Companies reconfigure surplus office space

From the 30th floor of Centennial Tower in downtown Atlanta, employees at Gensler architectural firm have a breathtaking view of the Atlanta skyline.

Lately, though, that panorama offers two different views at once: a soaring collection of buildings that define the city, and an office market you wouldn’t wish on Birmingham. A vacancy rate of 20 percent this summer is not out of the question. In good times, vacancies run between 12 and 14 percent.

A year ago, Gensler occupied 17,000 square feet of office space. But layoffs and realignments earlier this year left the company with 3,000 square feet of open space — little desert islands inhabited only by silent workstations. Instead of moving the firm, Gensler moved the furniture, separating its workers from its unused workstations.

“All the empties are at one end; 80 percent of our space is occupied, so it feels full,” said Stephen Swicegood, managing director of Gensler’s Atlanta office. “There’s nothing more depressing than walking on a floor that used to be full of workers, and now there’s only half the seats that are occupied. You lose energy that way. There’s no buzz.”

It’s a notable turn for a firm that has built a reputation helping other companies make good use of their space. It also illustrates corporate America’s dilemma: At many companies, two years of punishing layoffs have transformed the cubicle farm into a cubicle graveyard. Because real estate is a fixed cost, holding more of it than your company needs affects the bottom line.

In the first quarter of this year, U.S. businesses vacated nearly 25 million square feet of office space, according to Reis Inc., a New York firm that monitors commercial activity. That’s equivalent to roughly every building in Midtown and most of downtown being empty. It’s the most vacancies since the 2001 terrorist attacks. Vacancies nationwide are expected to double by the end of the year and continue to grow for another two years.

Friday brought another dose of bad news: The government announced that U.S. businesses cut another 467,000 jobs in June, pushing the unemployment rate to 9.5 percent. All told, more than 3.4 million jobs have vanished in the first half of this year — accounting for nearly half of job losses since the recession began in December 2007.

Companies in metro Atlanta are using a variety of innovative strategies to deal with office space they are no longer using:

— Consolidations or lease renegotiations. Selig Enterprises allowed one industrial tenant with 70,000 square feet of space in two buildings to move everything into one building, relieving the tenant of 40,000 square feet of space. In return, Selig got eight months of rent and the client got out of a five-year lease obligation — a deal virtually unheard of in good times.

— Shadow space: Others, unable to renegotiate their leases, are subletting to smaller companies in need of office space. The practice of “shadow space” — an industry term that refers to the space companies sublet — has picked up in this recession.

Some companies, such as Buckhead law firm Morris, Manning & Martin have even donated space. The firm, which is at 3343 Peachtree Road, is letting the Nathaniel Anthony Ayers Foundation use a vacant office free of charge, saving the nonprofit thousands of dollars in rent and related business expenses, said partner Cass Brewer.

“If you can imagine what office space with an address like that will cost, it is a tremendous savings,” said Ted Sapp, executive director of the foundation. “And in terms of the address, it certainly adds cachet to the foundation.”

— Early renewals. Real estate experts say they are seeing more renewals in which a tenant agrees to extended time on their lease in exchange for the building owner or property manager taking back unwanted space.

NAI Brannen Goddard, an Atlanta commercial real estate firm that represents tenants, has been “very busy” helping companies with good credit and strong balance sheets get good deals. But the company’s also arranging early renewals for those who aren’t as financially stable.

“We’re seeing more of the early renewals. That’s what’s different from the dot-com bubble,” said Chad Koenig, NAI Brannen Goddard’s senior vice president. “Companies are trying to conserve cash so they’re wanting to know: ‘How much can we save on the lease?’ “

— Reconfiguring office space. Companies are using a lot of modular office furniture and movable walls to create the illusion of vibrancy and filled space. Other companies that have workers in multiple places are consolidating workers in one facility or on one floor in a practice known as “restacking.”

Atlanta Office Planners, which has offices in Norcross and Marietta, has been redesigning office spaces for about two decades. Yet the company is “seeing more work during this recession,” said Jean Cox, manager of the company’s Norcross office.

“When the economy’s booming and doing well, companies buy new furniture. As it turns down, they buy used furniture. When it gets worse they reconfigure.”

In some cases, companies are using the downturn to create “one-stop” service. Some real estate firms, for example, are filling empty offices created by the real estate meltdown with closing attorneys and mortgage companies, said Randy Glazer, general contractor for residential and commercial building for Glazer Design & Construction. The firm is doing a lot of interior reconfigurations of work spaces as well as exterior face-lifts on buildings.

With time and space on their hands, “People are updating buildings to make them more welcoming and attractive to potential tenants,” Glazer said.

Nationally, a lot of landlords are finding themselves with a surplus of space. Nearly $9 billion worth of distressed office assets — 211 properties — are on the market. That list continues to grow by more than 30 properties a month, according to Real Capital Analytics, a commercial real estate research and consulting company.

And while the country will start to see some economic growth this year, it will be 2011 before commercial real estate starts to turn around, said Atlanta economist Roger Tutterow of Mercer University’s Stetson School of Business.

“Businesses are contracting so they need less space,” he said. Metro Atlanta has the additional problem of “too much product,” he added, with several more developments opening in Buckhead.

“It will take some pretty strong growth to bring down the vacancy rates.”

The glut isn’t all bad, however. It’s yielding opportunities for bargain hunters and new business-coping tools for some in the industry.

“Some real estate entrepreneurs are buying up properties such as commercial buildings, so when the market does improve they’ll be ahead of the game,” Glazer said. “They’re getting them at bargain basement discounts.”

The glut prompted architectural firm Gensler to create in the last year an online spreadsheet program called the Recession Compression calculator. It helps companies determine the best use of their office space, taking into account labor and benefits and other budgetary issues.

“We can quickly estimate how much space they can cut and what it would cost to do that,” Swicegood said. It also gives clients an idea of how long it will take for them to recoup what they’ve spent on space-saving projects.

“The calculator doesn’t have all the answers,” Swicegood said. “It’s just a good conversation starter. “

While Atlanta has had its share of vacancies, veterans of the local commercial real estate market say the region will bounce back.

“Atlanta is such a diversified business community, no one industry holds this city up,” said Koenig of NAI Brannen Goddard. “Atlanta’s a good spot, in the long run.”

The growing workplace

Workers enjoyed quite a bit more space in the mid-1990s, before companies became more concerned about the use of office space and began cramming people into smaller work areas.

That trend leveled off throughout most of this decade, before average office space size began increasing again last year.

The International Facility Management Association attributes the extra space to recent layoffs and downsizing.

Here’s a look at the average square footage per worker during the past 15 years:

2009: 435 square feet;

2008: 415 square feet;

2007: 396 square feet;

2004: 408 square feet;

2002: 406 square feet;

2001: 407 square feet;

1997: 471 square feet;

1994: 589 square feet;

— Source: International Facility Management Association

Office vacancies

At the end of the first quarter, office vacancies in metro Atlanta reached 17 percent and could rise above 20 percent this summer. Rental rates fell, and at $21.47 per square foot, average rents were the lowest since the third quarter of 2007.

— Source: Jones Lang LaSalle