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Earlier this week, the Cleveland Plain Dealer reported that KeyCorp and Columbia Property Trust have entered into a 15 year extension of KeyCorp’s lease In the 57 story Key Tower (Cleveland’s tallest building), while at the same time reducing the amount of space leased by KeyCorp in the building by approximately 30%.  The article states that the reduction of space is not due to staffing cuts by KeyCorp, but rather reflects KeyCorp’s creation of more efficient space, a reduction of the amount of space allocated per employee, the effect of employees working off-site and the focus of putting younger “Millennial” or “Generation Y” employees (who value increased social interaction) into more collaborative workspace than that offered by traditional private offices.  The downsizing evidenced by the KeyCorp deal is consistent with the observations of many others examining national trends in the office market.  The Urban Land Institute’s Emerging Trends in Real Estate 2013 report cited an ongoing reduction in space-per-capita requirements for office tenants as a primary weakness in the office market while noting that stronger office buildings in the U.S. market will be both (i.) LEED Certified and (ii) located closer to the “vibrant and dense urban environments” (when compared to the potential isolation of suburban office parks) sought by the tenants attempting to attract and hire the more collaborative and socially conscious upcoming Millennial  workforce.  Other employers are taking advantage of the practices of (i.)“hot desking” (aka office hoteling), allowing employees to work from home and (iii) reducing filing space with moves toward paperless technologies and cloud computing to reduce space needs and costs. 

 

As future office leases (or renewals) are negotiated, tenants and their brokers and counsel will want to take a number of steps to make sure that they will be able to fully take advantage of these potential savings initiatives by: (1) reviewing the “employee density” and “load factor” provisions in the Lease to make sure that reductions in space per capita do not result in a lease default (and negotiating any appropriate reductions); (2) negotiating options to terminate the lease (“early surrender”) with respect to unused portions of the Premises, although these provisions are not popular, to say the least, with Landlords; (3) making sure the Tenant has additional capacity and rights to access communication closets/rooms and risers to allow increased bandwidth capacity to and from the Premises, which will allow the tenant to locate networking, servers and other hardware off-site, (either in central facilities or lower cost facilities); (4) evaluating the feasibility of reduction of the tenant’s filing space requirements hoping that increased “cloud” and paperless storage will reduce the need for paper filing space and, in particular, expensive floor reinforcements to handle heavy paper files; and (5) obtaining the right to surrender paid parking spaces that may not be required as employees are given the opportunity to work off-site.

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