In the past year, Philadelphia companies signing new leases generally downsized their office space by between 20% and 40%. It’s a trend likely to continue as remote and hybrid work policies become entrenched in many white-collar professions.

Accounting firm KPMG is moving next year and cutting its space 38% from 134,000 square feet at 1601 Market St. to 97,000 square feet at 1735 Market St., known as the BNY Mellon Bank Center. Health care advertising and marketing company Digitas is moving from 108,619 square feet at the Wanamaker building next to City Hall to about 55,000 square feet at the Bourse in Old City. Law firm Fox Rothschild is cutting more than 40% of its space in 2024, down to 79,337 square feet, when it moves to Two Commerce Square.

The list of companies downsizing is lengthy. In prior years, companies waited to make long-term plans. Nearly four years removed from the start of the Covid-19 pandemic, those long-term decisions are finally being made, often with an emphasis on flexibility and potential contraction rights.

It has led to record high office vacancy in Philadelphia’s central business district.

Tactix Real Estate Advisors Principal Glenn Blumenfeld said these now commonplace downsizes of up to 40% aren’t entirely due to remote work. Office space is being designed differently, with flexibility in mind. Instead of workers sitting at their desks all day, modern offices are incorporating lounge areas and booths like in a café. People have become accustomed to working on a laptop and moving around.

“You don’t have to be sitting at a desktop,” Blumenfeld said. “I think that is going to be the biggest fundamental change in office design going forward.”

The new world of how office space is used poses challenges for business leaders tasked with making the leasing decisions. If executives want employees in the office on the same days, how do companies accommodate everyone in a smaller space?

Blumenfeld calls it the “Thanksgiving problem,” likening it to empty-nester parents who may want to downsize from a four-bedroom house. Doing so, however, would mean they may not be able to accommodate hosting their children for holidays.

“The problem that a lot of companies are facing, which is frustrating them, is let’s say they’re only coming in three days a week,” Blumenfeld said. “That means 40% of the time, virtually no one is in the office. But if everyone’s in the same three days, you have to build to your peak demand.”

In the past, when workers generally accepted the need to commute to the office five days a week, employers didn’t have to worry about making their space attractive. Workers were coming in either way.

But now, Blumenfeld said, office space can be a recruiting tool.

“What’s really interesting is office space is becoming more and more like hospitality,” Blumenfeld said. “How do you draw people into your space when they don’t have to be there? I think companies are really starting to think about how do I make my space compelling so that people want to be here as opposed to staying at home and working from home.”

As companies downsize their space, it’s having ripple effects across the market. The flight to quality remains a popular trend as trophy and Class A buildings have continued posting strong occupancy rates. Buildings with low occupancy have become distressed, putting owners in precarious positions. Flexibility, in both design and lease terms, is becoming more and more relevant.

While it’ll take years for the office market to adjust to its new reality, the downsizing trend became clearer in 2023.

See full article at the Philadelphia Business Journal.