In recent years companies like AT&T have taken to observing Telecommuting Day to honor thousands of their employees who work from home. In the past, such a phenomenon would have been considered bizarre–because everyone assumed that those who worked in offices had to actually be physically present there. Today, as technological advances make personal computers, fax machines, cell phones and beepers increasingly affordable, telecommuting is all the rage. The number of people who work from home continues to mount every year.
Such statistics tend to make real estate developers a trifle uneasy. After all, each worker who works out of her or his bedroom represents an empty space in some office tower. As trends like telecommuting catch on, developers worry whether companies will need fewer offices in the future.
Two other trends add to this anxiety. One is that companies are increasingly using offices more efficiently. For example, rather than having dedicated offices for employees, some companies have introduced so-called hotelling arrangements in which rooms–often fitted out with temporary name plates–are allotted to users who need them on specific days. The second troublesome trend is downsizing. As giant corporations hemorrhage jobs in the thousands, won’t demand for office space dwindle or even die?
Research by Peter Linneman, former director of the Samuel Zell and Robert Lurie Real Estate Center at Wharton, answers that question with a resounding “No.” In a paper titled “Will We Need More Office Space?” he contends that fears about the demise of the office market are exaggerated. Despite technological development and the evolution of trends like telecommuting, demand for office space has been steadily increasing in the past decade and will rise significantly over the next. “Technology and office space are positively–not negatively–correlated,” Linneman says. In short, the office market is not dead or dying; it is alive and growing.
Linneman points out that since 1980, the use of office space per worker in the U.S. has increased from 142 sq. ft. to 155 sq. ft., or by about 1 sq. ft. a year. The figure reached its peak in 1992, dipped for about two years as a result of the real estate recession, and then resumed its upward climb. Why? Part of the reason, Linneman explains, is that real office rents declined by some 40% during the 1980s, making it less expensive for tenants to use more space. An even more significant factor, however, is that contrary to popular myth, the proliferation of technology rarely reduces the need for space. For example, the widespread use of computer workstations may have eliminated the need for typing pools in modern offices, but these have been replaced by large video-conferencing facilities and trading floors. In short, technology does not cut down demand for office space; it just changes the way the space is used.
Yet another reason why companies use more space per worker is the changing composition of office employees. In the past, offices were made up of a few professionals supported by an army of typists and clerical employees. That mix, Linneman shows, has now decisively shifted in favor of professionals. “The modern U.S. firm employs more professionals (using larger amounts of space) per support worker (who use less space) than ever before,” he says. “As a result, the average space per worker has risen due to the changing mix of workers in the office building.”
Companies do not mind providing professional employees with larger offices, Linneman says, because they recognize that in a service economy it is part of providing a high-productivity work environment. “The annual after-tax cost of providing an additional 50 sq. ft. to a high producing professional is a mere $1,500, even at rents of $45 per sq. ft.,” he notes. “This is a small price to pay to attract an employee who will generate in excess of $150,000 in annual net profits for the firm.”
Linneman pooh-poohs the impact of home offices and telecommuting on demand for office space. Though home office use is rising, the number of people who work just from home is minuscule. Most people with home offices also have offices at work. Of the 20 million Americans who worked from home in 1994, “only about 100,000 reported that they did not also have offices at their places of employment,” Linneman notes. “Most of us work in our homes but also have offices (frequently large and elaborate) at our places of employment.” Linneman’s research shows that even if the number of people who work from home were to triple over the next decade, this would represent at best a reduction in demand for less than 0.5% of the U.S. office stock.
Telecommuting, too, is unlikely to pose any great threat to demand for office space. “The simple fact is that for most Americans the home is an extremely poor work environment,” he says, replete with distractions that include children, pets, food and the “ever present television set. complete with VCR and 100 cable channels.”
Downsizing, similarly, is a red herring. In most cases it reflects an outsourcing, rather than an elimination, of jobs. “Downsizing does not mean a drop in total employment, but merely the reshuffling of tasks and employment among firms,” Linneman says. “In fact, U.S. employment continues to grow by roughly 1.7 million workers per year even as downsizing has spread.” The main effect of downsizing is not that it reduces demand for office space, but that it makes office building owners vulnerable to higher risks. “This is because outsourced activities are generally performed by firms with higher credit risk than that of the downsizing firms. This will ultimately require office owners to operate larger and more diversified property portfolios in order to offset these increased tenant risks,” he explains.
If all this is true, how will these factors affect demand for office space over the next decade? Linneman notes that demand for office space depends on two factors: the number of office workers, and the amount of space that companies use per office worker. Even assuming that the space per office worker remains constant over the next 10 years, Linneman predicts that demand for office space will still increase significantly.
In the past 15 years the country has generated some 1.7 million new jobs a year on average. This means that in the next 10 years, the economy will generate 17 million new jobs, of which some 5.37 million will be office jobs. If each of these workers needs roughly 156 sq. ft. of space, this represents a total demand for roughly 832 million sq. ft. of office space in the next decade. If the decline associated with home office use is subtracted, it still means that 800 million sq. ft. of office space will be needed over the next 10 years.
Linneman’s conclusions have significant implications for office space developers. Over the next decade they must prepare to build almost 1 billion sq. ft. of office space. Realistically, most of this construction will occur after the year 2000, in view of current office vacancies. Despite the Cassandras, developers need not despair when they see the “For Lease” signs that festoon empty offices today. If Linneman is right, they might be better off ordering more reams of blueprint paper to prepare for the next office construction boom.
