Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

April 3, 2011

To see the office of the future, watch how Tech does it

Micro cubes & bull-pens requiring multiple break-out rooms. 5.7 employees/1,000 SF and growing. A negative trend for office buildings – especially suburban stock.

San Francisco’s tech sector employment is approaching the highs of the dot-com era. See the excellent article by Casey Newton in the SF Chronicle.

But don’t throw a party quite yet
What strikes me is the shrinking use of office space on a per employee basis is erasing the growth in employment. San Francisco’s Tech sector is now down to an average of 175 square feet per employee or 5.7 employees per 1,000 square feet, with many companies cramming 10 employees into 1,000 square feet.

Why is this important?
The tech sector is the harbinger of trends in office use. This makes sense: Tech companies refresh their build-outs often, because they are either growing or collapsing. Tech employees are generally younger and more willing to accept change. These companies have already adopted the latest technology, so their office layouts show what is coming next.

Take a good look at the photo of Zynga's office space...

What is making this possible?

Changes in Work Style
If you want to get a hold of a baby boomer, pick up the phone. If you want to talk to a Y-gen, send them an IM. In a phone-based corporate culture, 175 feet per employee would sound like a call center. These densities only work when people communicate electronically.
Richard Pollack, principal architect for the office interiors firm, POLLACK architecture, comments; “It’s becoming more prevalent in the young-person tech world that you shouldn’t even expect to get a quick response if you send an email to them! In fact, the current electronic communication approach is centered on social networking, even within companies. released Chatter in 2010 which is their social networking tool for use by their clients and staff, and Google relies strongly on their multi-user collaboration tools known as Google Apps. Both companies are POLLACK architecture clients.”

Changes in Design of the Work Place
John Able, a prominent office leasing broker in San Francisco, told me the secret to maintaining employee satisfaction, with bull-pens and micro-cubes, is the provision of ample “Break-Out Rooms” available on an unscheduled basis. Densities of up to 10 employees per 1,000 square foot can only work by providing unassigned private break-out rooms, available when an employee needs to harangue a supplier, pitch a potential big customer, meet with a colleague or set up a date for the weekend, i.e. If you are going to have an extended conversation you head to the break-out room.
Richard Pollack also notes that beyond the Break-Out Rooms, a current design focus is to provide significant open collaboration space, with massage chairs, foosball, ping pong, etc. These spaces often incorporate white board walls (sometimes using special “white board paint”). Other trends are a lot of glass, and all the perks that we hear about – dry cleaning, dental vans (the equivalent of a food truck), etc.

Tech jobs up; space per tech worker down
Changes in Corporate Priorities
Rent used to be the top expense after salaries for the most office users. No longer - many modern companies are now spending more on IT than rent. According to the Corporate Executive Board benchmarks, the average company spent $8,910 per employee per year on IT in 2010. Software and Tech companies spent slightly more at $11,470 per employee per year. If a typical Tech company finds space today at $35/sf/yr full service in San Francisco, with only 175 square foot per employee, their rent is only $6,125 per employee per year, little over half of their IT budget.

What does this mean for office buildings in the future?
Clearly the design of office interiors is changing. But what is also changing are the metrics – Companies are focused less on rent per square foot and more on rent per employee. This change in metrics effects tenants’ location decisions. If you want to cram 10 employees in 1,000 sf then a typical suburban office building in a business park is less appealing. A tenant will accept a higher rent if that location allows them to achieve a high employee density. The typical suburban inhabitant is not going to tolerate this cutting-edge work-style, which is more akin to a college study hall or university library then the office environment of the baby-boomer generation. If you want to lower your rent per employee you need to be near Generation Y , i.e. hip and urban areas. You will also need a location where much of your workforce can come by public transit because the typical suburban office parking lot with a parking ratio of 4 cars per 1,000 sf of office space will be overburdened.

What does this mean for the recovery in the office sector?

As employment picks up, we will be fighting a trend toward less office space per employee. The recovery of the office sector will be delayed unless your office building happens to be in a Generation Y hot-spot: In my mortgage banking territory that is Palo Alto-Mountain View, Berkeley, or San Francisco.

The graphs and pictures for this blog posting came from the San Francisco Chronicle;  click here to read the article