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December 28, 2009

Productivity Gains, Teleworking, Worker Preferences Shrinking Suburban Office Demand: Report

By Brendan B. Read, Senior Contributing Editor

The ‘office parks’ of today are slowly becoming park-like (i.e. quiet, and free of noise and pollution from motor vehicles.)
Productivity enhancements and practices such as outsourcing, teleworking and hot-desking are exacerbating the economic downturn on U.S. office market vacancy rates -- especially in the suburbs.
A new report by the Urban Land Institute and PriceWaterhouseCoopers -- Emerging Trends in Real Estate 2010 -- paints a bleak outlook for investors, owners and landlords for office space.

“Don’t expect any spikes in this recovery given the dearth of employment generators and rising vacancies,” said the report. “New demand could stall well into 2011 or even 2012. Employers continue to seek outsourcing and productivity gains, especially in the financial industry.”
According to the ULI/PwC report. big companies pursue various options to reduce costs, use space more efficiently, and increase people-per-seat metrics.
“They count on young employees to adapt to paperless environments as well as more work-at-home and open space hoteling strategies,” said the report. These secular trends could “mitigate any office rebound.”
Suburban office markets are in a much worse position than those in downtowns and accessible on transit. The central cities have and will outperform suburban sprawl, which it has done since 2007, as an investment prospects, with vacancy rates tracking approximately five percent less downtown than on the fringes.
Making the ULI/PwC recommendations doable is continuing expansion of new rail lines, aided by federal stimulus dollars. For example, the last leg of Seattle’s new LRT line opened to SeaTac Airport just before Christmas while construction continues on an extension north to the University of Washington.
“Avoid suburban markets,” the report recommended. “Urban and infill areas should benefit from demographics changes and economic shifts working against many suburbs. The “move back in” by echo boomers and empty nester baby boomers continues, and office tenants migrate toward suburban nodes with more urban amenities. Rising car-related costs (gas, insurance, user fees, loans) and increased congestion don’t help the suburban office story, either. In particular, obsolescence threatens older office parks.”
Similar trends are occurring in Canada, and the report makes likewise recommendations. They have been aided and abetted by transit investments there. Approval has been given for a light rail subway under Ottawa, Canada’s capital, while groundbreaking took place on a new light rail line in Toronto.
“Stick to the prime downtowns and avoid the suburbs,” said the report. “People and business favor urban cores for convenience and multidimensional environments. Vast underground passages, which link to subway stations, help workers avoid dealing with too much winter chill.”
The buildings that are viable are those that are green. A blog by Kaid Benfield, director, Smart Growth Program, Washington, D.C., published by the Natural Resources Defense Council, said the ULI/PwC report indicates green buildings have better-than-average prospects.
“The authors cite tenant preferences for reduced energy costs, building systems that produce better air flows and healthier, more pleasant work environments, and the marketing cachet that comes with being green,” noted the blog. ”Citing one interviewee’s straightforward admonition that ‘You’ll be stupid not to build green,’ the report concludes that operating efficiencies and competitive advantage will be more than worth ‘the minimal extra cost.’“

Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Marisa Torrieri

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