In late 2023, the outlook for office property remains volatile and uncertain. Occupancy and rent remain below the pre-pandemic levels, and many companies are struggling with decisions on how much space they need going into 2024. In several important real estate markets, including New York and San Francisco, office buildings are undergoing transformation into multifamily residential properties. Vacancies remain stubbornly high, reaching 21 percent in North America in Q3 2023, as reported by CRE leader JLL in their Q3 US Office Outlook. While the increase in space sharing has increased the reported office occupancy rates (the increase is achieved by assigning more than one person to a seat), utilization remains under 40%.
As the supply of office space continues to exceed demand, commercial tenants are in a great bargaining position. However, the market has some pockets of higher demand, particularly for new construction and properties with excellent amenities and locations.
Where are occupancy and vacancy rates headed?
According to JLL, leasing volume in the third quarter of 2023 fell by 4.2 percent quarter-over-quarter but outperformed Q1. Across the US, Q3 registered 18.3 million square feet of negative net absorption, and overall vacancy increased 39 basis points to 21 percent. Still, JLL expects a stabilizing market in 2024 due to several factors:
- Reduced construction starts.
- An improving economy.
- Continued increases in return-to-office mandates.
These factors complicate the considerations for CRE professionals deciding the best path forward—renewal or relocation, and for how many square feet. Of course, the decisions extend beyond the location and size. Existing or new spaces can incorporate layout changes to take advantage of employee preferences or to support the corporate objectives regarding where and how employees perform their work.
What should I consider when deciding whether to renew or not?
As a senior executive driving the renewal decision, the overall market conditions may influence your calculations. However, what’s going on in your organization is a more direct consideration. Perhaps the first factor to evaluate is the headcount the company projects in the near and mid-term future.
How many employees will work in the office?
Suppose the company is pursuing active growth in employee count. In that case, a secondary consideration is the company’s view of work locations—is there a preference for workers to collaborate in the office most of the time, or does the organization support hybrid and remote working options? The organizational approach to this question is essential in determining your future space needs. You can gain an understanding of the intended direction by seeking input from Human Resources and Finance, among others.
However, determining how much space is needed and how to configure it for optimal efficiency is a complex question that doesn’t rely strictly on the number of anticipated employees.
Where and how do these employees plan to work?
Another factor to incorporate into the leasing decision is utilization rates. If an office has seats for 200 people and is experiencing a 50% utilization rate, that typically means 100 seats are used daily. If the company has one seat assigned per employee, occupancy is also about 50%. In contrast, suppose the tenant has 400 people sharing 200 seats through a hoteling system. While utilization remains at 50%, occupancy would be at 100%, which is a much more efficient use of space.
Your company likely leased and designed your current facility before the pandemic sharply altered office occupancy patterns. This renewal point is an ideal opportunity to reevaluate your use of space, and the question of how much you need to function optimally.
How can I use occupancy metrics to guide my renewal decisions?
There are two essential metrics to consider when examining office space utilization. Planning metrics illustrate how space is intended to be used, while performance metrics show the actual utilization. For example, the planning of a space will include design density and people density, which highlight the number of seats and the headcount as a factor of total rentable or usable square feet. These ratios don’t change based on the number of people who use the office. However, actual utilization rates are determined by tracking and reviewing performance metrics, meaning how many people actually use the space.
As a company considers whether to renew existing space, downsize, upsize, or relocate, occupancy performance metrics can provide solid data to lead the decision-making process. Occupancy metrics identify more than just the number of people in the office daily. The metrics also show how people use the available common spaces. For example, suppose your company has invested in a state-of-the-art conference room that can join remote participants with onsite workers. If the room is underutilized, that critical information may influence the future space design. Similarly, if the company has created a tranquil meditation space, it’s helpful to know whether it draws workers.
While metrics offer a vital understanding of your occupancy needs, there is more to consider than how many people use the space. For example, if your company has 200 employees and a current utilization rate of 40%, you may be considering downsizing the space. However, if your management is pushing for a return-to-office mandate, that must be part of your assessment. Also, you may be able to right size but remain in a portion of the space you currently lease.
Deciding how much space to maintain requires understanding how workers use the office, not just how many people are coming in.
For example, employees may come in on fewer days each week but use conference rooms more often. This data could suggest reducing individual seats and increasing shareable space instead. Or consider reducing seating but transforming the extra square feet into amenities that will encourage employees to work in the office (if that’s the goal). Some companies have redesigned their space to add fitness centers, casual collaborative spaces, and break areas in addition to meeting rooms. [KR4]
Where can I get actionable metrics?
Occupancy metrics can be as simple as counting the number of badge swipes at the building entrances. However, this archaic approach won’t provide the data you need to make productive decisions. Badge swipes don’t provide the rich layers of detail that are now available using more advanced technology like occupancy sensors. An occupancy sensor is a small device that detects how people use a particular space. Simple sensors detect if a specific room or space is occupied. More advanced devices can determine the number of people in a space, how long they stay, what part of the room is being used down to the workstation level, and provide additional data about activity in the room, lighting levels, temperature, and humidity. For more on this subject read: Everything You Can Measure with Occupancy Sensors.
AVUITY sensors can provide custom data on your space utilization, ranging from simple counts to detailed metrics. AVUITY has solutions that can support your need for ongoing information and analytics or a one-time assessment of space occupancy. AVUITY also offers productive tools like online space booking systems and space planning support.
Once you have obtained and reviewed the data that provides insight into your space usage, you can make more informed decisions regarding renewing a lease or considering other options.
Renewal vs. relocation
As you consider the financial and productivity variables, you may also review the market to assess whether moving to a new location makes economic sense. Moving might make sense if you need substantially more or less space than what you currently occupy or if the current facility is undesirable or under-appreciated. Some factors to evaluate when considering this option include:
- The cost per square foot of a new lease.
- The added attraction of the new space option.
- The cost to build out the space to best support your objectives.
You may want to consider options, including subleasing the portion of your current space you don’t need and reconfiguring the existing footprint to enhance productivity and attractiveness. If your landlord wants to retain your organization as a tenant, they may offer incentives to make the decision more attractive.
A step-by-step decision-making framework
Initiating a process to decide between renewal and relocation can be intimidating. You can break the project into orderly steps to improve your outcome.
- Talk to company leaders about their needs and preferences. Ensure that you have accurate projections of headcount and work location objectives.
- Conduct a space utilization study. Obtaining precise data to indicate how the current space is being used will help inform the decision and support your recommendation to the executive team.
- Gather data about current use using sensor technology as well as department surveys.
- Analyze the data and use it to form recommendations for leadership to consider.
- Evaluate the market. Contact a broker with experience in your sector and location to get up-to-date information about current rates and prevailing lease terms.
- Calculate potential costs of a new lease and buildout.
- If your company decides on relocation, plan the project:
- Negotiate the lease.
- Design the new space using the data you have collected.
- Plan a smooth transition.
Today’s CRE market offers an unusual opportunity for real estate professionals to contribute to their company’s effectiveness, employee satisfaction, and financial success by making well-informed recommendations about facility options. You can enhance the impact of your message using actionable data available from AVUITY technology. Contact us today to learn more.
