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Green Street: Office Sector Faces Headwinds
One of the biggest headwinds for operating fundamentals this cycle for the office sector has been densification, or increased utilization of office space. These new work environments typically are tighter quarters, notes Green Street, as companies adopt space productivity strategies also designed to be more cost efficient.
But, writes Green Street’s Danny Ismail, that’s not necessarily good for landlord’s bottom lines. The resulting effect is that “densification can be considered a type of shadow inventory that is having an outsized impact on fundamentals in most major office markets,” writes Ismail.
By comparison, a company that took space in 2010 now likely uses 15% to 20% less square footage by packing employees into a smaller space. That trend has been further fueled by co-working companies that have gobbled up big chucks of space. WeWork, for example recently became the largest office tenant in New York. And, Ismail points out that “WeWork tends to operate more densely than traditional office companies.”
While new supply affects fundamentals, the shadow supply from densification and office reconfiguration is having a bigger impact. As a result, New York reported flat net rent growth over the last year, and Ismail notes, likely will not see healthy net rent growth over the next few years as job growth gets offset by tenants taking less space.
According to Green Street analysis, the bottom line is that densification creates a meaningful drag on office fundamentals that isn’t visible in traditional inventory growth statistics – and that means it can be overlooked by commercial real estate executives. In effect, markets need more employment growth to compensate for the increased utilization, writes Ismail.
For comments, questions or concerns, please contact Dennis Kaiser
