Is the world over?building?

One of the defining images of progress is an army of cranes presiding over the building of a new batch of tower blocks. By contrast, those same buildings standing empty is a symbol of decay. The latter image is the one becoming increasingly prevalent in cities around the world – developers are putting more supply on the market but a shift in working patterns is reducing demand. 

Long before Hurricane Harvey hit, Houston was struggling with a vacancy epidemic: almost a fifth of offices, amounting to 46.7 million square feet, were empty – the highest rate in the US. The vacancy rate in Washington DC is at its highest for 25 years, while in Shanghai, even China’s largest building is struggling to attract tenants as companies look to cut costs amid a wider economic slowdown.

Real estate consultancy JLL, in its most recent Global Market Perspective, said that while office leasing activity remained firm in the first half of the year, vacancy rates, particularly in the US and Asia, would rise towards the end of 2017.

One possible reason is suggested by real estate services firm Cushman & Wakefield, which has asked “is the world overbuilding?”

“Across the globe, an unprecedented office building boom is underway with more than 700 million square feet of space under construction that will deliver between now and the end of 2019,” the firm said. “That’s the equivalent of recreating five cities’ worth of office inventory – Washington DC, Dallas, London, Singapore and Shanghai – over the next three years.”

It seems an odd development, given that many companies are thinking deeply about how they can make their office premises more efficient. As long ago as 2013, Forbes noted that insurance firm Aetna had parted with 2.7 million square feet of office space, thereby saving $78 million a year because 47 per cent of its 35,000-strong workforce used flexible workspaces.

As the building consultancy Aecom points out, “On average, 40 per cent of workspaces are empty at any point during the core working day – and yet organisations are paying for this empty space.”

Collaborative workspaces with no fixed workstations “shrink the amount of expensive real estate given to employees without leaving them feeling too squeezed”, reports The Economist.

Bloomberg columnist Lionel Laurent adds that in London, at least, “Tech’s expanding footprint in the capital has turned the relatively simple business of just throwing up more towers into a Silicon Valley-inspired arms race for the hippest, most inspiring workplace cathedrals (think Apple’s flying spaceship in San Francisco). Meanwhile, cash-strapped banks are squeezing staff into new digs to consolidate multiple offices into one. Both these tendencies leave empty properties in their wake.”

Savills, the real estate consultancy, reported this summer that “the growth of serviced office space is disrupting the conventional commercial real estate market”.

As a result of all these trends, the commercial property world looks to be on the verge of a structural change, with mobile workers making a significant proportion of traditional fixed office space obsolete and inefficient. As more people work remotely for at least part of the week, businesses of all sizes will have to choose between paying for empty desk space or cutting down on permanent office space and opting for more flexible solutions.

In a recent article in the Harvard Business Review, Diane Mulcahy, author of The Gig Economy, said that the direct costs of maintaining the traditional office-based workplace are high, with the typical company in the US spending more than $12,000 per employee per year for office space. “It’s hard to find a return-on-investment case for office space, and much harder still to find any company that makes a compelling one,” Mulcahy added.

Much of the growth that exists in the market is coming not from traditional procurers of offices but from providers of shared working spaces. Commercial real estate website Bisnow states that any “uptick in occupancy is due in large part to the co-working culture that is taking the industry by storm”. Flexible office space providers accounted for over 7 per cent of leasing activity in London over the past three years, up from 1-3 per cent for most of the previous decade. Cities such as Paris and Berlin have also seen rapid growth.

“Experimentation and adoption of new types and formats of space, as well as an increase in the amount of shared, community or collaborative space within portfolios are all on the rise,” JLL said.

As a result, as Cushman & Wakefield argues, “from that perspective, perhaps the world isn’t overbuilding at all. Perhaps, the world is finally upgrading its office inventory, finally giving tenants more of what they really want.”

However, because this upgrade coincides with big changes in the way workers use offices, it creates real threats for older, lower quality offices. These offices just aren’t adapted to the new demands of the working world – and they need to be to survive.