Why the Office Market is Recovering Slowly

I recently participated in a commercial real estate symposium where I was a panelist.  My topic was the state of the office market in Metropolitan Baltimore.  I was the last presenter so I had plenty of time to absorb the preceeding presentations. 

 

The one that caught my attention, unexpectedly, was entitled “Government Leasing Trends,” presented by a member of the team that provides real estate brokerage services to the State of Maryland.  Initially, I thought, how exciting can this topic be?  But, I was very surprised.  First I learned the state is driving the commercial markets with adoption of green building technology, which keeps occupancy costs low.  Next, I learned the state’s office space standard had decreased from 125 usable square feet (“usf”) per person to 75 usf.  A usable square foot is generally defined as one square foot of office floor space that can be occupied by a person, a desk, a file cabinet, etc.  The state’s new standard equates to floor space approximately the size of a rectangle drawn on the floor with dimensions of 10 feet x 7.5 feet.

 

I soon drifted off into deep thought pondering how my office space needs had changed over the ten years I have been in business.  I have moved twice.  First, I departed the central business district for Charles Village, a neighborhood just north of mid-town.  Paid parking in the former, free parking in the latter.  Second, I moved within my building, downsizing from an 855 usf suite featuring a reception area, two large private offices and a large conference room, to a 457 usf suite with a file room and one large open area for two desks and a conference table.

 

I have also changed the way I work.  Today, I usually insist on meeting my clients in their offices.  Their office space, after all, is the main topic.  By visiting my clients, I can better understand exterior factors:  the quality and image of the building, traffic patterns, visibility, pedestrian access, parking, signage and neighborhood texture.  Inside the building and their space, I can better understand how they use office space:  cubicles, private offices, teaming areas, conference rooms, technology and storage.  I can also assess the quality of the work environment:  natural light, fresh air, “flow” of the floor plan, ergonomics of the furniture and fixtures, filing standards and efficacy of mechanical, electrical and lighting systems.

 

I have discovered I need less office space due to my spending the majority of each day in the field.  I now use my office for the occasional meeting, for receiving mail and packages, for preparing reports, and for production activities such as printing, scanning, and shredding.  Finally, I use my office less and less for storing paper documents.  Increasingly, I store documents, communications and brochures in the cloud and on an external hard drive.

 

Returning to the decreased Maryland space standards and the stagnant Baltimore office market, I theorized that many businesses had changed their spaces needs as had I.  Technology, which had spelled doom for manufacturers of rolling file cabinets in the 1990’s, was now wreaking havoc among office building owners.  Multiple-terabyte capacity hard drives, scanners, email and cloud storage were all conspiring to reduce the number and size of offices, desks, file cabinets, fax and copying machines.  This unruly gang was even chasing employees away from the office party.  File clerks, secretaries, receptionists and administrative assistants were fading in number and value.  Now, I often pass an empty receptionist desk when entering a client’s suite.  Increasingly, my clients are turning to web-based phone answering systems that can answer and forward calls, or record a voice message - with or without transcription.  Fax machines are now virtual and send output directly to email. And with respect to multi-line desk phones and desktop computers, most of my clients use untethered smartphones and laptops with a Wi-Fi or cellular broadband connection.  That’s how I operate.

 

Just as my colleague was ending his presentation, I realized the current office market malaise would probably linger a bit longer as office users evolve, recalibrate and adjust to this new age of recession-induced, technology-enabled productivity.  Low-cost technology is the current alternative to real estate and employees.

Move Over BRAC

At a luncheon for commercial real estate brokers hosted on May 25, by Corporate Office Properties Trust (COPT) at its newly acquired Canton Crossing Tower, COPT CEO Randall Griffin observed that while BRAC (the Base Realignment and Closure Act of 2005) may be heavily promoted as a big economic engine in the Baltimore-Washington, D.C. region, work being done by Federal government agencies and their contractors in cyber security may prove to be a far greater economic engine and anchor for our region. He further opined that with the construction pipeline for Class A office buildings near empty, 2011-2012 could see a spike in office occupancy levels along with a corresponding spike in Class A office rents. His friendly advice to the commercial brokers in attendance was to begin focusing more on office users who are involved in cyber security.


That is news we can use!


COPT's commercial real estate broker luncheon at Canton Crossing Tower was set in a former penthouse residence on the top floor of this 17-story, 474,000 square foot office building. The luncheon provided a unique opportunity for my fellow brokers and me to enjoy the exquisite culinary offerings of the Blue Hill Tavern. We dined while peering through the floor-to-ceiling windows at Baltimore's Inner Harbor, Fort McHenry, Harbor East and the working waterfront.


Landlords use broker events as marketing vehicles to let brokers experience a property that is being offered for lease. Landlords capitalize on the fact that brokers, being brokers, can seldom turn down free food, chances to win door prizes and the convenient opportunity to talk deals and market scoop with colleagues.

Rand Griffin wisely seized the opportunity to offer his thoughts on the big picture. He guessed correctly that his audience would be more interested in learning his perspective on the economy, financial markets and office markets than hearing a recitation of project details. After all, we had been mixing and mingling with the listing brokers and COPT's in-house leasing team throughout the luncheon.

Rand's expertise in the Class A office market is derived from his experiences developing and operating a large, high quality portfolio. COPT is one of Maryland's largest private office landlord, owning and operating 197 building with 13.6 million square feet. COPT owns 268 properties in six states (AL, CO, MD, NJ, PA and VA) containing over 20 million square feet. COPT's business model is to offer Class A office space to Federal government agencies having an alphabet-soup of names such as NRO, NSA, NGA, DoD, GSA, DISA and CIA. COPT derives 56% of its revenue from government agencies, 30% from government contractors and the balance from first class businesses such as CareFirst BlueCross BlueShield.

Thanks Rand Griffin for your insight. Your optimism is encouraging during these challenging, uncertain times.