By Dennis L. Greenwald
"Being technologically advanced...will mean more than just having so-called cutting edge or state of the art technological capabilities...to be competitive, office buildings will need to be what is sometimes called 'Techno-ready'-that is, capable of accommodating new (and perhaps not yet created) technologies."
One of the challenges for the real estate industry in the new millennium will be determining how ongoing technological advances will affect the development and use of real estate. With technological advances occurring at an accelerating pace, making well-founded predictions about the development and use of real property very far into the 21st century is daunting, to say the least. As that great philosopher and former New York Yankee Yogi Berra, once said, "prediction is really difficult...especially when it's about the future!"
Nevertheless, certain themes of how individuals and businesses will use the office workplace are emerging. For example, high speed telecommunications, telecommuting and other "live-work" models, the "paperless workplace" and the personal computer as the "virtual office" seem permanent fixtures of tomorrow's workplace. There is little doubt, then, that technological change will necessitate new models for developing, sizing, configuring and using office space and, correspondingly, new ways of dealing with the leasing process, lease terms and conditions and the lawyer's role in negotiating leases.
Changes in Physical Space: Technology, Technology, Technology
If "location, location, location" has historically been the catch phrase for real estate, a future motto might well be "technology, technology, technology." Technology will have such an enormous impact on the workplace that new and old buildings will need technological amenities to be competitive. Being technologically advanced, however, will mean more than just having so-called cutting edge or state of the art technological capabilities, because today's technology can easily be obsolete tomorrow. To be competitive, office buildings will need to be what is sometimes called "techno-ready"-that is, capable of accommodating new (and perhaps not yet created) technologies. For example, some developers are creating vertical conduits for future technologies, whether it be fiber optic technology or something not yet invented. As a more complicated example, building designers are increasingly trying to make building systems "application independent." In other words, the building wiring will be able to accommodate different software architecture instead of a single software architecture. Unfortunately, because technological applications outgrew the technological hardware of what were called "smart buildings," those buildings now seem like dunces. Thus, forward thinking developers are focusing as much on technological flexibility as they are on being state of the art.
Technological advances in the office environment have resulted in changes in both the speed with which information is transmitted and the method for transmitting information. Until very late in the 20th century, information was transmitted manually and, consequently, relatively slowly. Overnight mail couriers and fax machines, both of which are of relatively recent vintage, changed the model for transmitting certain kinds of information. Until the use of the personal computer became pervasive, however, the typical way of accessing a piece of information was the same during the 1980s as it was for most of this century-namely, by having the file folder in one's hand.
Beginning in the 1980s, information could be sent via overnight mail with efficiency. Even then, written information was still fundamentally anchored to a particular location until someone could manually retrieve it. Cyberspace, with its laptop computers and wire-less e-mail devices, has brought the method for transmitting information to an entirely new dimension. The result has been that information formerly housed in one specific location, available only during office hours, by only one person at a time, is now available to an unlimited number of people, all at the same time, 24 hours a day, every day. As a consequence, employees need not have access to a specific office to access information or to communicate with one another, their customers or clients. Thus, instead of retrieving information by driving to an office, picking up a file and driving to a meeting at another location (and thereby precluding anyone else from accessing that information while an employee is absent with the file), all an employee needs is a laptop to access the same information. This is one of the reasons why the computer is sometimes called the "virtual office."
The net effect of this change in communications and information technology is that employees need not necessarily have one specific office every day, less space is required per employee and employees can effectuate live-work or other telecommuting models, spending less time at the office. Depending on the particular kind of business, employees also might be able to work staggered hours, because information can be accessed, modified and transmitted to others independently of whether other employees are available.
Architectural and Design Reconfiguration
These trends will affect future changes in the physical space of offices, such as smaller individual offices, diminished requirements for filing, copying and other office services, increased telecommuting, fewer on-site employees, larger mechanical closets and computer and other technological equipment rooms. It is therefore reasonable to conclude that the size and configuration of floor plates will change. One change likely to occur first will be the conversion of internal, windowless space (which in high rise buildings has traditionally been used for office services such as filing, copying and mailroom functions) into work stations. Another significant change will be the shrinkage, if not the complete elimination, of libraries and other areas containing written reference materials. Hard copies of those materials will be taken off of shelves and loaded into the computer. There might even be a reduction in the size of parking areas as a result of increased telecommuting and fewer full-time, on-site personnel.
