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News release

Chicago, IL.

Corporate Tenants Shift from Retrenchment to ‘Grow Smart’ Plans

Jones Lang LaSalle survey results point to a “new normal” in the office building sector


CHICAGO, May 4, 2011 – Tenants throughout Corporate America are beginning to apply less pressure on cost containment within their real estate portfolios and are shifting their focus from retrenchment to growing smart to increase their productivity in 2011 and beyond. Jones Lang LaSalle unveiled these findings as part of the results of its 2011 Corporate Real Estate Survey distributed at the CoreNet Global Summit in Chicago.

In light of the lessons learned in the Great Recession, companies are preparing for growth, but will tread cautiously in expanding their real estate footprint. United States corporations are seeking to increase the utilization of all of their assets, whether it is in corporate headquarters space, worldwide workforce, or manufacturing facilities and data centers.  The survey revealed that though most companies are beginning to enter a cautious growth mode, firms are placing a strong emphasis on providing a compelling rationale for each square foot of their real estate footprint in response to Wall Street expectations for growth and cost management as well as M&A activity. 

In the United States, the mandate will be less focused on increasing square footage in a portfolio, and more aimed at supporting business growth in a flexible manner while managing total occupancy costs and reducing risk. It will also involve making strategic repositioning decisions to eliminate underutilized or redundant space. Occupiers will be challenged to adopt organizational structures that can drive global initiatives, balance growth and consolidation, control risk and enable quick decision making. 

Positioning for smart growth in the face of changing demographics, labor costs, energy costs and world politics is leading companies to carefully evaluate entire operational footprints – office, distribution and manufacturing – and to develop the right commercial real estate organization, governance and guiding principles that can drive global initiatives and produce results, while supporting a company’s appetite for strategic growth.

“Companies in the United States are entering a growth mode in terms of hiring and business line expansion, but this may not translate to growth in office space needs to the same degree,” said Kenneth Rudy, International Director, Corporate Solutions at Jones Lang LaSalle. “Even as they grow, companies are focused on strategies to maximize space utilization, both in the amount of space needed per employee and in the effectiveness of the space in driving a highly productive workforce.”

“The old rules no longer apply,” said Lauren Picariello, Vice President of Occupier Research for Jones Lang LaSalle.  “Many large companies will not immediately take on more space as they increase revenues and resume hiring.  There is a fundamental shift in the way Corporate America consumes commercial real estate today.”

Similar to the widespread diminished expectations for financial growth in the current economic climate, the office sector will see slower growth in occupancy than in past market upturns. The remarkably slow absorption rate (0.6 percent) of office space over the last 12 months is indicative of this change.

Space options in the United States office market essentially peaked at mid-year 2010 when vacancy reached a record high of 18.7 percent. In the first quarter of 2011, tenant expansions reduced the amount of choice in the market, albeit slightly, and the vacancy rate dipped to 18.4 percent. Though it is predicted to continue its descent in the next three quarters, the speed of this absorption is far slower than in previous recessions. 

Flight to Quality Ramps Up

Unlike previous cycles, this recovery will not be as broadly based. In recent quarters, in response to a tenant-favorable market, occupiers aggressively used flight-to-quality strategies to secure top-tier space at market-low rents. This trend contributed to 5.7 million square feet of positive net absorption in the Class A market, and occupancy losses of roughly 1.0 million square feet in the Class B sector, in the first quarter.

Companies are being hyper-selective with space requirements and are migrating to real estate that brings the company as close as possible to its clients, employees and other key stakeholders.  Many leading markets segments are now seeing the availability of premier quality Class A space tighten, making the flight to quality executed in 2010 more challenging. As shortages of quality space emerge, especially for large size requirements, relocation options will become limited, reducing tenant leverage.

As occupiers gravitate away from second-generation space to new higher quality options, holes have been left in the Class B and commodity space markets. This in turn has created opportunities for more price-conscious tenants looking to take advantage of higher vacancy and depressed rents for “flight to value” plays.

Unlike previous market cycles, new construction will fail to enhance the occupier position over the short term. A small development pipeline will result in limited new construction over the next three years. Consequently, the U.S. vacancy rate will likely decline to 17.5 percent by the end of 2011 and be closer to 16.0 percent in 2012. 

Growing Smart 

The key to harnessing a strong occupier position is by “growing smart” which is the capability to support business growth requirements in a flexible, responsive manner while aggressively managing total occupancy cost, reducing overall portfolio risk.

“Productivity is about more than just cost savings and efficiency, but about expanding output through improved quality and performance,” said Rudy. “It’s a measure of value that goes beyond cost and physical production and into measurable action. It is how we help our clients achieve the best outcomes with the most efficient use of resources.”

