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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.

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Inside The Story

Read more at Green StreetConnect With Green Street’s Ismail

About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.

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