Not all technological changes, however, will result in a reduction in office space requirements. Increased technology usually requires larger computer rooms and other mechanical closets to house the larger hardware for a business's computer needs.
If offices become more portable and office space therefore becomes more utilitarian, tenants may be unwilling to pay for certain architectural amenities such as more elegant building lobbies and other common areas. Indeed, as technology increasingly becomes important, developers might redirect dollars that they have historically devoted to design elements to pay for technological infrastructures.
Technological advancements might change the way commercial developments are built and configured in countless ways. Consider the following as a small representative sampling. With the growth of on-line shopping, will certain kinds of retail stores disappear or require less space? What will video stores have to offer when viewers can rent movies by means of satellite transmission? Will the number of libraries and other reference and information centers decrease or at least diminish in size as their materials become readily available via the Internet? Will the demand for branch banks decrease as consumers increasingly conduct banking transactions by electronic means?
Proximity to Businesses and Other Services
Geographic "clustering" of similar or complementary businesses may become obsolete in years to come. During most of this century, a number of industries have tended to be geographically clustered together. For example, banks and other financial services tended to congregate in the same part of town. Similarly, securities firms tended to be within close proximity of one another. In the 21st century, however, geographic proximity to other businesses will be of diminishing importance. Thus, for example, the importance of a "financial district" will gradually fade. A computer screen in an office on Wall Street provides exactly the same information as a computer screen in Walla Walla, Washington. With e-mail and other Internet capabilities, businesses can communicate just as effectively when they are across town as they can when they are across the street. This trend toward geographic decentralization will also mean that various departments within a business need not be housed under the same roof or on the same floor.
Moreover, if employees spend less time in the office, proximity to amenities such as shopping areas and restaurants might become less important for businesses. We have already seen the beginnings of less reliance on close proximity to social amenities by the development of "campus-style" projects. Many of these campuses tend to be more self-contained and beyond walking distance or other easy access to shopping areas, restaurants and the like.
Office? . . . What Office?
With the proliferation of increasingly inexpensive communication devices such as mobile phones, voice mail, car fax machines, laptop computers, home computers, home printers, home faxes, hand-held e-mail devices (that require neither electrical current nor a phone line), as well as new devices constantly coming on the market, who needs an office? That question is, of course, an exaggeration; but parties should consider how office technology is already beginning to change dramatically the size and use of office space.
Changing Technology's Impact on Leasing and Lease Provisions
Rent. Because rental rates have historically been a function of supply and demand, technological change may not affect the actual cost per square foot of space. If office tenants require less space per employee, however, then commercial tenants, on the whole, will require less space in the future. Additionally, if tenants use offices less intensively, they might be disinclined to pay higher rental rates for a more prestigious address or for more elaborate architectural design elements in buildings. Of course, if developers' costs in creating new technological infrastructures increase, there will be a corresponding increase in rents. One future development affecting rents seems inevitable-buildings with greater technological capabilities and infrastructure will be in more demand than those without such facilities.
Lease term. In the future, if tenants desire flexibility in the use of their office space to accommodate developing technologies, they may be unwilling to commit to long lease terms. After all, if technological change results in periodic fluctuations in staff size, office configuration or an industry's general method of conducting business, why commit to a long-term lease-especially if the space is easily replaceable by comparable "portable" office space? One of the reasons tenants dislike moving is the downtime, cost and aggravation that moving traditionally entails. When many employees can be moved to new space without much more difficulty than packing up their computers and some disks, one of the disincentives to moving is eliminated.
