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November 30, 2017

Office 2020

By Jonathan Zimmerman

Think back to the last time you shopped around for an apartment. Likely, the process was straight-forward and to the point: figure out your budget, pick a neighborhood, set aside a couple of days to tour, select a place you like, fill out the application, then sign a lease for a year or two. Apartment units are generally well-maintained and move-in ready, so there was probably no talk of demolishing or constructing walls, re-painting with wild colors or replacing carpet. The goal was to get in there fast and make it work.

Now, let’s contrast this with searching for office space. Traditionally, it is a much more cumbersome process which can easily drag on for many months. Since office leases are usually a longer term and greater in value, more time is spent searching for just the right space, negotiating every deal term, and constructing the space to the tenant’s exact specifications; that’s the way it has been done for years. Recently, however, it appears that we are on the cusp of a fundamental shift in the way businesses office.

Millennial attitudes and expectations now place greater emphasis on flexibility, move-in readiness, and amenities. What does that mean for the next generation of office space? For example, let’s look at a tech firm. While the company is starting up, co-working space will serve their needs well. The firm can walk into a building with pre-built, move-in ready suites, standardized layouts, and the option of furniture in place. It is only logical that at some point, though, that business will want to take the next step up from co-working space and graduate to a private, autonomous atmosphere.

Rapid growth in co-working space for smaller-sized tenants combined with larger office buildings adding common amenities at a robust pace is putting pressure on office buildings to become a hybrid of office space, apartments, and hotels.

Attentive landlords have caught onto this trend and have already started creating small and mid-sized prebuilt offices positioned as both an alternative to shared office space as well as an option for young companies who have outgrown the co-working model.

To facilitate this new approach, expect to start seeing even more buildings demise larger-sized suites into smaller units ranging from around 1,000 to 10,000 square feet, and molding them into a move-in ready state. These smaller suites will be designed for shorter terms, likely 3 years or less, which will fit right into the desired strategy of the new era business model. By breaking up larger sized suites into smaller units, buildings will not be as devastated if one is vacated, as compared to a situation where a large tenant moves out and leaves a building half empty. Landlords will benefit because these types of spaces often lease quickly and at higher rents, as tenants have demonstrated a willingness to pay more in exchange for flexibility.

If the system is functioning, turnover costs are less, as tenant improvements will not be required each time a space changes hands and only some elementary redecorating will be needed every few years. If a tenant moves out, another should come along and fill it shortly thereafter, just like an apartment.

The hotel component comes in with the amenities, many of which are offered by the co-working providers. These features include things like shared conference facilities, w-fi lounges with big screen televisions and gaming, food service onsite, fitness centers, rooftop decks or equivalent outdoor space, bike storage, ability to bring dogs into the building, and concierge service. Having a plentiful supply of shared elements makes tenants even more willing to go along with the standardized layout approach for their office as they are buying into the entire package offered by the building, not just the space.

While news and statistical analysis of the office market mostly made up of large tenants who work in Class A properties, small and mid-sized users have always been the lifeblood and will be the ones to lead the thrust into the next generation. While there are now and will continue to be certain types of tenants—law firms and medical tenants, for example—who will have no interest in this type of arrangement, technology, media, creative-oriented firms and nonprofits will continue to propel this fundamental transformation.

Tenants no longer want to wait 6 to 12 months to find a space, take time to execute a lease, and build it out. In a world of Amazon prime and same-day grocery delivery, the demand for getting things now has increased in all areas and office space is no exclusion. Change is the one constant in real estate and perceptive landlords who are willing to adjust to the market demand and stay ahead of the curve are the ones who stand to benefit the most as we move into the next decade.