The Rapid Expansion of Shrinking Tenancies

Friday, June 12th, 2015
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Downtown tenancies have diminished sharply in size in recent years, resulting in new opportunities on the market for CBD office space.

Efforts by business owners to reduce costs and raise efficiencies as well as fundamental shifts in office culture are translating into shrinking tenancies throughout Australian CBDs.

Speaking at the Property Council’s The Future is Smaller event in Melbourne, Colliers International associate director Anneke Thompson said smaller tenants are commanding a rapidly expanding share of the market for office property, as the demand for larger sites recedes.

According to Colliers, data enquiries pertaining to Melbourne offices under 1,000 square metres have increased from 71 per cent of the total in 2009 to 82 per cent last year, while those concerning properties in excess of 3,000 square metres have fallen from nine per cent to five per cent over the same period.

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The average lease size has plunged since the start of the decade, falling from 1,353 square metres in 2010 to 848 square metres in 2014.

This phenomenon is far from confined to the Victorian capital.

“The same thing is happening nationally – small tenants are moving back into CBDs,” said Thompson.

The average lease size for nationwide CBD offices has fallen from well over 1,100 square metres in 2010 to just above 600 square metres in 2014.

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A slew of factors are behind the reduction in tenant sizes. These include efforts by corporations to reduce costs in a post-GFC global economy, and the greater emphasis placed by tenants upon better building services.

Other key factors involve widespread changes to workplace culture, including the growing opinion that desks should only be used infrequently (as exemplified by the adage that “sitting is the new smoking”) and greater demand for open plan offices amongst small start-up businesses.

Multiple tenants are also seeking consolidation of space in order to achieve co-location efficiencies.

“Consolidation is a big trend that a lot of companies are taking the opportunity to pursue,” said Thompson, pointing in particular to the business services, finance and insurance and IT and telecommunications sectors.

Data on declining workspace ratios over the past two decades attests to this trend. While the average amount of space per employee was a capacious 27 square metres in 1992, this figure had fallen to 20 square metres by 2002.

The ratio has continued to decline as we’ve advanced further into the new century, falling to 18 square metres in 2012, and 16 square metres by 2015.

This ongoing shrinkage in tenancy sizes and per capita floor area could translate into major changes on the Australian office market, chief amongst them a shift to greater use of suites and shared workspaces, as exemplified by the company WeWork in the US market.

Thompson noted that WeWork’s innovative brand of shared space and office services has made the company the fastest growing lessee of new office space in 2014 in New York – an extraordinary accomplishment given the extremely competitive nature of the Big Apple’s office market.

Benefits include savings on costs for security, reception facilities and broadband and printing, as well as the inclusion of joint healthcare, web hosting, payment processing, accounting, legal, cloud computing and advertising services.

According to the Thompson flexibility is the key to the appeal of the WeWork style of office leasing to the fast expanding small tenant market segment.

“Small tenants play a key demand role in our market,” said Thompson. “Flexibility will be the buzzword for big and small tenants alike.”

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