“For the remainder of 2011 and beyond, there will be a continued emphasis on cost management, but executing strategies for smart growth and raising the overall productivity of the business through intelligent real estate decisions will be top of mind for real estate executives,” added Rudy. “The powerful impact of real estate on cost reduction and its ability to enable broader business objectives is no longer a well-kept secret.”

Jones Lang LaSalle surveyed more than 185 companies in the Americas region and a total of more than 504 companies in 36 countries across the globe to identify their short-term responses to the global financial crisis as well as the long-term strategies they are implementing to gain advantage within the new economic realities. According to the survey, 72 percent of companies reduced occupancy costs overall during the economic downturn. Additionally, 73 percent consolidated their occupancy into fewer buildings.

U.S. Corporations Heading South for Growth Opportunities

A geographic shift is also taking place in where U.S. companies are placing their bets on high-growth opportunities. Corporations are realizing that their most effective expansion strategies will take place in markets outside of the United States, particularly in Latin America and South America.

Across the majority of office markets in Latin America, strong economic growth is translating into healthy demand, highlighted by Brazil, where tenant demand is outstripping new supply in major markets. 

Mobility, Smaller Footprints as the New Normal

Growth in corporate headcount may not result in the same level of growth in occupancy, as more companies implement worker mobility programs that may reduce space needs. According to the survey, 79 percent have either already implemented mobility programs or are in the planning stages of creating such programs.

Mobility programs often—but not always—reduce space needs as some employees choose to work from home or share space with others. If 54 percent of companies are implementing mobility programs more broadly, there may be a mitigating effect on occupancy growth.

According to the survey, the greatest constraints to the adoption of workplace mobility programs include: management and/or employee engagement; resistance/fear of change; lack of executive buy-in; technological deficiencies; and maintaining organizational culture.

Companies that implement the best model for managing their mobile, and increasingly diverse, workforce will hold the greatest advantage.  Those that create a workplace that is flexible enough to support a wide range of work styles and preferences but that encourages increased mobility and more efficient use of each square foot of real estate will both win the war for talent and reduce costs. Currently, the average rentable square foot per employee is 200 and is expected to drop closer to 50 by 2015.

“What used to be an exclusive focus on cost savings has now been expanded to creating a work environment that helps attract employees, reinforces the brand, and helps achieve the company’s sustainability objectives,” said Ed Noha, International Director, Strategic Consulting, Jones Lang LaSalle. “Companies are using less space per person, enabling more mobility and expanding the potential labor pool in the process.”

Corporate Real Estate in the C-Suite

“Social dynamics, bottom-up consumerism, and their impact on brands/reputations are among the many forces changing the global economy and corporate real estate (CRE),” said Richard Kadzis, Editor of CoreNet Leader magazine, the official publication of CoreNet Global, the largest association of corporate real estate and workplace executives in the world. “Today’s CRE executive needs to be more attuned than ever before to the complexities that impact the growth and direction of the businesses we support inside the multinational corporate enterprise, so that non-real estate skills like change management and client relationship management are becoming more critical.” 

According to CoreNet Global’s Corporate Real Estate 2011 State-of-the-Industry Report, corporate real estate has gained more clout over key business drivers like talent, productivity, risk management and speed to market. 

The report also demonstrates how CRE executives responded effectively to deliver immediate cost savings and financial impact during the 2009 recession; a role that is now counter-balanced by the need for companies to start reinvesting in growth once again. Aside from the fact that CRE professionals are viewed as effective early responders in times of crisis, the need for upskilling beyond CRE competencies is also fast becoming a major factor. 

Key Themes for 2011 and Beyond

According to Jones Lang LaSalle’s survey, the global financial crisis generated four overarching global trends impacting the future state for commercial real estate (CRE) leaders. These include:

• Higher demands on productivity - The commercial real estate department is now exposed to senior leadership and needs to perform to the new expectations of the post-global financial crisis era. According to the survey, today and for the next few years, the two primary areas of focus for corporate real estate executives will be business growth (35 percent) and cost pressures (11 percent).

• Balancing dual forces of growth and right-sizing - Portfolio growth will be happening in different gears depending on what market is being considered, putting varying demands on CRE teams.

• Progressing towards partnerships - As growth returns, leveraging external resources and service providers will increase and accelerate. 

• Reshaping CRE structures and skills - Increasing demands from the C-suite will require more strategic, less tactical real estate skills.

The challenges facing commercial real estate executives are significant, and those who address these challenges head on and who think and invest in developing their talent pool, recruiting key talent from the industry, or from outside traditional boundaries, will be those operating at the vanguard of the industry. New thinking is required and the rewards for delivering such will be significant.

About CoreNet Global

CoreNet Global is the world’s leading professional association for corporate real estate and workplace executives, service providers, and economic developers. More than 7,000 members comprise nearly half of the Forbes Global 2000. For more information, please visit www.corenetglobal.org

About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 60 countries from more than 1,000 locations worldwide, including 185 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $43 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.