Tenant improvements. If one believes that office tenants in the 21st century will prefer more utilitarian office space, then the typical tenant improvement package may be faster, easier and less expensive to build with the exception, of course, of cabling and other technological infrastructures. Additionally, if office space becomes more utilitarian, the lead time to complete tenant improvements may also become shorter than in today's environment, where tenants want more detailed, customized space.
Notice provisions. Until relatively recently, the conventional method for giving notice was via U.S. mail or personal delivery. Notice by overnight air courier service then came along, followed by notice by facsimile transmission. Now we are on the verge of accommodating formal notice via e-mail. Who is to say what form of notice will become commonplace in years to come? Indeed, one must be careful not to require that notices be given by a specific kind of technology if that technology might become obsolete in years to come. For example, if a party is signing a 20 year lease today, is it really advisable to provide that notice be given via facsimile transmission when that method may soon be an outmoded form of communication?
Condition of premises, maintenance and repair. Because offices are becoming so dependent on technology, issues pertaining to the condition of the premises, maintenance and repair increasingly will be focused on the installation, maintenance and uninterrupted functioning of technological capabilities. One significant issue will be how to deal with technological "outages." Historically, power outages, failure of HVAC systems and even breakdowns in telephone communications have not necessarily resulted in the complete cessation of a tenant's business. Nevertheless, when so many aspects of communication and paperwork are conducted through technological devices such as the computer, the inability to access the computer could result in the complete shutdown of a tenant's business. Even if the phones are still working, a computer shutdown might preclude access to telephone numbers entered into the computer "rolodex." Therefore, parties will probably negotiate more intensely on issues such as abatement in rent and other tenant rights following a technology outage. Another issue will be determining which party has the obligation to repair a technology breakdown. It may not be easy to determine the precise location or cause of the damage, and allocating responsibility for repair between landlord and tenant may be quite difficult.
Damage and destruction. Traditionally, damage and destruction clauses allow the landlord a certain amount of time to repair or rebuild the premises before the tenant has the right to terminate the lease. In the future, office tenants might require landlords to rebuild faster. When damage or destruction occurs, tenants might find it easier to move to new space than to wait for the landlord to rebuild their current space. As noted above, moving will become increasingly easier and alternative office space will be readily adaptable.
Assignment and subletting. As tenants desire more mobility and flexibility, they may be moving more frequently than they have in the past. Consequently, there will be greater pressure from tenants for the right of free assignability and subletting.
Alterations. One of the principal subjects for negotiation between landlords and tenants in the future will be over the tenant's right to make alterations to the premises to accommodate new technologies. As technologies change, tenants will want the flexibility to adapt their space to the installation of new technologies without having to obtain the landlord's consent first.
Common area charges. With the cost of maintaining technological infrastructure escalating, landlords will be motivated to include certain of those costs in common area charges that are passed through to their tenants.
Percentage rent. For retail tenants and landlords, Internet-based sales will present challenging problems for determining percentage rent. In the future, many retail businesses will sell much of their product on-line. Thus, the methodology for calculating percentage rent may have to change dramatically. In fact, demand for retail space may well diminish by virtue of increased on-line purchasing.
There is, of course, no blueprint for dealing with ongoing technological changes in the workplace. We can be certain, however, that technological changes will continue to occur with increasing speed. This process will necessitate flexibility and adaptability for landlords, tenants and their counsel if they are to remain efficient and competitive. No doubt, offices and office buildings in the 21st century will look increasingly different and function differently as technologies are designed and implemented.
Some specific trends are clear, such as smaller and less paper-intensive offices, increased dependence on communication technologies, more telecommuting and other live-work arrangements and geographic decentralization. Longer range trends are more difficult to predict, but the business community is wisely developing a "be flexible or die" mentality toward technological change. The business community seems keenly aware of another Yogi Berra aphorism: "The future, there's just no stopping it!"
Dennis L. Greenwald is a partner with Stern, Neubauer, Greenwald & Pauly in Santa Monica, California. He is Vice-Chair of the Real Property Division's Condition of the Premises (K-1) Committee and a member of its Remedies and Miscellaneous Clauses (K-5) CommitteeInsert additional links