The New Economics of Office Space

Traditionally corporate real estate costs represent nine to 12 percent of a total company cost base. But as concepts like work from home and spoke and hub gaining traction as COVID-19 lingers, Joe Brady, CEO Americas for The Instant Group, a workspace innovation firm, sees an opportunity for some firms to bring those costs down to five or six percent.

Brady sees they can do this by relying on spokes where people can come together to fill personal contact voids without commuting to the main office hub, which are in central business districts and will have spaces, such as boardrooms and huddle rooms, dedicated to “engagement and collaboration.”

“With this idea of the hub and spoke, if you’re reducing expensive real estate in the prime core business districts, the urban cores, and you’re moving out to first string suburban, you’re going to see some, some cost savings,” Brady says.

Brady thinks a lot of this cost savings will come from better utilization of space.

As companies look to distribute their workforce into more locations, Brady predicts that they’ll also need to reengineer space. For instance, he sees a movement towards “resimercial” design with touches that include soft seating, couches and comfortable chairs. 

“You can hunker down and talk,” Brady says. “They’ll have some screens and white walls and things of that nature. So I think we’re going to see more meeting rooms and creative collaboration in hub offices.”

Before COVID-19, Brady says office densities were moving toward 100 square feet and under. “I think we’re going to see that bounce back,” he says. “So companies will likely reduce their space, but not as much as we think in the downtown areas. That space will just be converted around collaboration and whatnot.”

These reconfigurations aren’t cheap though. Brady says companies can either restack in place and fund the renovations themselves. If they’re toward the tail end of their base lease, landlords can expect requests for a tenant improvement allowance with their landlord. Otherwise, they may relocate and start a new lease and negotiate a tenant improvement allowance with their new landlord. 

The tenant improvement allowance allows companies forego putting a majority of their own capital into a renovation project. They can then reinvest that back into their core business function. 

The flexible workspace areas that will most likely be home to these “spokes” can also offer some benefits for landlords

Companies will also see some benefits from a higher speed to occupancy out of these flexible workspaces.

“They can move much more quickly,” Brady says. “Oftentimes when you’re thinking about relocating an office, it could take six, nine, or 12 months. Oftentimes can deliver space in four to six months. So if you think about that increased speed occupancy, you’re not paying double rent elsewhere while you’re building out the space. So there’s some efficiencies that are, that are realized.”