Maybe Everything We Know About Downsizing Space Is Wrong

Bethany Schneider, senior research analyst at NGKF

WASHINGTON, DC—A new white paper by Newmark Grubb Knight Frank has connected a few dots about rightsizing, confirming what many have suspected: when companies, or the federal government for that matter, squeeze too many employees into a space, productivity declines. Okay, that is common sense. But what NGKF went on to establish, though, that the margin is surprisingly very thin between productivity and the savings, or conversely additional rent paid for better space. “Only a 2% decline in productivity [resulting from cramped space] would wipe out the savings a company realizes by” downsizing space, report co-author, Bethany Schneider, senior research analyst and report co-author told GlobeSt.com. Conversely, she continued, “it only takes a 3% increase in productivity to recoup the cost of upgrading to trophy space.” While these precise numbers may come as a surprise to tenants, the general sentiment behind them probably do not. “Anecdotally we hear that the push back against densification is continuing,” co-author Sandy Paul, CRE Managing Director of National Market Research told GlobeSt.com. “We do think it will show up in company financials sooner or later.” That said, few companies have come to the conclusion that better and more space is a financial plus. Rather, Paul said, what is happening is that tenants are entering the market hoping to downsize their space by being “more efficient” with their space, but at the end of the search they have expanded their space requirement. “I think that is because employees are resisting this push,” for downsizing, Paul said.

Sandy Paul, NGKF’s CRE Managing Director of National Market Research

Paul and Schneider sketched out the math behind their conclusions in the white paper, The Impact of Office Space on Employee Productivity and Implications for Occupancy Costs. A few caveats, first, though. The goal of the white paper was not to measure the gains or losses experienced by companies as they increased or scaled back their space, Sandy said. “What we set out to do was to alert people to the impact on occupancy costs in general.” Also, the white paper makes clear it is not uniformly condemning open floor plans, often associated with downsizing. “Every company and industry is different and for some employees and some companies, an open floor plan makes sense,” according to the report. In fact, well-designed open layouts can work quite well and have proven to be particularly effective in the accounting and consulting industries. “However, the practice of over-densification – drastically reducing the square footage per worker without the forethought of how it will affect employee morale and productivity – is unwise,” the report said. The report takes a broad view of this issue. It takes into account whether a building is located on mass transit. Such buildings command higher rent and may not be a consideration for a company that is rightsizing. But employees’ easy commute adds significantly to productivity. Likewise for buildings located close to restaurants or that have a gym. Finally, this report is not a knee-jerk condemnation against downsizing. As the following shows, NGKF looked at two scenarios in which a company scaled back their space. The difference was in how they did it. 10 Cities, Two Scenarios NGKF looked at 10 cities as it ran the numbers. It started with two scenarios for a prototypical business and financial services firm of 250 employees that occupies Class A office space in the downtown or Central Business District of each city. Scenario 1: The company relocates to another Class A building and over-densifies by reducing the space per employee from 200 to 180 square feet. Scenario 2: The company upgrades to trophy office space in an efficient layout, which allows it to reduce the space per employee from 200 to 190 square feet. For the first company, Paul and Schneider found that across every metro studied, a mere 2% loss of productivity was enough to fully offset the cost savings achieved by reducing leased space from 200 to 180 square feet per employee. And for metro areas with lower rents, such as Dallas and Atlanta, only a 1% loss of productivity was required to offset the rent savings accrued through such a densification program. For the second company, the findings were similar. In all of the cities, with the exception of San Francisco and New York City where trophy rents are the highest in the country, a 3% increase in productivity is enough to offset the added cost of upgrading to trophy space. But even in New York and San Francisco, upgrading may make sense; it would take only a 4% and 6% increase in productivity in these cities, respectively, to offset the additional cost of occupying trophy space. Americans Resign from Jobs In Record Numbers Paul and Schneider aren’t exactly expecting to hear the sound of many hands slapping their heads over this study, followed by a wholesale rush by companies to expand their space. But the market — or specifically, the labor market — is going to force their hand. “As the employment market continues to heal, workers are more willing to take a chance and go elsewhere if they are not happy with the current position,” Paul said. Actually that is already happening. This week the Labor Department released its monthly Job Openings and Labor Turnover Survey, its so-called JOLTS report [ PDF ]. And guess what: some 3.1 million Americans quit their jobs in December, the highest number since December 2006. Of course, this is not to say the exodus is due to cramped quarters. But clearly, employees are willing to move on if they have a reason. Said Paul: “I think we will see companies respond to employees’ pushback in greater numbers in the next cycle of leasing.” That next cycle is almost upon us, he noted. “The densification trend started eight years ago with the Great Recession and a lot of those leases are getting ready to roll over.”