By: Richard Lee
Consolidation: Brokers see trend as companies look to reduce costs
It has always been thought that as the economy improves, companies would hire more staff and office buildings in Fairfield County would start to fill up.
But while real estate brokers continue to believe that expanding employment rolls will mean a drop in office vacancy rates, some companies are squeezing employees into less space while others are looking to communications technology to reduce their space needs.
Businesses are in a constant re-evaluation of their workspace and real estate strategies, said Robert Ageloff, international director and head of Jones Lang LaSalle's Stamford/Westchester office. More workers do not necessarily equate to more space, a trend that is reverberating in the office market at midyear 2013.
In a joint research project, CoreNet and Jones Lang LaSalle have determined that in the past three years there has been a 62 percent increase in space-density implementation.
"Businesses that are hiring are using less space for employees, and those that aren't hiring are shrinking, " Ageloff said, adding that businesses involved in media, Internet and technology seem to prefer an open space environment that encourages more interaction.
Jones Lang LaSalle's second-quarter office market report showed the Fairfield County overall vacancy rate rose to 22.7 percent from 22 percent in the second quarter of last year. But the good news is the rate fell from the first quarter, when it was 22.9 percent.
The Class A office vacancy rate for the second quarter was 22.4 percent, up from 21.5 percent in the year-ago period, but down from 22.6 percent in the first quarter of 2013.
Those stagnant vacancy levels can be partly attributed to some companies opting to occupy less space and reduce their rent by allowing some employees to work from home and other off-site locations, according to David Lewis, president and CEO of OperationsInc, a Norwalk-based human resources outsourcing consulting firm.
"It (working off-site) can significantly reduce a company's need for more space, " he said. "We work with clientele about managing a remote workforce. You need a plan to manage those people."
Lewis knows first-hand the benefits of managing employees who work both from their homes and clients' work sites.
"We have an employee base of a little more than 40, but we only need space for 20 to 25. They don't need to be here every day. They may not have a consistent place to sit when they are here. We've designated a set of desks for employees, " Lewis said. "They come in with their laptops and sit at these desks. They push a few buttons on the phones, and they're ready to go."
If his firm operated in a traditional office format, it would need double the 8,000 square feet it occupies, he said.
Rents still high
Every square foot counts at companies looking for ways to manage their spending.
Jones Lang LaSalle reported that overall per-square-foot rental rates in the county remain over $33, with the average second quarter rental rate falling to $33.26 from $33.57 in 2012's second quarter. In the first quarter of 2013, it was $33.82.
At the Class A level, it rose to $37.42 from $36.87 in the second quarter of 2012. In the first quarter of 2013, it was $37.64.
Business services companies like OperationsInc, have been able to reduce their space needs by having employees work at their homes and conduct human resources duties at clients' facilities.
But for some businesses, allowing employees to work at home on a large scale is difficult because of technology challenges like installing firewall protection, said Lisa Mercurio, director of Fairfield County Information Exchange, a unit of the Business Council of Fairfield County.
"There are sensitivity issues about information that employees may be transmitting," she said, "but some companies allow it because of long commutes. It depends on the culture of the organization."
There is a clear trend toward the reduction of space for employees to accomplish their daily tasks, according to Jim Fagan, senior managing director of the Stamford office of Cushman & Wakefield.
"It used to be 350 square feet for every one employee, but now in traditional offices it's one for every 250 square feet. In the back office, it's one for every 200," he said. "We've seen cubicles get smaller. We've seen hoteling when people come in and use any desk they want. Companies are off-siting data centers. If you're in a law office, you don't need a library any more. People are more productive."
Companies also are experimenting with letting employers work at their homes, Fagan said.
"There's a trend out there. It's easy to be connected," he said.
But Cory Gubner, CEO of RHYS Commercial in Stamford, said he is not seeing an uptick in the work-at-home strategy among his clients when seeking office space. Instead, they are increasingly requiring office formats different than the traditional design.
"I think companies have found you can't replace workplace stimulation. We're seeing companies be more streamlined and more open office areas -- but not consolidating space, " Gubner said.
But, some clients of CBRE's Stamford office are trying new office layouts to use less space and still promote a convivial work environment, said Beth Chappel, vice president of the Stamford office.
Though her square-footage estimates vary from those stated by Fagan, they both see the same trend.
"Space usage used to be 250 square feet per employee. Now it's down to 160 or 170 with an open space plan," she said. "There's some impact (on the region's vacancy rate) because they aren't expanding. Working from home also has some impact. I know a lot of people who work from home."
