Office sizes reduce 18th May 2012

Since 2002 the size required by the typical office tenant has declined by 10% from 5,000 SF to 4,500 SF.

This raises two questions: Why has this decline in tenant size occurred, and what are the strategic implications should the decline continue? In typical economist fashion, let’s assume that the reduction in lease size is mainly due to more efficient space usage per job, rather than a shift to smaller employers.

This finding suggests that the impact of alternative office-space utilization strategies – including office hoteling and work-from-home programs, a shift from paper to electronic information storage, and a general reduction in personal space – is now negatively impacting the demand for office space. In fact, these factors are often cited by both office owners and brokers as reasons for space reductions when tenants renew leases for slightly smaller square footages.

The reduction in space per tenant has occurred despite a trend toward more meeting space in offices and lower office rental rates, which are factors that would have normally caused lease sizes to increase. Upon further analysis of our lease data, the reduction in size was concentrated in Class C properties, as space usage per tenant in these 1 & 2 Star properties fell 20% from 2,500 SF in 2002 to under 2,000 SF in 2011. In comparison, Class B space utilization per tenant was down by only 12%, while Class A lease size per tenant was up by about 4%.

There are several strategic implications that can be drawn from this trend.
First, the demand for office construction is likely to be lower in this recovery than in the past. In fact, PPR’s office forecast calls for a 1% per year average reduction in the office space per job utilization rate through 2020, as a reduction in shadow supply and space per employee is factored into our forecasts.
Second, this means that tenant renewal rates could fall, as tenants are not willing to lease space that is not needed.
Finally, the office market is likely to compensate for shrinking tenant size by splitting up large, hard-to-lease suites.