Change of Seasons?

ATLANTA (March 23, 2010) In what may be a sign of things to come in corporate America,  Atlanta Business Chronicle reports IBM is preparing a major consolidation of the company’s Atlanta office space. The article says  IBM has 1.7 million square feet which it might shrink to as little as 400,000 s.f.

This news come on the heals of a Cushman & Wakefield report on office space conditions globally suggesting rents worldwide dropped more than 10% at the end of last year. Of course, in certain product types and in certain geographies, rents fell much more. While it is no surprise rents are falling through the end of 2009, the percentage drop is certainly significant on a global basis.

My Team is aware of multiple large companies that have consolidation plans similar to the IBM announcement. This phenomenon is caused in part by the large drop in employment in knowledge-based industries and a fundamental change in work habits by US employees. We will write more about the latest in so called Alternative Workplace Strategies in an upcoming post.

What will be interesting to watch is how corporate America adds workers back and in what type of facilities. As we enter into economic recovery, older facilities – especially those created in the “curvy 80’s” that have inefficient floor plates –  are out of favor.

Also, corporate users seem to be changing what they do in the space they occupy. The trend to move away from private offices has been in place for 10 years or more, but it is currently accelerating. It feels as if many tenants want to create one big corporate Starbucks.

What is in favor are buildings with rectilinear floor plates that are much more efficient. Also, buildings that are green (not necessarily LEED certified, but the designation does help) are more competitive on operating cost  and therefore, will have an advantage. Finally, buildings which are located on or near public transit get to check an important box in corporate site selection searches. To put it succinctly, large companies seem to be trying to achieve “density with dignity.”

So, there may be a change of seasons coming for office buildings. It’s easy to see that buildings developed in the 70’s and before are passe’. But now, much of the product developed in the 80’s and even the early 90’s may no longer fit the appetite of corporate decision makers.

Keep this in mind when you read of huge vacancy rates across the United States which address all classes of office buildings. While most real estate data does break out research by so-called class of building, these definitions are loose. Most media reports tend to talk about the vacancy in all classes within a certain type of real estate such as office.

Smart landlords will seek out product that fits with today’s corporate sensibilities and work on marketing campaigns similar to luxury car makers. They will try to make you feel that their product is far superior, and in some cases they might be right. They may also eventually be able to command more for their product.

On the tenant side, large corporate users are voting with their feet, as evidenced by IBM’s apparent Atlanta consolidation. The majority of IBM’s Atlanta presence is in buildings which were built-to-suit in the early ’80s. Big companies tend to set the trends and certainly have the ear of large scale property owners.

When your company is in the market for office space, keep in mind where the trend is headed. This will allow you to make smart space decisions and pick buildings that will support your enterprise in the current environment.

That is, until the seasons change again.

Ken Ashley

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