Pendulum Swinging to Occupiers

The pendulum is about to swing to occupiers.

Last week, Kevin Thorpe (Cushman & Wakefield’s Economist), Steven Quick (CEO of Global Occupier Services at C&W), and David Smith (Sr. Director of Occupier Research at C&W) all held a webinar on the factors shaping the occupier markets both today and into the near future.  The big news is the pendulum is shifting to an occupier market place.  The entire webinar can be watched here.

We have been in a Landlord favorable market for months now and occupiers have been feeling pinched when looking for or renewing their leases.  Most of the market cycles in the past 15 years have favored the occupier but that hasn’t been the case recently.  Rents have risen and vacancy is low but that is about to change.  We have seen vacancy inching upward in the past several quarters and rent growth is slowing down and it appears that occupiers will start to build some leverage over the next 12 months.

A quick summary of the points from the webinar are:

• When will the US go into a recession: A recession is not on the horizon and in fact, the US economy is looking stronger and stronger and while we’ve had about 8.5 years of growth, we don’t appear to be headed to any correction in the near future.
• Factors impacting occupiers:
  • We are in a very strong job market which makes it hard to get and retain good talent,
  • The density per worker has increased which results in companies needing less space,
  • Wage growth is expected and that can slow demand for more space,
  • New construction is bringing more supply online which will keep vacancy up,
  • Concessions are on the rise. In fact, we’ve seen TIs on the rise as well as free rent for new deals.
• Key Occupier Trends:
  • Millennials are all the rage. We are seeing the largest generational shift in the workplace with Boomers exiting, Generation X is status quo and Millennials are coming into the work force at a high pace.
  • Millennials value flexibility and a key challenge to occupiers is to find a way to give them the flexibility they want and still build a corporate culture, trust and teams.
  • Density is dropping for the last 8 years. In 2010, the average square footage per employee was 225 sq. ft. and today the average is 195 sq. ft. per employee.
  • Looking ahead, the Digital generation will desire offices which have open layouts, coffee shops, lots of food options nearby, laid back and quiet environments to name a few.
  • Millennials are moving to suburban neighborhoods. They represent about 33% of all buyers today.  Expect to see suburban markets to grow at a higher pace than recent years.
• Vacancy Forecast:
  • The top 5 markets expected to see vacancy rise in are Dallas, San Francisco, Houston, Denver and Nashville.
  • The top 5 markets expected to see vacancy decrease are San Diego, Phoenix, Philadelphia, Raleigh and Miami.
• Ideas for Occupiers:
  • Take advantage of the supply boom as vacancy is expected to rise.
  • Don’t follow everyone and don’t be afraid to consider older spaces as they are cheaper.
  • Middle floors have a better value.
  • Density doesn’t work for everyone so taking more space might give you a competitive advantage to other offices.
  • Look for landlords that know where we are at in the cycle. Those landlords will offer more concessions to new tenants.
  • Avoid tech markets because they are the most expensive. If you can be in the next town over then do it as you will save money if you avoid being in a tech market.
  • Treat your space as a strategic decision for the company as it will attract talent to your firm.

If you are thinking about your office lease and want to put together a strategy for your firm I would welcome the opportunity to meet and listen to what is important to you and your firm and help you develop a strategy for the next 5 to 10 years.  I can be reached at 510-915-7645 or via email at chris.crabtree@cushwake.com.