Investment Analysis

Walk to Work

Urban office locations are the new employee perk.

Research and market observations have revealed that the new generation of employees is clear on what they want out of the ideal office space — with many of the preferences manifesting outside of the company’s walls. Employees want to be in areas where there is access to other talent and work in communities that are walkable, close to transit, and offer a compelling mix of residential, entertainment, and business options. These employees don’t want to balance work and life; they want it integrated. Those cities that offer this integration will be best positioned to attract top businesses and talent.

Demand Factors

Not only have office space needs and wants evolved, but so has overall space usage — presenting companies with new opportunities. The average square foot per person in a typical office has decreased by more than 300 square feet since the 1970s. A typical company can move from a 100,000-sf class B space to 70,000-sf class A space, upgrading the environment for the same number of employees without affecting its bottom line.

Tenants’ desire to be in higher-quality buildings and better locations, combined with the recession and a general lack of new supply over the last five years, presents pockets of opportunity for new office development. Many of these development opportunities are in primary markets where fundamentals support replacing functionally obsolete buildings. However, there will also be opportunities in business-friendly, secondary markets driven by low business costs, quality labor supply, friendly regulatory environments, strong economic growth climates, and a better overall employee quality of life.

Business-Friendly Cities

In ForbesMagazine’s 2013 list of the best American cities for business, the No.1 ranked city is not San Francisco, New York, or Washington, D.C.: It is Des Moines, Iowa. Provo, Utah, is No.2 and Raleigh, N.C., is No.3 — both tech-centered cities in states with exceptionally business-friendly conditions.

Nashville, Tenn., and Denver take the fifth and six slots, with Salt Lake City coming in at No.12 and Charlotte, N.C., at No.19. The attraction of these secondary cities is not only economics but also their renewed and re-energized urban cores.

Companies of all sizes are seeking locations that offer access to transit, mixed-use amenities, and overall convenience. Technology-driven flexible work days have created a demand for access to restaurants, entertainment, other people, and especially public transportation. Businesses now strive to offer an environment that keeps their employees within the office area to increase productivity and ultimately bottom-line results.

According to The Walk-Up Wake-Up Call: Atlanta by Christopher B. Leinberger, a research professor with the George Washington University School of Business, tenants of all types are willing to pay a premium for real estate located in walkable urban places. For example, in Atlanta, average rents per square foot for walkable urban locations are 112 percent higher than rents for drivable suburban areas.

It’s significant that the study focuses on Atlanta because the city has long been viewed as the prototype for boundless urban sprawl, having no geographical boundaries to contain development. The study notes that, since 2009, 60 percent of new office, retail, and rental properties built in this sprawling metropolis have been located in walkable urban places. This represents a clear shift toward reanimated urban cores. Additionally, this trend is not specific to Atlanta alone, but has been noted in other cities, including Washington, D.C.

Urban Clusters

Urban locations are also seeing increased interest from intellectual property-driven companies that want to be in close proximity to other related industries and innovators, thus creating clusters. The Portman Holdings’ Makers Quarter mixed-use development in San Diego, for example, leverages the cluster attraction by creating a hub for the region’s budding design and technology cluster in a downtown former-warehouse district. Interest in the project has been significant from technology- and knowledge-focused companies seeking an area to reside for mutual benefits. Competition for technology and other knowledge industry workers is also bringing attention to education clusters, also frequently in urban settings, such as Raleigh.

While urban office space may ultimately cost more on a price psf basis, corporations are beginning to view their real estate office decisions holistically and understand that they represent not a cost of doing business, but rather a tool for doing business better. Although slightly harder to define on a spreadsheet, these qualitative advantages translate into corporate quantitative benefits.

Charles Pinkham is vice president of development for Portman Holdings. Contact him at cpinkham@portmanholdings.com. Travis Garland is a leasing manager at Portman Management Co. Contact him at tgarland@portmanholdings.com.

Recommended

Surviving Retail in Troubled Times

Winter 2021

The COVID-19 pandemic has exacerbated and accelerated already challenging circumstances for shopping malls and their owners, but there may be other options for these beleaguered assets.

Read More

Failing to Plan

Spring 2021

Commercial real estate should be a profit generator whenever possible, which may require creative thinking.

Read More

Understanding Joint Ventures and Funds

Fall 2020

Recognizing the differences in the two investment structures can help investors and legal practitioners understand a counterparty’s perspective.

Read More

Adjusting the Rules of Refinancing

Summer 2020

The economic fallout of the COVID-19 pandemic will have long-lasting effects on refinancing in commercial real estate.

Read More