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The Shifting Cycles of the Real Estate Market

POSTED BY on Dec 11, 2014

As the saying goes, “If you build it, they will come.” While the current commercial real estate market might not exactly be the field of dreams, it’s finally gaining momentum again following a roller coaster ride of ups and downs over the last several years. According to Emerging Trends in Real Estate in 2014, a survey by the Urban Land Institute and the accounting firm PwC, “Overall prospects for investment, development, and homebuilding improved in 2014… And the office sector could see an increase in re-development as building owners look to reposition properties to meet changing tenant demands.” With aging commercial office towers beginning to show their years, developers are looking to renovate and enhance their facilities to compete with the multitudes of towers around them.

In past cycles, brokers would find the best space and the lowest price per square-foot based on tenants’ basic space needs. Now, the choices are broader, costs per square-foot are higher, and the role that space plays in attracting and retaining the coveted worker has shifted the priorities for all involved. Tenants want an address and a space that showcases their company’s brand. In Seattle, there’s a variety of refreshing/repositioning of office towers happening, while at the same time, the horizon is dotted with cranes for new buildings as well. At last count, I heard (anecdotally) they’ve literally run out of cranes for new buildings in the area. But with so many buildings vying for the same potential tenants, developers now must appeal to new tenants who have a wider variety of offerings from which to choose.

While the real estate market has always been about location, location, location, both this and price are still the hottest commodities. But with limited prime location availability, timing is everything – can you deliver the space I need, when I need it?

Ultimately, one of the biggest challenges faced by this new cycle is standing out and attracting not only specific tenants, but also retaining current ones who may be looking to upgrade their office environments and offerings to meet new work and life style needs. So, exactly what’s different this time?

  • We’re seeing more creative space options for start-ups – WeWork, Convene, Impact Hub and several others are providing “co-working” spaces or specialized meeting/working spaces for small groups and individual entrepreneurs, often in an “incubator” or “membership” type set-up.
  • Since the last cycle, many start-ups or younger companies are looking to appear and act more “grown up” – moving from the hip urban loft space into more legitimate office spaces/towers. But they still want to keep that edgy vibe and feel. Why? Because they want to still be the “cool” place to work and they need to attract/retain the highly coveted knowledge worker.
  • While renting office space almost always necessitates hiring a broker to negotiate a deal, some new disrupters are emerging like HiRise, modeled after Airbnb, which enables companies to rent out space for much shorter term contracts; and 42Floors, which simplifies how people search for available office space.
  • Building developers are focusing more on speaking to the needs of the end-user: enlisting them in developing insights, marketing, and the positioning of a property earlier in the process.
  • Brokers’ biggest challenge is to convince tenants to buy/rent despite the difference in cost from when they last were in the market. Brokers are also evolving in their roles, since they are no longer the sole keeper of all information. 
  • Sustainable design and building policies matter more this time around. Tenants and employees want to see and be engaged with LEED certified buildings.

Companies are facing their own obstacles when it comes to attracting and retaining talent. It’s no longer just about job description and salary. Incentives offered by companies, including the environment in which employees will spend a good chunk of their days has increasingly become a major selling point for recruits.

  • The most significant shifts seem to be around the necessity to use the workspace as a recruiting tool. Lease decision makers (from facilities and HR up to C-level) are feeling the pressure to differentiate to attract the talent they need.
  • The market for top talent is very competitive. Developers and brokers are focusing more around “end-user” messaging, with more emphasis on appealing to their needs (reframed around how the space can help attract them).
  • Office space is considered one of a company’s greatest recruiting assets, so multiple tactics are being enlisted like technology, messaging and strategic positioning to expose potential tenants to activation and promotion independent of the broker.
  • Different types of companies will need different selling points than others. For example, most technology companies are “global” regardless of size. They work odd hours to connect to other locations, and require amenities that are available to them at the times they need them.
  • Companies are looking to move to a hipper urban core as the millennial generation wants to have more connectivity to the downtown energy including – urban amenities, commuting, mobile, trends on urbanism versus campus office space, what’s the right kind of office to build for their more informed consumer, etc.

Between tenants adapting to the changing manner in which work gets done and developers seeking to update their portfolios to remain competitive, I believe we are approaching the new real estate market cycle with conservative optimism. Developers, brokers and tenants are all facing adjustments to expectations, availability, and product mix. It’s a promising market, steadily growing momentum and bringing with it a new landscape to meet new needs. We’ll be watching, learning and adapting as it unfolds, and we look forward to sharing stories and insights along the way.

* This POV was published in the Seattle Daily Journal of Commerce in December 2014. A downloadable pdf is attached.

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