Adding Value to Office Space

Companies may be willing to spend more on their workspace these days, but developers and real estate pros need to know what will entice the tenants of the future.

May 22, 2014

Commercial real estate practitioners know that in order to make the sale, they’ve got to create an ironclad value proposition for every property. It’s just not about falling in love with the space.

“Commercial is all about numbers,” National Association of REALTORS® Chief Economist Lawrence Yun told the audience at the Commercial Economic Issues & Trends Forum at this month’s REALTOR® Party Convention & Trade Expo in Washington, D.C. He added that commercial clients “are not emotional; they are dispassionate.”

But there are ways to create value without relying solely on numbers.In the world of office space, that means offering workspaces that will attract top talent and maximize the utility of the floor plan.

A Need for Flexible Space

Although labor tends to be the most expensive piece of a company’s budgetary puzzle, the next item on the list is usually real estate, according to Jeffrey Kottmeier, a research analyst for commercial real estate services giant CBRE. He’s surveyed companies to get an idea of the emerging trends in office space, and found that some of the dire predictions for this sector that came out of the financial crisis have softened in the recovery. While many companies have specific goals to reduce their spending on office space, cost savings isn’t always the motivating factor behind a company’s decision to move.

Kottmeier noted that when they did the survey in 2011, the top business driver cited by respondents was indeed budgetary, but that concern slipped to fourth place in 2013, with work-life balance being the top priority. “It’s not all about cost… People are using a lot of different places besides their office desk to do their work.”

Of course, when commercial practitioners hear “work-life balance,” they might equate it with more employees working remotely. But that’s not necessarily the case. Kottmeier said he’s seeing a desire for more flexibility in the space, not less space overall. He’s seen firms where no one is assigned an office space but the CEO, and workers are allowed to sign up for the space they need depending upon their preferences and tasks on any given day. He’s also seen the rise of OFADs, or “office for a day” rentals.

John Sikaitis, senior vice president and director of office and local markets research for investment firm JLL, agreed:“Flexibility is going to reign. Working remotely is not.” Another trend that Sikaitis expressed skepticism in was the bench-style seating popular in the start-up, design, and high-tech worlds. He said that the intention of a workplace design such as that was to foster collaboration, but if you look at it in practice, most of those employees spend the day with noise cancelling headphones in their ears.

“They’re being forced, in a way, to work in this collaborative, bench-style workplace,” he said. “That did not work, and now I think we’re moving a little more toward the traditional.”

Changing Demands

Now that LEED certification and energy-efficient buildings are becoming the norm, Kottmeier says companies are moving on to “Sustainability 2.0,” which he said represents an effort to foster healthier internal environments for their employees. Developers are looking to integrate circadian rhythm lighting systems, antimicrobial surfaces, and environments that promote walking.

Such changes attract top talent, but healthier workplaces can also see benefits to their bottom line.

“Poor air quality alone costs $90 billion in lost productivity each year,” Kottmeier said. He added that companies are feeling an added sense of urgency over new findings of the problems that come with a sedentary lifestyle, as “inactivity is becoming the new smoking.”

In the aggregate, these trends add up to high demand for new, or newly remodeled, Class A office space. 

“High quality space is dominating in this recovery,” said chief economist for real estate services firm Cassidy Turley, Kevin Thorpe. Class B and Class C spaces are getting emptier… We’ve actually flooded the market with a product that the market doesn’t want.”

Investment Opportunities

Kottmeier said that one demand-side indicator that those looking to invest in high-tech office space should watch is whether or not immigration reform (specifically a loosening of the H1-B worker visa process) can pick up any steam in Washington.

“The only thing that enables future growth [in the sector] is immigration reform,” he said. “This would not even be on the table in Congress right now if it weren’t for the technology companies.”

Thorpe said the interest in U.S. commercial real estate from abroad is growing quickly, but it’s generally concentrated on the coasts. He said that a real estate professional working with international investors would be wise to demonstrate the value of other regions.

“There needs to be some education about other parts of the country,” he said. “That’s an opportunity for brokers.”

Meg White

Meg White is the former managing editor of REALTOR® Magazine.