How the Modern Workplace is Reshaping the Office Market

With the pervasion of smartphones, laptops, and tablets, the 21st century workplace is no longer confined to leasable office space; workers can conduct business just about anywhere. According to workplace design company Knoll, workers now spend just 49% of their time in a company’s main office.

In addition to increased flexibility, the workforce is changing. According to workplace expert and author Jacob Morgan, Millennials are projected to comprise 50% of the workforce by 2020 and 75% by 2025. Between the need to entice workers back into offices and a growing cohort of employees that expect work environments to support their work-life balance, office space design has changed drastically.

The new model of office environments focuses on fostering collaboration, with open floor plans and few private offices. Some companies have taken that concept one step further and are choosing to occupy shared space with other firms through membership platforms such as WeWork.

Google, which is known for its innovative work spaces, has a "150-feet from food" rule. The idea that no part of the office should be more than 150 feet from sustenance (be it in the form of a restaurant, cafeteria, or mini-kitchen) is rooted in collaboration. If employees are encouraged to snack, they are more likely to run into people they don't normally work with. Such encounters promote the creation of new ideas while facilitating camaraderie. 

Opportunities for social stimulation and recreation have become increasingly important, as worker happiness leads to higher retention. Meanwhile, physical storage needs have been reduced, as paper files have been replaced with electronic files and cloud storage.

As these changes have spread from tech tenants to more traditional office occupants, the way tenants use office space has necessitated significant improvements to keep existing buildings from becoming functionally obsolete. As part of this transformation, tenants are leasing less space per employee, requiring many existing buildings to undergo substantial retrofitting to attract tenants.

Keep in mind that right now, most companies are trying to catch up with the office trends set forth by preeminent technology firms such as Facebook, Twitter, Lyft, Adobe, YouTube, and Airbnb. But many those offices were adapted for the company. New trends are being established as companies choose to build from the ground up, which provides more design flexibility.

For example, in the massive Bay View Google campus that is under construction, employees will always be about three minutes away from every other employee. All indoor space will be optimized for natural light, and outdoor space will play a significant role in employees' day-to-day job functions. As these office layouts prove themselves successful, other companies will attempt to mimic the designs, resulting in additional modifications. And in this case, modifications mean construction.

The changes tenants are requiring of their existing office space will reshape the office market, leading to fluctuations in vacancies, subletting, construction, and occupancies. Ultimately, retrofitting existing properties should lead to increased rent per square foot and occupancy levels.The possibility exists, of course, that certain older buildings will be left vacant if property owners choose not to undergo significant upgrades. Regardless, this paradigm shift in what office environments should accomplish will take time to be reflected across the market and will affect tenanting in the interim.

New York Area Fourth Quarter 2013 Office Market Report

Expanding Tech Firms Help Boost New York Occupancy

Progressing job growth, particularly in the robust technology sector, together with improving financial markets, will lift the number of new leases in the New York City office market. Recently, Yahoo announced it is consolidating its three sites in Manhattan into 176,000 square feet in the former New York Times space on 43rd Street. Upon inking the new long-term lease, Yahoo announced plans to continue expanding its staff in the coming years. Other expansions include YouTube, which recently announced it will open a new 25,000-square foot creative studio in Chelsea in 2014. Due to limited supply, these large corporations are paying premium rents for quality space. The rise in rents is driving many smaller firms and startups to the Garment District, where developers are repositioning old manufacturing floor plates for traditional office and tech tenants. The finance sector, the former primary driver of significant office space demand, continues to recover from job losses incurred during the recession. As the stock market gains traction and volatility decreases, financial firms are expected to bolster headcounts by 4,000 positions this year. As a result, many financial firms will backfill underutilized space and potentially expand into larger footprints.

After a frenzied investment climate during the last quarter of 2012, the market has entered a period of equilibrium. Many owners who purchased during the downturn are taking profits after a significant gain in the value of their assets, while other investors are divesting to reallocate capital into other strategies. As these assets come to market, they are targeted by high-net-worth individuals, local syndicates, and foreign investors who are competing aggressively to purchase assets located in primary office districts in the city. Value-add plays have also been a prime opportunity to achieve outsized returns for buyers positioned to assume the risk of converting old properties in the Garment District and lifting rents to the current market rate. As properties convert, investors seek to capture the influx of tech tenants who will pen seven- to 10-year leases. Properties repositioned for these tech companies are trading with first-year returns around the high-4 to low-5 percent range.

2013 Annual Office Forecast

• Employment: Robust job growth will continue through year end as 85,000 workers find jobs, lifting payrolls by 2.2 percent. Office-using employment will expand over 29,000 positions in 2013, increasing headcounts by 2.3 percent. Last year, 29,000 office workers were added in the metro.
• Construction: Developers will deliver over 6 million square feet of office space this year, expanding inventory by 1 percent. In 2012, approximately 1.3 million square feet of office space was added to inventory.
• Vacancy: By year end, vacancy will fall to 10.7 percent, an annual decrease of 70 basis points from 2012. Vacancy declined 40 basis points in the previous year.
• Rents: As conditions tighten this year, operators will lift asking rents 4.5 percent to $49.83 per square foot. In the previous 12-month period, asking rents for marketable space increased by 3.2 percent to $47.69 per square foot.