Creative office - Lowe Enterprises

Photo: Gensler
A new slant on office space: The open floor plan being used by CBRE
Creative office
The evolution of ‘open-plan’ work spaces demonstrates significant
changes have come to market
by Bill Cockrum, Brad Howe and Peter Houghton
T
he office market is transforming more
today than at any time during the past
50 years. While location, cost and image
remain high on the list for prospective tenants,
new to the list and moving up quickly in priority are a new set of criteria focused around
making office space a powerful tool for building
company culture in a rapidly evolving creative
economy. No longer just walls, doors and windows, office space is now viewed as a place that
should inspire new ideas and creativity. With
labor being employers’ largest expense item,
the focus is on attracting, retaining and inspiring
people to do their best work.
With a relatively small percentage of tenant
overhead devoted to the cost of office space,
The Letter – Americas | 1 | February 2014
Photo: Gensler
Tryst for two: Employees can find private time for teamwork at Plantronics.
tenants have become more selective, choosing
office space based on location and design first
and cost second. For office tenants thinking
about leasing real estate, employee recruitment
retention is the number one consideration, with
a focus on younger employees. Leasing decisions are being made in the C-suite because of
the importance of attracting the best talent, as
well as accounting lessons learned for FAS 13 in
the global financial crisis. While core real estate
valuations have become concerning to many
investors, value-add office including adaptive
reuse remains an attractive risk-adjusted real
estate investment strategy. All of these changes
are resulting in a dynamic and evolving office
investment environment in the United States.
What are the hallmarks of creative office?
The interior use of office space is evolving
away from perimeter offices and six-foot-high
cubicles to the communal workspace model
pioneered by technology companies. This type
The Letter – Americas | 2 | February 2014
of space, referred to as “open plan,” has dense
work areas, low or no dividing walls between
individual work spaces, and central gathering
places. Tenant improvements focus on shared
workspace and on-site amenities such as great
rooms, indoor and outdoor space, “coffee shop”
areas, fire pits, roof decks, and breakout meeting space. Individual offices are located on the
interior, and collaborative space is located on
the exterior. Wireless connections create mobility allowing for laptops and employees to roam.
Communal rooms are incorporated for meetings, private calls and projects. At the extreme,
offices are becoming “paperless,” and desks are
reserved daily by different employees. Noise
is mitigated with white noise machines, high
ceilings (nine to 12 feet high versus historical
eight- to nine-foot ceilings), and floor-to-ceiling
glass in conference/communal rooms. Creative
office design features have become mainstream,
incorporating natural light, fresh air, flexible
configurations and better temperature controls
that emphasize health and sustainability.
Open designs require less space and accommodate more employees. Technological advances
have made file cabinets and law libraries virtually obsolete. A decade ago, 250 to 300 square
feet per employee was a common ratio for office
space. Today, space planners budget closer to 150
square feet per employee. This employee densification creates greater building demands for vertical transportation, parking, electrical systems and
temperature control. Transit infrastructure is also
important to support densification. There are certain efficiencies with open designs. For example,
fewer offices improves HVAC efficiency, lowers
tenant improvement costs and allows for common hallways to be absorbed into the office’s
leasable space.
These creative work environments are not
only occupied by the likes of Apple, Google
and Microsoft, though technology companies
have spearheaded the trend. Indeed, an estimated 80 percent of technology companies use
these types of open design plans. But 60 percent
of financial companies also use creative office
schemes, and 30 percent of law firms. Typical
space utilization for corporate relocations has
been reported by national real estate brokers to
result in a 20 percent reduction in office space
needs, with a 40 percent increase in the number
of employees occupying that reduced space.
There is an illuminating YouTube tour of the
new GlaxoSmithKline headquarters at the Navy
Photo: Gensler
Office space at Intuit is a marriage between shared space, collaboration and electronic displays.
The Letter – Americas | 3 | February 2014
Photo: Gensler
One of the best advertisements for open, creative office space can be found at McCann.
Yard in Philadelphia showcasing this type of creative
space and how it has improved employee morale
and productivity. (It can be viewed on YouTube by
entering GSK at The Navy Yard in Philadelphia in
the search field.) Creative space is being used to differentiate companies with clients and employees. It
has become an element of corporate branding.
The most in-demand live/work/play/shop
locations are characterized by walkable neighborhoods in markets with innovative job clusters,
primarily related to technology, energy, medicine
and education. Innovative sectors invent new
products, new technology and new ways of making things; they are usually unique, and you cannot easily reproduce the cluster somewhere else.
According to The New Geography of Jobs, written
by Enrico Moretti, the job multiplier effect for
“innovation clusters” results in about five new
service jobs in the local economy for every new
innovation job, which is about double the number of service jobs created by manufacturing jobs.
