Corporate real estate strategies have undergone a dramatic transformation since the pandemic. While remote work has gained prominence, many organizations recognize the enduring value of physical office spaces for fostering collaboration, innovation, and company culture. A trend towards smaller yet more premium office spaces has emerged in response.
The shrinking footprint
A growing number of companies are opting to significantly reduce their office footprint. Research indicates that large occupiers are typically cutting back 20-30%, with some reducing their spaces by 50% or more.
This downsizing trend is evident in the decisions of tech giants like Google, which plans to sublease over one million square feet of office space, and Kickstarter, which has put its headquarters on the market. Other big companies that have opted to reduce their footprints also include:
- The IRS
- Carnival Cruises
- Glassdoor
- Yelp
- General Electric
The “premiumization” of office space
In a competitive job market, companies are investing in high-quality, amenity-rich office spaces to attract and retain top talent. These premium spaces often feature flexible workspaces like hot-desking (or hoteling) and shared co-working areas to accommodate diverse work styles.
Employers are also incorporating wellness amenities like fitness centers, on-site dining, and green spaces to enhance employee well-being and job satisfaction. Amazon Canada’s new Vancouver office, complete with its community garden, dog park, and basketball court, exemplifies this approach, blurring the lines between workplace and community hub.
Key elements of premiumization
To attract (and keep) high-quality talent, companies have recognized the need to offer exceptional environments that go beyond basic functionality. This strategy is crucial in a competitive market where tenants have more options than ever before. There’s a strong correlation between amenity-rich properties and increased tenant demand. To maximize ROI, landlords are focusing on health and wellness initiatives, hospitality services, and outdoor spaces.
- Health and wellness: Recognizing the growing emphasis on employee well-being, fitness centers, relaxation rooms, and wellness programs are becoming standard offerings. The trend toward mental health support, with mindfulness and meditation classes, is also gaining popularity.
- Hospitality-driven experiences: To create a truly differentiated experience, concierge services, personalized attention, and welcoming common areas are becoming essential elements of modern office buildings. The goal? To make tenants feel valued and cared for and foster a sense of community and belonging.
- The outdoor oasis: The pandemic highlighted the importance of outdoor spaces, and landlords are responding by incorporating them into their building designs. Roof terraces, green spaces, and outdoor work areas are in high demand. These spaces offer employees a respite from indoor environments, promoting well-being and productivity.
Repurposing underutilized space
As remote work gains traction, many organizations are grappling with the challenge of underutilized office space. One solution is repurposing these spaces for alternative uses, converting office buildings into mixed-use developments incorporating residential, retail, or leisure components.
Ten US and Canadian cities, including Atlanta, Calgary, Dallas, New York City, Philadelphia, and Toronto, have begun converting office space into housing (also known as “adaptive reuse”).
While this strategy offers potential benefits, it’s important to consider the feasibility of such conversions, as factors like building infrastructure and zoning regulations can present significant hurdles. Adaptive reuse also isn’t a quick solution, nor is it inexpensive.
On June 26, 2024, the Biden administration announced, jointly with the Department of Housing and Urban Development (HUD), the release of nearly $85 million in grants as part of the Pathways to Removing Obstacles to Housing (PRO Housing) program. The program aims to help address critical housing challenges local communities face via adaptive reuse strategies and finance conversions.
Sustainability as a competitive advantage
Corporate real estate has recognized the importance and value of championing environmental sustainability. Companies are increasingly seeking green-certified buildings designed to reduce energy consumption, minimize waste, and promote employee well-being.
As environmental regulations tighten, businesses understand the need to adopt sustainable practices to mitigate risks and enhance their reputation. Leading organizations like Microsoft are going beyond carbon neutrality by setting ambitious goals to become carbon-negative, water-positive, and zero-waste.
This convergence of a trend toward smaller footprints and a heightened emphasis on sustainability is creating a unique opportunity for commercial office spaces to gain a competitive edge. Smaller spaces often require less energy to heat, cool, and light, providing an immediate energy efficiency advantage. Fewer employees occupying a space reduces waste generation and increases resource conservation.
Sustainability as a tenant attraction
Tenants, particularly those in environmentally conscious industries, gravitate toward office spaces aligned with their sustainability goals. Landlords can attract and retain these clients — and enhance their property’s reputation — by creating more sustainable spaces.
Green buildings often prioritize indoor air quality, natural light, and access to green spaces. These features contribute to healthier and more productive work environments, essential for attracting and retaining top talent.
Buildings with energy-efficient systems and materials generate lower operating costs. Building owners and landlords can pass these cost savings to their tenants via lower rental rates — or use the savings to invest in additional building amenities.
As environmental regulations become more stringent, sustainable buildings are better positioned to comply with future requirements, reducing the risk of costly retrofitting or fines.
Specific sustainability features
To capitalize on the sustainability trend, commercial office spaces can incorporate the following features:
- Energy-efficient lighting, HVAC systems, and building automation systems
- Water-saving fixtures and technologies, like rainwater harvesting and greywater recycling
- Sustainable materials with low environmental impact
- Comprehensive waste management programs, including recycling and composting initiatives
- Green roofs, indoor plants, and outdoor spaces to improve air quality and tenant (and visitor) well-being
- Technology that optimizes energy consumption, monitors environmental conditions and enhances occupant comfort
Integrating these elements into office spaces empowers landlords to create environments that support a more sustainable future and appeal to tenants seeking greener environments.
The future of the office
The commercial office sector continues to face headwinds, with negative office space projected to persist through 2025, according to a recent National Association for Industrial and Office Parks (NAIOP) report. While this rate is expected to gradually decelerate by the end of next year, the market’s performance in Q1 2024 significantly underperformed initial forecasts, registering a substantial negative absorption of 13.4 million square feet.
The confluence of negative absorption rates and a substantial volume of loans approaching maturity poses challenges for regional banks. The perfect storm of economic factors is creating a complex, uncertain landscape for the CRE industry.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
