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Is it Time Yet?

Redesign your commercial real estate space

Posted by Surabhi Sheth, Real Estate research leader, Deloitte Services LP, on July 23, 2013

Digital adoption rates are beginning to impact the way companies evaluate commercial real estate needs. The 2012 Flexibility Drives Productivity Regus Study1 reports that $15 billion in savings can be achieved if all U.S. firms adopt flexible work schedules. That’s quite a figure, considering that three-fourths of U.S. workers are likely to be mobile this year. So what are the trends when it comes to flexible work schedules? 81 percent of businesses across the US are already offering their employees alternative work options to fixed working hours in an office. This comes as no surprise, according to a Deloitte report on Work Environment Redesign2 — many individuals tend to lose passion in a traditional physical space where employees need to be in the office Monday through Friday. A broader view of the work environment includes the physical, virtual, and management infrastructure that enhances efforts of employees. An adaptable workspace provides employees with flexibility and increases their sense of ownership.

Many companies are already experimenting with alternative workplace strategies, which in most instances results in lower demand for physical space. This is visible in below-average office vacancy and rental growth — 15.3 percent and 3.5 percent in 1Q13. Further, while net absorptions remain positive (4 million square feet as of 1Q13), new development activity is insignificant. Can office players anticipate tenants’ demands to optimize workforce effectiveness, appropriately redesign existing space, and up their game? 

The technology jinx has spilled over to retail property players as well, as retailers’ store sales and margins are being impacted by the rise in Internet sales. Retailers are cautious about expanding brick-and-mortar stores as they target more and more consumers through alternative channels such as online. Store completion is at a record low, which will temper the effect of lower demand to some extent. In fact, net absorptions expanded to 7.6 million square feet in 1Q13 compared to 1.4 million in 1Q12. Vacancy declined 60 basis points year over year (YoY) in 1Q13 to 12.5 percent. Effective rents declined 0.2 percent YoY, which is substantially better than the 1.7 percent decrease in 1Q12. Can retail players help tenants redirect traffic back to the stores by enhancing customer experience through integrated use of mobile apps and social media? On the positive side, the increase in online shopping has led to higher demand for warehouse space from e-retailers.

Here’s the happy picture. Rent growth stood at 1.8 percent in 1Q13 versus -0.6 percent in 1Q12, and vacancy improved to 12.5 percent compared to 13.1 percent in 1Q12. Even though new construction activity remains slow due to low rents and elevated supply, net absorption was a strong 63 million square feet in 1Q13. Can warehouse operators benefit from using technology to spruce up and make existing space efficient? Is it time for you to redesign your existing commercial real estate space?

1Regus, Flexibility Drives Productivity, February 2012.
2Deloitte, Work Environment Redesign: Accelerating talent development and performance improvement, June 3, 2013.

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