Office Space News
Commercial office space market’s hidden losses
Published November 26th, 2008 by Mike Sullivan
ABetterOffice has been covering information about drops in occupancy over the past few weeks. I reported yesterday that commercial office space has dropped in occupancy nationwide about 60 basis points from second to third quarter of 2008. What gets obscured, however, is the real vacancy rate of commercial office space. Many companies are shedding jobs, but are not as quickly able to get rid of their office lease. Instead, they are putting it on the market as a sublease.
For example, NAI Global reports that commercial office space in Chicago has been reported to be at its strongest in 7 years, but the report goes on to say:
…the 10.44% rate is slightly misleading. Leasing activity overall has driven the vacancy rate down, but sublease vacancy rates are on the rise, creating an overall market vacancy rate of 19.60%.
There are a bunch of ideas to explore with this information, but I think the one most salient to the executive office suite market is the idea that this could be a turning point for the industry and how businesses manage real estate.
First, the reason so much work these days gets outsourced is the idea that you pay for only what you need. Rather than hiring a developer and finding work for her, you contract her for one job. When you’re finished, she finds a new gig. The same idea should be applied to commercial real estate office space. Instead of taking on significant burden and risk, companies should outsource the management and risk of the space. At the heart of the problem are multi-year office leases that many companies have. With a managed office, the managing company’s job is to keep the space full. This management company may be paying on a 10 year lease, but it will have tenants that may have much shorter leases. This places a big burden on the management company.
Businesses both large and small will come out of this downturn I believe looking for a better way to manage their real estate portfolio. They can hire, fire and contract workers, but before now haven’t done much to demand more fexible real estate options. Hopefully, this will change and the serviced office market will be in a good position to respond.
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Marcus Hester November 28th, 2008 at 9:24 am
When Bill O’Reilly interviewed Barack Obama, O’Reilly admitted that stats from the campaigns were basically bull. They can be manipulated one way or another. With office lease stats, that’s true to some extent when a market is undergoing such a dramatic impact. This post highlights that. It’s hard to accurately measure a commercial office rental market that’s in such transition. Things are shaking out. That’s not to say we shouldn’t analyze it. But we have to take these office rental stats with a grain of salt.
Melanie Jones December 2nd, 2008 at 9:15 am
I think Mike is right. People will come out of this downturn looking or a better way to manage their real estate portfolio. There is no telling how long this recession will last — a new report indicates we’ve been in a recession since December 2007 — but executive office suites are a bright spot. If serviced offices can leverage this potential, it could change the game in a major way on the small to mid-sized business front.
Bill Brookshire December 4th, 2008 at 7:52 am
I like the outsourcing analogy for rented office space. Serviced offices give you the best of both words — a reliable, professional office and the flexibility to get leases as short as six months. If you look at big cities like Los Angeles and Chicago, you’ll find folks “outsourcing” their office needs at executive office suites that rival the class and style of traditional properties.
Elizabeth Sanchez December 9th, 2008 at 8:02 am
Paying only for what you need is part and parcel with the serviced office concept. If you only need to rent an office for six months, you can do that in various executive office suite buildings from Los Angeles to New York. If you want special amenities, you can pick and choose the office services that meet your specific needs. It’s sort of like an outsourced office, in the sense that you are outsourcing the responsibilities to a serviced office provider while you benefit from the infrastructure they’ve put in place.