Will Office Densification Continue?

NAIOP Research Foundation Newsletter, November 2017

Has densification of the office environment reached a tipping point? Yes, say research directors from national real estate brokerage, data and investment firms, whose consensus is that on the whole, office densification is either approaching or has already reached a tipping point, as most of the larger office space users have already downsized and the smaller ones that are left to downsize are not expected to move the market.

These research directors came together in mid-September at an annual gathering hosted by the NAIOP Research Foundation.

Sarah Dryer, director of research, Washington, D.C., region for Savills Studley, stated the trend will vary by industry. Tech firms, for example, might continue to shrink their office footprints but others want to “right size” as different industries use space in different ways. Elizabeth Norton, managing research director for Transwestern’s Mid-Atlantic region, noted that many larger firms have already restructured, but when one considers that average lease sizes range between 8,000 and 10,000 square feet, she does not know if it will be possible for the smaller firms to contract further, given that they are starting from such a low basis.

One participant noted, however, that there may be possibilities for contraction among public sector tenants. “Current federal government offices are still relatively large but new leases are smaller by 15 to 20 percent,” said Revathi Greenwood, Americas Head of Research at Cushman & Wakefield. “There is still room for densification within the federal sector and with some of the Washington, D.C., law firms as they move their libraries online.”

Jim Costello, senior vice president at Real Capital Analytics, and John Chang, first vice president of research at Marcus & Millichap, believe that going forward, it is unlikely there will be continued contraction among office space users. They noted that for some employers building out new space, individual workstations are smaller, but collaborative spaces are larger, resulting in no loss or gain of square footage upon execution of new leases.

The participants noted that resizing and open plans are not always optimal, as densification can lead to decreased productivity among workers and stretch the limits of building systems (e.g., HVAC and bathrooms), a challenge faced by numerous owners. “Some companies have crunched so small that they actually have to renegotiate space,” said Ray Wong, vice president at Altus Group in Toronto. He countered by saying, “I think there’s still some room in the marketplace to densify, but at what cost? Productivity and densification need to balance. Densification for densification doesn’t make sense.”