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Property Fundamentals - Space Demand

Something is happening…

In 2018, demand for office space witnessed a bizarre anomaly: despite rising rates of office employments, the amount of space rented has fallen drastically short of initial forecasts. It’s a trend that’s befallen the real estate market as a whole, leaving it with what university researchers Josh Harris and Hany Guirguis describe as a “significant conundrum.”

"Every imaginable economic variable that we have both tested for research and anecdotal common sense tells you, you should predict more absorption of office space," said Harris, "It's not being seen in the data. You are seeing very low rates of absorption. … There's something going on. 'Is this something that's temporary or something more long-term?' That's the big thing that we are wrestling with."

What’s the Cause?

It is no surprise that the real estate market has gone through some radical changes in recent years. Between tumultuous political climates, lightning-fast technological changes, and unprecedented shifts in social norms/values, the way land and space is distributed and sought after is unrecognizable from just a few years ago. Office space is no exception and reflects the industry.

Unconventional Work

With cloud computing minimizing the need for on-site storage and telecommuting jobs eliminating the demand for office space, employers have fewer reasons than ever before to rent. E-retail has played a huge role. Take, for example, Amazon. One of the largest companies in the world, there is essentially zero forward-facing customer service component that requires real-world space/property. Bezos’ mega-giant processing warehouses are so hyper-efficient that what once would have required many skyscrapers worth of property are now condensed.

Additionally, the very nature of the “office” itself has changed, thanks in part to the influence of Silicon Valley’s open, collaborative workspaces. Today, companies like WeWork specialize in transforming the dull, systemic “office” of the past into vibrant, open spaces where community and freedom trump organization and seclusion.

Telecommuting jobs, or freelancing from home, has also minimized demand throughout the real estate market. Dual-using one’s own home as their workplace is an increasingly common phenomenon. The result is a drastic reduction in the amount of space being occupied in various sectors. Cloud computing is another potential cause. At its core, off-siting computers and storage into centralized hubs has resulted in a more efficient use of space.

Experiences Versus Possessions

Another key factor drastically altering the consumption of space is the growing trend—especially among millennials—to crave experiences rather than possessions. “Experiences” in this context refer to activities that enhance a person’s sense of life fulfillment. “Possessions”, on the other hand, are objects and properties that offer value through ownership (such as a new car, jewelry, or a home).

As the trend continues to advance towards experience as a value rather than ownership of material possessions, the demand for tangible goods and especially various real estate properties diminish. Instead, “experiences” such as traveling—or even “backpacking”—offer a new twist on pursuing happiness. Coinciding with this is the rise of alternative housing/lodging options such as Airbnb, where individuals’ homes are being repurposed as makeshift “hotels” for travelers on a budget.

What Now?

The real estate market isn’t going anywhere—it’s simply transforming. What the industry is losing in office space it’s gaining in other unique opportunities. Market research will be crucial moving forward to better understand both consumer and industry needs. Fundamentally, though, “space” is as inherent to market activity as any other variable, it’s now just a matter of intimately learning how it will change. Valbridge is here to help – whether through market analysis of existing space of ground up construction or valuing current positions. Contact us today at www.valbridge.com.