John Vivadelli: The Real Estate Perfect Storm

Commercial real estate is currently experiencing a perfect storm, one that will utterly change the way corporations utilize their office space in the future.  This is the opinion of John Vivadelli, CEO and founder of AgilQuest Corporation and a well respected industry expert in the fields of alternative office environments; real estate metrics and cost management; and business continuity.

Prior to founding AgilQuest, Vivadelli was instrumental in developing IBM’s workplace management system in the 1990s to support the company’s transformational workforce mobility program, creating their “office of the future”.  This new workplace strategy resulted in reconfiguring the technology giant’s real estate footprint by shedding millions of square feet that saved hundreds of millions of dollars annually. AgilQuest provides the services and systems necessary for companies and governments to achieve similar results.

According to Vivadelli, this perfect storm is impacting both the supply and demand sides of commercial real estate.

On the supply side, the United States has approximately 12.5 billion sq. ft. of commercial office space, which carry an estimated $1.2 to $1.4 billion in loans that will come due in the next two years. Many of these loans will not qualify under new reserve requirements.  While the average base vacancy rate is currently 17 percent nationally; that statistic does not include shadow space – square feet that are paid for but not occupied – which adds another 5 to 20% to the overall vacancy rate.  Additionally, with the upcoming implementation of FASB Rule 13, both owned and leased properties will have to be reported on corporations’ balance sheets.  Off-balance-sheet leasing will no longer be an option.

On the demand side, he sees a fundamental shift downward in real estate absorption.  The nation’s unemployment rate is approximately 10 percent, with an additional seven percent who have opted out of looking for a job. Some of these jobs will never return.  Add to that the number of workers who perform their jobs remotely and stay connected to the office via PDA, cell phone and laptop, and the average actual occupancy rate between 8 a.m. and 5 p.m. is between 30 and 50%.  That means over half of all office space across Corporate America is vacant on any given day.  Considering that an average of $60 is allocated per sq.ft., that adds up to $360 billion that companies are paying to landlords for office space that is empty and they don’t need.  This wastes 1.5 quads of energy and results in 40 million metric tons of unnecessary carbon released every year.  As companies recognize the scale of the problem, the real estate industry will see a profound shift in how we use space.