The incredible shrinking office

Size of average lease deal has fallen by almost half since 1997

Office feeling claustrophobic? It’s not just your imagination: The average office leasing transaction has fallen to just 5,700 square feet. That’s a roughly 50 percent drop from the peak of 10,500 square feet in 1997, according to data the CoStar Group provided to The Real Deal.

The trend translates into more shared offices and open floor plans, and far fewer rooms of one’s own. Observers say the less-is-more approach is likely here to stay, and the uptick in demand for large floor plates during the recent boom just masked the long-term trend toward smaller offices.

“Most of the deals we’re doing now are in that range,” said Michael Kaufman, partner in the Kaufman Organization, which owns or manages roughly 5 million square feet of New York metro-area property. “Everyone is forced to use space more wisely.”

Buildings over 250,000 square feet still make up about 70 percent of the market, and their average lease size has stayed constant at about 20,000 square feet. But the other 30 percent of the market, where smaller deals rule, is where the action is — and that segment is starting to gain market share at the expense of larger properties.

“It affects what the recovery looks like — it’s fueled more by smaller tenants and less by large,” said Josh Scoville, director of U.S. research at CoStar.

These smaller tenants include technology firms, financial services firms and fashion companies, brokers and landlords said. The rise of the hedge fund, where a handful of executives can manage $100 million in assets from a 2,000- or 3,000-square-foot office, and the downsizing of many companies also underpin the trend.

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In this shaky economy, these smaller companies also have the upside of moving to spaces prebuilt by the landlord rather than shelling out tenant improvement dollars. That’s adding 10 to 15 percent more in “prebuild costs” for Kaufman’s buildings. The extra investment funds more glass, nicer light fixtures and even granite countertops in kitchen areas to lure good tenants.

This year so far, most of the deals Cynthia Wasserberger, a managing director at Jones Lang LaSalle, has worked on are for smaller, prebuilt spaces. She recently brokered a deal for 4,184 square feet at 745 Fifth Avenue for a financial services firm.

“The landlords found it’s profitable to prebuild the space and attract small users,” Wasserberger said. “If you build it, they will come.”

Boutique office buildings with smaller floor plates are best positioned to benefit from this market shift. Wasserberger cited 400 Madison Avenue, for which Jones Lang LaSalle serves as leasing agent, as a case in point. Spaces range from 2,000 to 10,000 square feet.

Looking ahead, that advantage will become more pronounced if, in a shaky economic recovery, even firms that grow remain in smaller offices to minimize the cost of rent.

“It’s an enhancement to landlords that have boutique-style buildings … but buildings with very large floor plates that don’t lend themselves to divisions will be a little more challenged if the size of leasing deals does stay down permanently,” said Chris Kraus, a managing director at Jones Lang LaSalle.