As we wind down 2012, there are no shortages of forecasts and predictions of how the commercial real estate and the national office space market will perform in 2013. Many are predicting that the office market will continue to improve in 2013 despite the fact that economic expansion is somewhat anemic. I am probably not as equally bullish as many as the forecasts I have observed, not that I expect the office market to retreat, but I expect companies to continue to take a wait and see attitude about the economy before adding jobs at least in the first two quarters of 2013.
Earlier this week, I came across an article which discussed how many companies have managed to exceed earnings expectations for the third quarter despite the decelerating economic expansion. The crux of the article is that most companies exceeded profitability expectations not through better than expected sales, but by squeezing expenses, primarily salaries to improve their bottom line. The reality of today’s labor market allows corporate America this opportunity.
We have all heard many times from commercial real estate brokers that real estate is a company’s second or third largest expenditure behind labor costs. There is no debate that companies have paid closer attention to their real estate costs, during the recession as a matter of survival and going forward as an avenue to enhance profitability and productivity.
Those of us in the commercial real estate industry have read often and in some cases written about the impact of technology, changing demographics in the workplace and a host of other factors are having on office space in the enterprise. Some forward thinking companies are out in front in looking at and implementing innovative new office space strategies. However, I believe for a significant proportion of companies there has been more discussion than implementation and when it comes to controlling office space costs and they have done primarily two things:
- Disposed of excess space
- Leveraged market conditions to secure favorable rents and concessions on the lease side and seized the opportunity of a favorable cost of capital structure on the ownership side.
The Great Office Space Reboot
I walk around my office everyday and notice how increasingly unoccupied designated workspace is by my colleagues and it is not because we are not working hard, we are having a fantastic year. There is no question that we are using office space differently than we did 2-3 years ago. Also, when I think about my clients and the leases I have completed over the past couple of years only a handful have taken a look at new office designs as most have focused on taking advantage of market conditions. Some have expanded and some have rightsized, space allocations are down slightly and more collaborative space and amenities are popping up in the workspace. However, opting for taking a more serious look at more radical changes with office space designs just has not occurred.
Some day, hopefully sooner than later the labor market will improve and salaries will rise, resulting in a more intense focus on the new realities of office space. When is the only question that remains to be answered. When squeezing labor costs is no longer an option, the great office space reboot will begin in earnest.