Innovation clusters are not only located in primary cities such as Los Angeles, San Francisco
and Washington, D.C., but also in secondary cities such as Denver, Philadelphia and San Diego.
Not surprisingly, over long periods of time,
markets with high concentrations of educated
workers and supply constraints have consistently outperformed their rivals. According to
Property & Portfolio Research, the top markets
for average annual office returns from the second quarter of 1997 to the end of 2012 are:
1. New York City
2. Stamford, Conn.
3. San Diego
4. Washington, D.C.
5. San Francisco
6.Seattle
7.Houston
8. Los Angeles
9. Orange County, Calif.
10.Portland, Ore.
11.Austin
12.Nashville
13.Boston
14.East San Francisco Bay Area
15.San Jose
16.Miami
17.Denver
18.Ft. Lauderdale, Fla.
19.Raleigh, N.C.
20.Philadelphia
The Letter – Americas | 4 | February 2014
The collective challenge of office market selection going forward is to invest in long-term
innovative job growth markets and in markets
with supply constraints, as well as to invest in
cyclical buying opportunities in other major
markets.
Overall, we predict that creative office demand
will continue to grow. Adaptive reuse of older
“hackable” industrial and office buildings located
in desirable urban locations has far exceeded the
development of new space, which is at a 30-year
low point. Therefore, many great office buildings
need to be redeveloped. New build of the future
will include (i) flexibility such as allowing for
growth by adding mezzanine with higher floor
heights and (ii) design features difficult to add to
older buildings such as raised floors containing
air and electrical. Andy Cohen, CEO of Gensler, a
global design and architecture firm based in San
Francisco, estimates that 75 percent of current
work in the United States is adaptive reuse versus 25 percent in 2005/2006. The entitlement process also makes new build more difficult. While
much of the adaptive reuse is low- and mid-rise
buildings, there will also be long-term durable
demand for high-rise urban product. Suburban
locations connected to walkable neighborhoods
with good schools nearby will thrive. However,
Design is not just what it
looks like and feels like.
Design is how
it works.
Steve Jobs
Apple, Inc.
office buildings in poor locations may be converted to residential or something else. There are
meaningful synergies with nearby multifamily
urban residential development and infrastructure
investment in rail/transportation.
The evolution of office markets such as New
York City and San Francisco demonstrates the significant changes taking place. Both are leading
“live, work, play, shop” markets for college graduates. In New York, the highest rents and lowest
vacancy has shifted from Midtown to nontraditional Lower Manhattan submarkets appealing
to technology firms focused on sectors such as
social media, online advertising and e-commerce
that hardly existed 10 years ago. Adaptive reuse
has been a focus illustrated by Google at 111
Eight Ave. in Chelsea (a 2.9 million-square-foot,
18-story art deco building completed in 1932). In
San Francisco, traditional office users such as legal
and financial services have been reducing leased
space, which has been offset by significantly more
demand from tech tenants, especially in South of
Market locations anchored by the new Transbay
Transit Center. In addition to adaptive reuse in
New ideas, not money or
machinery, are the source
of success today, and the
greatest source of personal
satisfaction, too.
John Hawkins, author
The Creative Economy
San Francisco, development has been a focus led
by the Transbay Tower (a 1.4 million-square-foot,
61-story Cesar Pelli design with 13-foot ceiling
heights, 10-foot windows, and raised floors for
electrical and air).
From an investment perspective, higherquality class A space is in greatest demand, with
lower vacancy rates than class B and C space
that competes more on the basis of occupancy
cost. Tenants are willing to pay up for the right
class A space. We focus on buildings that allow
for more density and have adaptable architecture
with unique features. Big space users may be
less prevalent as technology is allowing smaller
groups of people to produce more revenue.
Although technology tenants may have historically been perceived to be risky, it is important
to remember that financial services tenants,
such as mortgage and banking companies had
the most defaults in the financial crisis. The key
to technology tenant risk is understanding the
underlying business. For example, Yelp is really
just yellow pages, and Twitter is just a media
company. Managing tenant improvements is
important to ensure utility for re-leasing if there
is a problem. Overall, the investment objective
is to buy below replacement cost, reposition
the asset, build a durable income stream, and
dictate optimal timing for exit. Having invested
more than $3 billion in office properties, we are
strong supporters of creative office as an important part of any office investment strategy. v
Bill Cockrum is senior vice president, Brad Howe is
CEO, and Peter Houghton is senior vice president of
Lowe Enterprises Investors.
Copyright © 2014 by Institutional Real Estate, Inc. Material may not be reproduced in whole or in part without the express written permission of the publisher.
The Letter – Americas | 5 | February 2014