Real estate attorney George Powell is witnessing firsthand how rapidly advancing technology is helping South Florida business cutback on their space needs.
For landlords, it is a troubling trend.
As an Akerman Senterfitt shareholder based in Miami, Powell and his colleagues are converting to paperless record-keeping. Space-hungry filing cabinets and storage rooms will become a thing of the past for many law firms and corporations.
Powell is also finding that as web conference systems like Citrix Systems’ GoToMeeting proliferate, he no longer needs to be in the same room as his clients.
“What I’m seeing in my practice is a greater reliance on Internet tools available to do business,” said Powell, who is also a member of the invitation-only The Counselors of Real Estate (CRE).
In a recent national survey, CRE members said that many large office users are significantly reducing their space needs because of technology advances.
The digital world also is impacting the retail sector, but for different reasons. The continuing rise of Internet buying, or e-commerce, has permanently changed consumer habits, according to the CRE. Brick-and-mortar retailers are under unprecedented pressure from web-based companies like Amazon.com Inc. Those that can’t compete will disappear, pressuring owners of big-box buildings and shopping centers.
While the digital revolution is changing everyone’s lives and South Florida businesses aren’t immune to the trend, local real estate professionals say the region should fare better than most markets.
Still, in the office market, large users collectively reducing their space needs could severely hamper what has been an incremental real estate recovery.
South Florida office vacancies have steadily inched down over the past year, an encouraging sign for landlords. The region’s overall vacancy rate declined from 14.9 percent at the end of the third quarter of 2011 to 14.6 percent in the fourth quarter of 2011, 14.4 percent in the first quarter of 2012 and 14.2 percent in the second quarter of 2012, according to CoStar Group.
The current 14.2 percent rate still represents a significant glut of vacant office. More of the empty space must be filled before the market returns to pre-recession levels. Large tenants capitalizing on technology to downsize would potentially set the market back or at least negate the recent occupancy gains.
“The trend toward using less square footage has negative implications for landlords and will probably slow the process of absorption down a little bit,” according to Jones Lang LaSalle broker Rod Loschiavo, a tenant representation specialist.
“We need a little more job growth than in the past to get the same kind of reduction in vacancy,” he said.
Larger office tenants with upcoming lease renewals are finding that they can add employees to offices while taking less square footage or maintaining the same size, Loschiavo said.
Those tenants are opting for “less walled offices and more use of modular furniture,” he said. “Some clients have gone paperless, so there’s less of a need for storage.”
Loschiavo cited one of his clients, Brown & Brown Insurance, as an early indicator of the trend. The company last year moved from a 35,500-square-foot office on Cypress Creek Road in Fort Lauderdale to a 29,670-square-foot facility on the same block despite planning to increase the number of employees. Going paperless helped make the downsizing possible.
For law firms, eliminating paper is a “significant achievement in efficiency” that allows some firms to reduce office sizes by 15 percent to 20 percent, according to Christian Driussi, vice president and general manager at Brickell Bay Office Tower. Driussi handles leasing at the 1001 Brickell Bay Drive tower.
The ability to reduce office sizes does not mean all South Florida tenants are going in that direction, however. Some companies are taking advantage of space gains from technology to expand other components of their offices, according to Cushman & Wakefield senior director Jon Blunk, who represents landlords.
“If someone gets rid of a law library, you might see a larger cafeteria and break room,” Blunk said. “Some of what has become obsolete, like hard files, is made up for with larger conference rooms, big kitchen areas and think-tank sections.”
Landlords “have to know who the user is and adjust accordingly,” he said.
South Florida office building owners have an advantage over landlords in other U.S. markets that could help them withstand consolidation from large tenants: Technology is predominantly helping large tenants cut space requirements, but South Florida is an office market dominated by small tenants.
Companies occupying 50,000 square feet or more make up only 1.3 percent of the local market, according to CoStar. A whopping 80.3 percent of tenants in the region use less than 5,000 square feet of office space.
“This is a 1,000-square-foot to 5,000-square-foot market,” Driussi said.
And many smaller office tenants are currently in expansion mode, according to Cushman’s Blunk. Top executives from large law and financial services firms are leaving to start their own companies and need small offices.
These executives “want tenant-ready space and make it easy for landlords to decide what the market is for that building,” he said.
In the retail sector, South Florida landlords are still analyzing both the short-term and long-term impact that e-commerce will have on tenant demand and space needs. They know physical retail stores will take a hit, but the full extent is uncertain.
“There’s no denying the Internet will help shape the future of retailing,” said retail specialist Alan Esquenazi, a principal at Coral Gables-based Continental Real Estate Cos.
Online competition likely drove electronic retail giant Best Buy’s decision to close 50 of its larger U.S. stores during its current fiscal year, which runs through February 2013. While closing down certain big-box stores, Best Buy is set to open 100 smaller stores focusing on mobile products.
Best Buy’s move was necessary for the company’s survival, Esquenazi says, because its stores have become a “showcase” for consumers to examine a product in person before going online to find a better bargain.
Many other retailers are considering following Best Buy’s lead, said Powell, the Akerman attorney.
“Some clients are looking to change their operation format and downsize in some regard,” he said. “They might cut back on product diversification.”
Banks, which often lease up prime ground-floor and corner retail spaces, could be the next to reduce retail locations. Thanks to direct deposit and the use of smart phones to pay bills and make deposits, customers can avoid going to their local branches.
“I represent a larger bank chain that is right now considering the future of banking,” Esquenazi said. “You don’t have to go to the bank as much as before.”
Going forward, retailers must come up with creative approaches to their stores that entice shoppers to shut off their computers. Apple has had some success in that department with their stores.
“Apple has created an exiting atmosphere with a great shopping experience,” Esquenazi said. “A physical store’s success will be reliant on the ability to be creative.”