrast between suburban and urban is even more stark, and this constitutes a profound transition for businesses across the country. Offices are shifting downtown: approximately 10% of urban office spaces are vacant, versus 15% of suburban ones – a trend that is only continuing.(4)
Researchers estimate that up to 22% of office inventory is obsolete (1 billion ft2 in the fifty largest US metro areas), amounting to what CityLab calls “the slow, agonizing death of the American office park.”
Real estate strategies are beginning to reflect changes in employees’ work patterns. Paradoxically, smaller and more expensive space is becoming increasingly desirable. Between 2010 and 2015, the average square foot per employee in New York offices shrank by almost half, from 225 to 120. “More people are taking up less space,” according to Kenneth McCarthy, chief economist for Cushman & Wake Field, interviewed for the New York Times.(3)
The risk in this trend is that people are crammed together in a dense warren of ever-shrinking square footage. Compacting the workplace cannot be a simple blanket assumption. A poorly structured real estate portfolio will be ill fit to the demands of its occupants, resulting in either empty or over crowded space. (4)
The challenge is in right-sizing a real estate portfolio for the 21st century. Does a business pay for what it needs? How often does it check, and what metrics could it use to answer that question? Real estate is a significant expenditure and is directly tied to attracting and retaining the best employees. There is consensus on the vital importance of portfolio optimization, but here is no single silver bullet – density, location, amenities or telecommuting – for strategy.(5)