Last year our assessment of office construction cost trends focused on corporate America taking less space and looking for more real estate efficiencies during challenging times. We now have been through two full years of corporate contractions, including head count and salary reductions, as well as facilities and workplace consolidations.
Most companies now are familiar with various efficiency-focused strategies as they search for competitive advantages and survival approaches, and many firms have adopted and implemented these strategies. Approaches such as increased mobility, work-from-home programs, smaller workstations, “hot-desking,” hoteling, fewer enclosed offices, and increased “open plan” space are some of the now-common strategies that have been used to reduce real estate occupancy.
As we look ahead, we see a more consistent warming of the market, with erratic economic growth on the foreseeable horizon. If there are headlines this year, they look something like this:
• Fit-out and renovation costs have stabilized at a five-year low.
• Companies have reduced operating costs and adapted to living with less.
• The more obvious space efficiencies have been implemented and maxed-out.
• Sustainability continues to play a major role in corporate real estate strategy.
• There likely will be a gradual upswing in the office construction market.
Cost Implications of New Workplace Strategies
Reducing operating costs via reductions in real estate and increased facilities efficiencies leads to divergent impacts on the demand/price index for interior construction.
While it is true that such efficiency-focused strategies do reduce demand on quantity of space, in many cases they also have generated a boost in transactions (and the corresponding renovations or relocations), as companies shed larger spaces and occupy smaller footprints. However, these newly relocated and renovated companies often use the latest furniture and technology to compensate for smaller footprints, frequently creating a higher expenditure per employee/per square foot.
The combination of reduced real estate area with more expensive fit-outs has an indeterminate net impact on the cost index. These variables are also combined with many tenants moving into “pre-built” space (lower construction demand) or “staying in place”—either delaying growth plans or even “downsizing in place” and thus saving on both the real estate and renovation costs.
Innovative Thinking: The Workplace as an Integral Business Tool
In terms of operating cost reductions, many companies have reduced their occupancy levels as much as possible, and many of these newly developed office spaces have become as efficiently planned out as possible. The workspaces can get only so small, and costs can only be reduced only so much before these reductions begin to impinge on a firm’s core business. At the same time, companies understandably are still reluctant to invest, and this duality has created a stagnant environment.
However, for organizations that have been surviving by ratcheting up real estate efficiency, innovative thinking is one of the only options for sustainable growth. We see industry leaders using their workplace as an integral business tool and investing in productivity and performance. The question we hear from these innovators is: How can the workplace help us leverage our greatest (and most costly) asset—our people?
As companies confront the need to invest to succeed, we will see an upswing in both the quantity and quality of workplace. This is a self-fulfilling prophecy: As the invest/success cycle becomes more visible it will be increasingly emulated. This brings us back to supply and demand. As demand slowly increases we will see a corresponding firming up of construction costs.
Some Notable Statistics
• The year 2011 will see more than 10 construction fit-out projects in excess of 250,000 sq. ft.—double that of last year.
• Pricing from subcontractors has increased 5 percent over the last six months due to increased demand.
• The submarket has exhausted its tolerance of "at cost or below cost " work over the last 20 months.
• As market activity increases, net square footage absorption is increasing, thus pushing up rents and urging undecided tenants to take action and finalize landlord negotiations in order to: a) obtain the best rent rates and b) still retain the ability to take advantage of substantially low construction costs (i.e., 2005- 2006 pricing).