Executive Summary: Space Utilization & Economic Value Opportunity
By Tom Jackson
Is “hidden” workplace vacancy eating your company’s profits?
Most corporate real estate tenants are overspending on office space.
Two statistics support this finding. In a study of more than 80 large employers, encompassing greater than 500 million square feet of space, almost 80% have vacancy rates associated with their office space of greater than 10%. Beyond that, most have office space utilization of between 60% – 70%.
When you combine those two figures it reveals quite a gap between the capacity of office real estate and the amount of space that’s actually used. That gap results in lost profits. In this paper, we will take an in-depth look at “hidden” workplace vacancy and uncover the REAL economic impact of hidden vacancy. We’ll call this the Economic Value Opportunity (EVO) associated with underutilized commercial real estate assets.
The Big Costs associated with underutilized assets
Increasingly many companies find that one of their most expensive assets is significantly underutilized. Not surprisingly, one of a company’s largest annual cost entails their investment in office real estate, to provide their staff with a productive work environment. For most companies, these costs are in the top five overall costs they incur right behind total spend on employee salaries and benefits. For most companies of 100 or more employees these costs can easily exceed $600,000 or roughly $6,000 per employee.
Why underutilized?
As you have probably experienced in your workplace, over the past decade, but increasingly over the most recent five years, there has been a significant increase in the number of employees who are mobile workers. Mobility of the workforce stems from a variety of factors. Laptop computer & mobile phone technology have rapidly advanced. Remote access to work files from anywhere has improved significantly. It is now possible for employees to be as productive outside the office as at their office desks. These factors, combined with more attractive workspace options outside the office, are providing companies with a dilemma. They are asking: “How do we empower our employees to be productive; entice them to come to the office and provide them with the flexibility and benefit of working where they can be most productive?”
There is no reason to believe that the mobility trend won’t increase over the next five years especially in light of continuing technology improvements and a growing millennial workforce.
How big of an impact does this have in terms of office space vacancy and what is the cost of this increasing trend?
Let’s consider some surprising statistics. One of the largest office furniture companies in the world has studied private office and cubicle utilization over the past few years. Using sensor technology, they’ve monitored space utilization by companies in most industries.
What did they find? More than three quarters of the time private offices space was unoccupied and perhaps more surprisingly, workstations were similarly underutilized, being unoccupied 60% of the time. So, what’s going on here?
Well, this is the impact of traditional factors like: local out of office meetings, business trips, vacations, long weekends (Mondays & Fridays), yearly holidays etc., combined with the impact of increasing worker mobility.
On top of that, more and more companies have official mobility programs where certain employees (by function or entitlement) can work from home. All these factors work together to have a significant impact on the number of people in the office at any given time.
Space utilization is the measure of the number of employees at work (in offices, workstations & conference rooms) at any given time during the workday. This data is usually captured in at least two ways: average utilization and peak utilization. And for most companies the figures are in the 60% – 70% range.
Let’s take a closer look at how this happens. For a traditional 20,000 sq. ft. space (with 19,000 sq. ft. of rentable space), that equates to a capacity of 91 people, or roughly 209 sq. ft per person. While sq. ft. per person trends have dropped significantly for newly configured offices over the past 5 years, many firms remain in the 200 sq. ft. per person range. With that configuration and a capacity of 91 people, most organizations have about 10% vacancy, reducing the 91 people to 81 individuals. Generally, utilization runs at 60% – 70%. If one applies the 65% utilization, that increases vacancy to 35%, resulting in more than 1/3 of the space not used!
For most people that number is a big surprise. The natural next question they ask is how much is that costing me? Well, as you might guess, the cost is substantial. Using an average cost of $30 per sq. ft. the19,000 sq. ft of rentable space has an annual cost of $570,000. To determine the cost of the excess vacancy (hidden vacancy driven by low utilization) you have to first determine your target vacancy rate. We can use a 10% target rate. So, subtracting the 10% from the 35% gives us a 25% cost associated with low office utilization. The cost of that excess 25% vacancy? About $142,500 or 25% of the annual cost of the office suite.
Thus, in the case of a 7-year lease with five years remaining and assuming a 35% vacancy rate, if a company were able to initiate an early termination of the lease with the property owners, or sub-let the extra space to a third party, they’d save a whopping $712,500! That’s real economic value available to your firm!
Just as the technology is changing to enable your employees more mobility, it’s also providing an opportunity for you to re-position your space needs in light of a more dynamic and changing workforce. Be an early mover taking advantage of this opportunity. Your company will benefit as will you.
Sources:
- Occupancy Annual Report: JLL 2017
- Herman Miller Space Utilization Analysis & Report 201
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Tom Jackson is the CFO at Microshare.io. He has a BBA from Temple University’s Fox School of Business and Management and has done MBA course work at Drexel University’s LeBow College of Business. Contact Tom.