In a recent presentation to a group of professional economists, Ken Simonson, Chief Economist of the Associated General Contractors of America, gave some really useful information that could help drive more cost-effective commercial space acquisition over the next year or two. Some tidbits I picked up include:
Companies are shrinking their office footprint all over the US, taking less space than before, even if staff size hasn’t contracted, thus lowering facility cost per employee. At the same time, companies that have long maintained their more spacious offices outside of the major population centers – read suburbs – are moving their teams back into the city. Partially a reflection of their needing less space and thus being able to be more in the heart of things, it’s also a nod to the growing millennial employee base, workers who are increasingly wanting to be closer to the cities where the action is. Finally, construction is still far below levels of a decade ago, when it last peaked. So less new space available in those cities.
What does that tell you from a strategy standpoint? Demand is dropping outside the cities due to migration, and increasing in the cities, despite the smaller footprint when relocating. Supply isn’t growing as the construction recovery has been slow, so demand is outstripping supply. Result: higher rents, fewer concessions, tougher negotiating with landlords who are in the driver’s seat for now.
You could conclude that it makes more sense to buy than to lease under such market conditions, and I’d likely agree. But of course part of that supply/demand imbalance is affecting the buyers’ market as well. An organization on whose board I sit sold their previous building for a handsome profit, but it took them 2 years to close on a replacement building because of the availability of suitable inventory.
What’s the takeaway?
For sellers/landlords: This may be a great time to sell commercial property that no longer serves your needs. The market could get better, but it’s been a long time since it’s been this good. Bird in hand, and all that.
For buyers/lessees: Plan ahead. Ensure your strategic plan is current and relevant when it comes to facility needs, and start looking well in advance of that need. Make sure you have a good broker who knows the region and will work hard for your interests. Oh, did I mention Plan Ahead?
As always I welcome your feedback and comments.