Office Vacancies and Efficient Space Use

CRE Finance World, Winter 2013

Office Vacancies and Efficient Space Use Howard Y. Esaki James M. Manzi Managing Director, Global Head of Senior Director, Structured Structured Finance Research Finance Research Standard and Poor’s Standard and Poor’s M in the current space used per worker would raise the growth until 2015, according to Standard & Poor’s credit analystwhich has the potential to keep retail vacancies higher than theyotherwise would be, we view the more efficient use of space as astructural change that will affect office sector demand over a numberof years. The national office sector might not see meaningful NOIore efficient use of office space has the potential tokeep office vacancies elevated over the long term, whichin our view would be a credit negative for commercialmortgage-backed securities (CMBS). A 10% drop office vacancy rate to near 18% by 2017 from 16% currently, Larry Kay, with office efficiency playing a major role (4). according to our estimates, using second-quarter 2012 CBRE Econometric Advisors’ (CBRE-EA) forecasts of additions to stock At the end of 2011, 15.8 million employees occupied 3.4 billion sq. and employment growth. And although we believe it unlikely, if ft. of office space (217 sq. ft. per person) according to CBRE-EA, office use per person drops 10% below the long-term average, down from the high of 221 sq. ft./person in 2009. This figure fell the vacancy rate could rise as high as 24%, holding all else equal. gradually from the high of 221 sq. ft./person in 2009. Over the last In addition, higher vacancy rates would likely lead to lower rent 25 years, the amount of the total stock occupied by each employee growth, which in turn would lower property level net operating has stayed between approximately 190 sq. ft. and 220 sq. ft., income (NOI) and loan debt service coverage ratios (DSCRs). averaging close to 200 sq. ft. A number of corporations — including some large ones like Chart 1 Alacatel-Lucent, Microsoft, Credit Suisse, Unilever, and Blue Space Per Office Using Job (1985-2011)* Cross — have either recently announced or implemented plans to reduce office space use per person (1, 2). According to a CoreNet Global survey (an association of corporate real estate and workplace professionals), the average office space per worker will be 151 sq. ft. in 2017, well below current levels. New York City’s Office of Management and Budget noted in a recent report that although the number of office workers in the city rose by 93,000 over the last two years, the amount of available office space only fell by 9.3 million sq. ft. (or about 100 sq. ft./worker). It attributed the lower square footage per person to a potential shift in company practices toward more efficient utilization of space (3). Some tech firms have already taken this early trend a step further, moving to a so-called officeless work environment as workers use homes as primary workspaces and communicate primarily over the Internet (see “Step Into the Office-Less Company,” Wall Street Journal, Sept. 5, 2012). Space Usage Per Worker Is Near A 25-Year High But Is Trending Down * we interpolated the results for 2012–2016 between the 2011 and 2017 data points.The Standard & Poor’s scenarios displayed in the chart reflect projections for 2017; Despite some early moves to efficiency, in 2011 the average office Sources: CBRE Econometric Advisors and Standard & Poor’s. LT — Long-term. space per worker was about 220 sq. ft., according to CBRE-EA, above the 1985-2011 average of 200 sq. ft. We attribute some of Office Vacancy Rates this increase to the temporary effect of financial and legal sector The office vacancy rate also reached a near-term high of 16.6% in layoffs and expect a downward adjustment as leases expire. As 2009 and has fallen to 16% as of year-end 2011. Over the 26-year technology continues to improve, we believe more employees will period from 1985–2011, the vacancy rate has averaged about 15%. be able to work remotely. Much like the trend of rising online sales, CRE Finance World Winter 2013 48


CRE Finance World, Winter 2013
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