With Higher Vacancies Than Normal, It’s Not Your Father’s Office Space Anymore



By Sheryl Mazirow
Introduction by Gary Wartik
February 25, 2015

Introduction:

During the Great Recession of 2008-11, the vacancy rate in office buildings in large parts of California reached unheard of levels.  In the Conejo Valley, straddling the Los Angeles and Ventura county lines, for example, vacancy rates reached 25 percent for a period.  Based upon some current data, vacancy rates are still in the high teens.  As a result, two things occurred, they being that property owners started offering new tenants excellent, but shorter-term lease rates, and the layout of office space began to change in order to meet demands of some tenants for more open and flexible office space.

The open space concept has contributed to a notable reduction in tenant build-out costs that otherwise would be reflected in tenant lease rates.  Additionally, the open space concept accommodates more employees, and secondly purports to foster more of the “team spirit” within the business.  On the latter, the jury is still out.  This office knows of several firms who tried the open space office concept, only to revert back to the more familiar fixed-wall office format.

In Ms. Mazirow’s article below, she focuses on some of the specific changes she is observing as the office market moves back to a healthier occupancy level.  Saved for a future article is the issue of why vacancy rates remain high, but we do know that one reason relates to the number of firms, especially professional firms, that have merged with others or which have reduced their staff space needs.  As well, more individual professionals are engaging in strategic relationships in which, as it relates to office space, each works in their own space, many of which are part of the growing home office segment.

Article:

Welcome to the brave, new world of office space in the Los Angeles market. It is comprised of neighborhoods, communities, huddle spaces, hoteling, benching, pathways, and — above all —collaborative space.  Oh, and let’s not forget the ability to bring man’s best friend, our beloved dog, to work.

Today’s office space landscape is far different than it was just a few years ago, and the driver in the Los Angeles area is the desire of tenants to secure what is known as creative office space. Although originally sought only by technology firms, this trend has gone mainstream with law firms, real estate companies, accounting organizations, and insurance companies now demanding corporate office space that is 180-degrees opposite of “our father’s office space.”

New Must-Haves

Often the creative office environm1-imageent includes an “open ceiling” exposed plenum, which is the area between the structural floor and the dropped ceiling that houses air conditioning, heating ducts, and insulation.  Although the plenum is typically unattractive in appearance, it is expensive to change traditional space into an exposed environment.

Clusters of open spaces are the hallmark of creative office space versus a row of offices along the window line with secretarial or staff bays on the interior in traditional corporate office space.

This open landscape is designed to promote interaction and collaboration among employees or departments, known as “neighborhoods,” within an organization.  There often is no specific office assigned to a particular individual.  Employees “plugin” and “log on” and perform their work task at different areas within the premises.

2-imagePrivate conversations take place in a “huddle” area, which is often simply an alcove. Offsite employees who drop into the office and all visitors in the office are said to be “hoteling.”

Creative office space has a lack of walls to create enclosed spaces. This all seems like an easy, efficient way to provide workspace. Unfortunately, it isn’t. Tenant improvement costs are incurred opening up the ceiling to expose the plenum areas and allocated for demolition of the previously designed traditional offices. Core drilling into concrete floors for electrical and data drops can get expensive but is critical in these open landscape plans. Often “soft walls” made of fabric, which can be decorative to enhance the atmosphere, may or may not be movable and used within the premises to define a specific area.

Generally, creative office space in Los Angeles translates into to a boatload of employees. Therefore, density has become a major topic of discussion during the lease negotiations, and the load usage of electricity is a hot button issue due to the number and variety of gadgets that employees use daily in this office environment.

Parking, Kitchens, Dogs, Bikes

Parking also is another important issue that must be addressed in lease negotiations. Often, the standard of three parking spaces for each one thousand square feet leased, known as the 3/1,000 Rule, is not adequate and was undoubtedly established when the building was constructed. Landlords can later go back to the city and request a modification, but this often is difficult to achieve. But there are other options such as re-striping the parking lot to include more spaces, providing a valet service to jockey cars into other space around the building, or converting reserved parking spaces—especially those that are vacant the majority of time—into unreserved ones to accommodate daily employee and visitor demand.3-image

Kitchens no longer only satisfy the need for food in creative office space, and they have replaced conference rooms as significant topics of negotiation. The “look” and “brand” that the organization wishes to display to the world is now imprinted in the kitchen area.   Often the kitchen will be the central point within the premises, no longer regulated to an interior windowless space, but the premier lounge location. Kitchens are gathering areas to work, create, and collaborate.

Under the Rules and Regulations section of a lease, a tenant will normally see the prohibition of dogs, but the creative office user is big on dogs. This can be a difficult but humorous negotiation. We just completed a lease that hinged on how many dogs are allowed into the building, how many times a week one dog can enter the 4-imageoffice, and how much it can weigh. There usually is a prohibition on bicycles – the transportation of choice for the creative office user. Institutional ownership of buildings is more challenged to achieve a comfort level of permitting dogs versus bicycles, where the landlord provides racks and bikers the locks. But we’re seeing new buildings providing restrooms with lockers and showers.

Window line also is critical because users want to be as close as possible to the outside environment and natural light. Users also want easy access to parking and amenities; restaurants within walking distance are a must.

Multi-story buildings from in the 1970s are very challenged to accommodate creative office space given the architectural design that was popular then and their location in “concrete jungles,” but we are seeing large, single-story industrial buildings redesigned for creative office space. Additional parking and exterior green areas for gathering are being incorporated into these projects, but they come at significantly higher rental rates.

Conclusion

The world of office space continues to evolve, but it would have been hard to imagine a few years ago that a transaction would come down to how many dogs may visit your office per week and how much they are permitted to weigh. While it sounds like this “could only happen in Los Angeles,” the trend of creative office space has spread to San Francisco, Seattle, Houston, Chicago, New York City, and Miami, so get ready for a new and fascinating era of working in an office.

For additional information on the changing office market, please call us at Vision Economics, 805-987-7322, or Mazirow Commercial at 805-449-1945.  Mazirow Commercial has been specializing in negotiating lease terms on behalf of tenants for more than twenty-five years.