The Great Recession’s Impact on the Office Market

The Great Recession caused interesting and identifiable changes in the commercial real estate industry, particularly the office space market. A tenuous economy coupled with technological advances caused companies to reevaluate the way they do business, which in turn had significant impacts on their decision-making with regards to taking space. In the short term, many businesses were unwilling to sign up for long-term leases due to fear over the fate of the economy. Over the long term though, tenants sought to lower costs and maximize efficiency by altering the way they operated, even questioning the need for office space altogether.

While not a unique product of the Great Recession, outsourcing certainly increased in prevalence as a result. The Affordable Care Act’s requirement to provide healthcare to full-time employees also greatly contributed to employers outsourcing certain roles and services. Why hire a full-time accountant, for example, when you only need part-time accounting work? Companies were able to lower costs by hiring less full-time/overhead employees and as a result required less office space.

Another change that occurred during this time was a move towards more open office layouts*. Collaboration was all the rage and companies wanted their employees to be able to communicate and share ideas more easily. The number of individual offices dramatically decreased; giving way to cube farms and team spaces and “war rooms.” The old, high-profile cubicles were abandoned in favor of low-profile, smaller cubes or even long tables or desks. This change allowed companies to increase their employee density. In office intensive environments employers would typically budget 200-250 square feet per employee. This included each employee’s share of the common areas of the building and space, i.e. kitchen, bathrooms, conference rooms, etc. With the more open plan concept, employers were able to lower their employees’ footprint to 150 square feet or less. As in the case with outsourcing, this change allowed companies to take less office space thus lower their costs.

*The move towards open office layouts appears to be a failed experiment as many employers are trending back towards individual offices; citing lack of privacy as an impediment to employee productivity and morale.

Advances in telecommunications and connectivity led to an increase in the viability and desirability of telecommuting. Many functions can be performed remotely; allowing employees to work from anywhere. Companies now had the option to allow certain staff to work from home or only require them to come into the office a few times a week or month; leading to cost savings from decreased space requirements. “Phone booth” offices and hoteling became popular alternatives to permanent space for telework employees.

Coworking spaces have been growing in popularity since 2008 particularly with newer and hipper options such as WeWork and MakeOffices entering the marketplace. Most people were familiar with the 800-pound gorilla, Regus, and what they offered: short-term office rentals, access to conference room space on an hourly basis, and receptionist services. Sensing an unmet demand, these new companies presented a slightly different offering. Instead of the maze-like, office intensive environment of their competitors, they provided a more collaborative environment with modern finishes that appealed to millennials. Furthermore, Regus’ a la carte services led to many a client being shocked when they received their monthly bill. Newer options provided many more amenities such as beer/wine, black and white copies, game rooms, etc. for free.  One reason that they were able to offer more for less was due to the additional money they were able to generate by reducing office sizes and increasing hoteling options.

While it is yet to be seen if the changes to the commercial office market brought about by the Great Recession are temporary or permanent, the present effect has been a decrease in square footage per tenant and increased vacancy rates. This has led to a prolonged tenant’s market with landlords being forced to offer increased concessions and additional amenities to attract tenants.

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