Using space wisely in a down market

After a 10-year boom that sent rents soaring and sale prices through the roof, the commercial real estate market is slowing down as the rapidly shrinking economy leads businesses to bail out of leases and defer office expansions. Vacancy rates are rising and rents are falling from Boston to San Francisco. Frenzied bidding wars among would-be tenants, common a year ago, are no more.

The commercial real estate market is loosening up as companies, especially high-tech firms, are either pulling out or downsizing their office space. These reversals are sharpest where the high-tech frenzy has been the greatest.

Commercial rental rates in cities such as Phoenix and Dallas have dropped 10% to 15%, while San Francisco, home to many high-tech firms, has seen a sharper decline. In Silicon Valley, rents have dropped 25%, while in San Francisco's South of Market (SOMA) district, home to many high-tech companies, rents have plunged by almost 50% due to current availability of 3 million sq. ft., an increase of more than 250% available space in less than six months. This trend contrasts with last year's rent increases of more than 110%.

What to do

As a result of these faltering numbers, Equis Corp. has been called upon by numerous major corporations for advice on how to handle real estate matters in today's troubled economy. I prefer to separate these tips into macro tips and micro tips for buyers, renters, lessors and investors.

Among the macro tips, or pieces of advice affecting a whole building or a portfolio, we encourage buying, renting or leasing while prices are down, and renegotiating leases during a down market to take advantage of more favorable rates.

When selling or liquidating, some ways to reduce lease operations are to consolidate holdings and facilities into fewer buildings. We also recommend keeping strategic assets and disposing of non-strategic assets such as manufacturing plants to be phased out, or those used for manufacturing products that may be slated for discontinuance or approaching obsolescence.

‘Rationalizing their real estate’

Our micro tips, or those applying to parts of a building or to internal space utilization, include getting rid of excess warehouse space by unloading surplus inventory and parts, and ordering less to cut down space requirements. We also advocate “lean manufacturing,” a practice in which manufacturing space is compressed and internal aisles are reduced in width. Troy, Mich.-based Delphi Automotive, one of our clients, is implementing “lean manufacturing,” a process which the client also calls “rationalizing their real estate.”

By taking this approach, a single multi-tenant corridor can serve two departments or functions, rather than requiring separate aisles for each — an obvious move toward space efficiency. We also suggest finding methods of increasing capacity without increasing square footage. Other good moves include reorganizing workplace designs to improve workflow, using flexible furniture designs for office layouts and implementing open-plan processes in manufacturing facilities.

One Equis client in the actuarial and benefits consulting field, with specialty subpractices in human resources and employee benefits, is growing despite the changing economy. The company, which has offices totaling 1.2 million sq. ft. in 37 cities, is working to accommodate its growing head count while doing its best to avoid an increase in occupancy costs. By managing space densities, using open plan processes and installing flexible furniture systems, the company was able to increase the number of employees without expanding its real estate commitments.

In the firm's New York office, for example, where it occupies three floors, the company had multi-tenant corridors designed so it could sublease space without having to disrupt its employees. Due to the firm's large real estate holdings, it always strives to expand capacity without increasing square footage or incurring high capital costs.

Generally, now is a good time to shop. Even in tight office markets, the addition of sublease space forces landlords to lower rents to compete. Landlords in most major markets also are increasing their tenant improvement allowances, or offering concession packages such as one or more months of free rent. These days, tenants can be more aggressive and landlords are willing to listen.

Michael Silver is president of Equis Corp., a corporate real estate services firm based in Chicago.

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