Robert Scinto, chairman of R.D. Scinto in Shelton, owner of 32 buildings totaling more than 2.5 million square feet, agreed that there is a trend toward tenants seeking office reconfiguration to cut rental costs and streamline employee interaction.
Reinventing the workplace
"Sometimes it works. Sometimes it doesn't. They're trying to save money any way they can. We have our own architect who designs space for them," said Scinto, who has 235 tenants. "I'm always talking with my tenants, and most are growing."
One of the specialities at the Stamford office of the architectural firm of Perkins Eastman is office design, and Principal Mark Van Summern said companies want to reinvent the workplace to align with business objectives and how staff can better use space to accomplish tasks.
"In each engagement, the human resources leaders and the financial leaders have recognized that to retain and recruit staff they have to look at a more robust design solution, " said Van Summern, whose office has worked with area businesses including Pepperidge Farms in Norwalk and Boehringer Ingelheim in Ridgefield and Danbury. "In most cases, this also coincides with a reduction in overall square footage required for lease. We are currently working with a firm in the Shelton area going from 40,000 square feet to 30,000 square feet by moving to a full open plan workplace solution and providing more conferencing and support space than they currently have, plus a day-two strategy to grow headcount and not footprint."
John Hannigan, a principal at Stamford-based Choyce Peterson, has encountered a similar tenant-space strategy among his clients.
"We've been very successful working with companies. We bring in an architect that guides the tenant," he said. "Tenants are often surprised that the building owner will retrofit their space. The concession is a result of high vacancy rates and the economy."
While some companies are studying ways to limit their office space needs, second quarter leasing levels in the county reached 654,735 square feet, aggregating 902,517 square feet, year-to-date, according to a CBRE report.
While this represents an increase of nearly 300 percent over the previous quarter, the dearth of first quarter leasing velocity leaves year-to-date activity 25 percent below the five-year mid-year average, CBRE reported.
To be sure, strong leasing activity helped propel Fairfield County to 318,450 square feet of overall positive absorption in the second quarter, leading to the slight decline in the availability rate, when combined with a slowdown in space give-backs.
Gubner voiced optimism that the improvement, albeit slight, will speed up in the next quarter.
"While we aren't having tremendous leasing now, you have tremendous lookers, " he said, predicting that it will translate into signed leases in the upcoming third quarter. "We represented 9 West St., in Stamford, and we're showing it almost daily. "I think you'll see extremely busy leasing in the fall. I think the economy is getting better, and businesses are more confident."
The overall office vacancy rate in the Stamford central business district, increased to 25.8 percent in the most recent quarter from 24.3 percent in the second quarter of 2012, while rental rates rose to $46.12 per square foot from $45.75, according to Jones Lang LaSalle.
Despite the fact that Building and Land Technology continues to plan office buildings in its Harbor Park project and Malkin Properties is constructing a 385,000-square-foot office complex near the Stamford Transportation Center, Ageloff said those complexes and BLT's vacant 614,000-square-foot Financial Centre will eventually be occupied.
Flight to quality'
"The [central business district] in Stamford with Metro North access, I think they'll fill up, " Ageloff said. "Younger workers want access to the train station. There will be a flight to quality and more efficient buildings. I think it will take three to five years."
Those prices found in Stamford's CBD still pale when compared with the Greenwich central business district, where the overall office rental rate tumbled to $82.28 in the second quarter of 2013 from $89.73 a year ago.
That occurred as the overall rental rate rose to 21.5 percent in the most recent quarter from 18.3 percent, said Jones Lang LaSalle.
Owners of office properties in the northern Fairfield County communities couldn't touch the rents their peers receive in Greenwich, according to the Jones Lang LaSalle report, though overall office vacancy rates were higher.
Overall rental rates in the north fell to $21.39 from $22.61 in the second quarter of 2012, while vacancy rate fell to 24.2 percent from 24.6 percent.
In central Fairfield County, the overall office vacancy rate climbed to 23.4 percent from 21.6 percent in the second quarter of last year, and the rental rate dropped slightly to $27.03 from $27.44.
In the eastern portion of the county, the overall office vacancy rate fell to 16.7 percent from 18.1 percent in the 2012 period, and the rental rate also fell to $18.98 from $21.65.
The lower numbers there could be the result of a smaller inventory and businesses there having easy access to the labor market of eastern Fairfield and New Haven counties, Ageloff said.