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Tenants Shifting from Retrenchment to ‘Growing Smart

New Mandate Less Focused on Increasing Square Footage and Aimed More at Supporting Business Growth in a Flexible Manner While Managing Total Occupancy Costs and Reducing Risk

Tenants throughout corporate America are beginning to be less concerned about cost containment within their real estate portfolios and are shifting their focus from retrenchment to “growing smart,” in which they are looking for ways to maximize space utilization and to increase productivity in 2011 and beyond, according to Jones Lang LaSalle as part of the results of its 2011 Corporate Real Estate Survey distributed at the CoreNet Global Summit in Chicago.

The survey revealed that most companies are beginning to enter a cautious growth mode. Firms are placing a strong emphasis on providing a compelling rationale for each square foot of their real estate footprint in response to Wall Street expectations for growth and cost management as well as merger and acquisitions activity.

“Companies in the United States are entering a growth mode in terms of hiring and business line expansion, but this may not translate to growth in office space needs to the same degree,” said Kenneth Rudy, international director, corporate solutions at Jones Lang LaSalle. “Even as they grow, companies are focused on strategies to maximize space utilization, both in the amount of space needed per employee and in the effectiveness of the space in driving a highly productive workforce.”

The mandate will be less focused on increasing square footage in a portfolio, and more aimed at supporting business growth in a flexible manner while managing total occupancy costs and reducing risk.

It will also involve making strategic repositioning decisions to eliminate underutilized or redundant space. Occupiers will be challenged to adopt organizational structures that can drive global initiatives, balance growth and consolidation, control risk and enable quick decision making.

Positioning for smart growth in the face of changing demographics, labor costs, energy costs and world politics is leading companies to carefully evaluate entire operational footprints – office, distribution and manufacturing – and to develop the right commercial real estate organization, governance and guiding principles that can drive global initiatives and produce results, while supporting a company’s appetite for strategic growth.

“The old rules no longer apply,” said Lauren Picariello, vice president of occupier research for Jones Lang LaSalle. “Many large companies will not immediately take on more space as they increase revenues and resume hiring. There is a fundamental shift in the way corporate America consumes commercial real estate today.”

Flight to Quality Ramps Up

Unlike previous cycles, this recovery will not be as broadly based, JLL said. In recent quarters, in response to a tenant-favorable market, occupiers aggressively used flight-to-quality strategies to secure top-tier space at market-low rents.

Companies are being hyper-selective with space requirements and are migrating to real estate that brings the company as close as possible to its clients, employees and other key stakeholders. Many leading markets segments are now seeing the availability of premier quality Class A space tighten, making the flight to quality executed in 2010 more challenging. As shortages of quality space emerge, especially for large size requirements, relocation options will become limited, reducing tenant leverage.

As occupiers gravitate away from second-generation space to new higher quality options, holes have been left in the Class B and commodity space markets. This in turn has created opportunities for more price-conscious tenants looking to take advantage of higher vacancy and depressed rents for “flight to value” plays.

Reprint from  CoStar.com     By Mark Heschmeyer

Categories: Leasing, Uncategorized
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