Tech Firms' Diminishing Space Standards

A prime lesson learned from the “Web 1.0” market corrections of the early part of this decade is that the governance boards of Venture Capital-backed technology firms no longer wish to see a large portion of their early stage investment money go towards non-core expenditures (think traditional brick-and-mortar real estate in the form of lavishly appointed offices with long-term lease obligations.)

The current trend in space requirements for tech firms has been for 1) built space (sublease or direct), 2) in “move-in” condition and 3) available for terms of less that five years. Recently, however, and perhaps in response to the rising real estate market, we’ve also noticed an additional criterion of high-density in layout/ seating plan.

Density Defined
The concept of density, with regard to a space’s layout is the ratio of the rentable square footage ("rsf") divided by the headcount (based on a seating or furniture plan). In today’s rising and increasingly competitive market for commercial space, leasing opportunities that would meet the other three criteria (i.e., economical, turn-key and short-term subleases) are often eliminated from consideration by a relatively low-density layout.

It is possible to improve a space’s density, but it is accomplished most efficiently when addressed in the pre-construction or planning stage. The easiest method for increasing density is by substituting workstations for private offices wherever possible or by substituting smaller workstations for larger workstations. A traditional office environment with a mix of individual offices and workstations and common areas averages anywhere from 225 to 375+ rsf per employee. The higher metrics tend to represent lavish executive or law office installations while the lower numbers represent primarily open, sales or bullpen-type environments. A broker’s rule of thumb for a space requirement formerly was to use 250 rsf per employee and multiply a firm’s headcount by that number, i.e. 40 employees equals 10,000 rsf. Now, however, that number needs to be lower as most open-plan or call center environments can layout at densities under 200 rsf/employee.

Advantages & Disadvantages
The economic benefits to these substitutions are obvious: less square footage reduces base rent costs. However, there are other benefits to an open-plan or high-density environment such as higher levels of employee communication, camaraderie, cooperation and creativity. Similarly, an open plan environment tends to be less hierarchal and can improve and accelerate decision-making processes. The primary detractions of open-plan space, though, are loss of privacy and a potentially negative impact on recruitment of senior executives or others accustomed to a private office environment.

Most firms that create a high-density environment, however, offset the lack of privacy and personal areas with communal-type amenities, such as conference or “huddle” rooms, cafeterias, phone “booths”, lounges, even game rooms. At CRESA, for example, we attempt to practice what we preach in advocating open plan environments. Unlike most of our competitors, we have an open office environment that encourages sharing information and collaborating on assignments and new business development. Our 9,834 rsf office near Grand Central Station (100 Park Avenue) provides seating for 36 employees (273.2 rsf/employee). While this is comparable in density to a perimeter office-type installation, we compensate for our workstation efficiencies with approximately 2,000 rsf of communal areas and modular conference rooms. If you overlook the communal space, we occupy at a density of 217.6 rsf/employee, which is relatively lean by the standards of professional services firms.

But our late-1990’s space is relatively lavish compared to some of the layout densities we are seeing with recently negotiated leases for technology clients. A couple examples:

Some Examples
An Internet marketing firm’s original premises had a seating plan of 5,000 rsf for approximately 40 employees = a density of just under 125 rsf/employee. Their growth necessitated a move to larger quarters. The challenge was to find suitable, existing open-plan layouts with acceptable densities. Our solution was to find an existing sublease installation in Hudson Square with the combination of a high-density, open-plan environment with multiple communal areas. The resulting space density came in at just under 225 rsf/employee.

A venture-backed Internet client leased space in lower Manhattan for five years – a long-term commitment by technology standards. However, this firm was able to accommodate long-term growth by designing an open layout with a seating plan that attained an overall density of under 115/rsf employee.

This trend was taken to an extreme by a mobile content provider that interviewed our construction management team to devise a layout for their expansion space at approximately 65 rsf per employee, based on target density for full occupancy. We determined that we were unable to assist this firm, mostly because at such a high-density, there is little space remaining for any traditional office furniture or partitions.

Historical Comparison
For comparison purposes, I revisited a white paper written by members of our firm from 1999-2000. During this period, the average rentable square foot (“rsf”) per employee for the “New Media” industry was 246 rsf. This was low by comparison to the traditional office occupancy standards of 350 to 400 rsf/employee, but still higher than today’s trend, mostly due to the generous allotment of lounge and recreational common areas – think “foosball tables”. However, at that time, like today, in the "bootstrapping" phase of growth it was not unusual to see firms reach average occupying standards of 100-150 rsf/employee consistent with today’s densities. This was typically during the prefunding phase and achieved by “doubling up” workstations and offices.

Doubleclick was a prime example of density trade-offs. They achieved an efficiency of 280 rsf per employee (at 450 West 33rd Street) while including a full size basketball court, gymnasium, large “park” area, break out rooms, lounges and other common amenity areas.

To conclude, like in 1999, today‘s technology firms are able to use internal expansion and fluctuating densities to accommodate growth and to offset the economic impacts of a rising real estate market. The key difference is a much more economical approach to both space design and leasing decisions. While communal areas are required to offset an open-plan environment, they do not have to be extravagant or playful. On the leasing side, while the market is competitive, there is less of the “land grab” mentality of 1999 in the leasing commitments made today. Instead, the key drivers for practicing these aggressive density modulations are 1) more flexible layout and furniture systems, 2) greater mobility and flexibility in employees, 3) flatter hierarchical structure and 4) the addition of amenities to offset loss of space and privacy.