How the Modern Workplace is Reshaping the Office Market

With the pervasion of smartphones, laptops, and tablets, the 21st century workplace is no longer confined to leasable office space; workers can conduct business just about anywhere. According to workplace design company Knoll, workers now spend just 49% of their time in a company’s main office.

In addition to increased flexibility, the workforce is changing. According to workplace expert and author Jacob Morgan, Millennials are projected to comprise 50% of the workforce by 2020 and 75% by 2025. Between the need to entice workers back into offices and a growing cohort of employees that expect work environments to support their work-life balance, office space design has changed drastically.

The new model of office environments focuses on fostering collaboration, with open floor plans and few private offices. Some companies have taken that concept one step further and are choosing to occupy shared space with other firms through membership platforms such as WeWork.

Google, which is known for its innovative work spaces, has a "150-feet from food" rule. The idea that no part of the office should be more than 150 feet from sustenance (be it in the form of a restaurant, cafeteria, or mini-kitchen) is rooted in collaboration. If employees are encouraged to snack, they are more likely to run into people they don't normally work with. Such encounters promote the creation of new ideas while facilitating camaraderie. 

Opportunities for social stimulation and recreation have become increasingly important, as worker happiness leads to higher retention. Meanwhile, physical storage needs have been reduced, as paper files have been replaced with electronic files and cloud storage.

As these changes have spread from tech tenants to more traditional office occupants, the way tenants use office space has necessitated significant improvements to keep existing buildings from becoming functionally obsolete. As part of this transformation, tenants are leasing less space per employee, requiring many existing buildings to undergo substantial retrofitting to attract tenants.

Keep in mind that right now, most companies are trying to catch up with the office trends set forth by preeminent technology firms such as Facebook, Twitter, Lyft, Adobe, YouTube, and Airbnb. But many those offices were adapted for the company. New trends are being established as companies choose to build from the ground up, which provides more design flexibility.

For example, in the massive Bay View Google campus that is under construction, employees will always be about three minutes away from every other employee. All indoor space will be optimized for natural light, and outdoor space will play a significant role in employees' day-to-day job functions. As these office layouts prove themselves successful, other companies will attempt to mimic the designs, resulting in additional modifications. And in this case, modifications mean construction.

The changes tenants are requiring of their existing office space will reshape the office market, leading to fluctuations in vacancies, subletting, construction, and occupancies. Ultimately, retrofitting existing properties should lead to increased rent per square foot and occupancy levels.The possibility exists, of course, that certain older buildings will be left vacant if property owners choose not to undergo significant upgrades. Regardless, this paradigm shift in what office environments should accomplish will take time to be reflected across the market and will affect tenanting in the interim.

Why Chinese companies rush to buy Manhattan's commercial property

Chinese investors' rapidly growing appetite for high-profile U.S. commercial properties has been highlighted as China's Anbang Insurance Group Co., the buyer of luxury hotel Waldorf Astoria, has agreed to buy 21 floors of an office building on the famed Fifth Avenue in Manhattan, New York City, recently.

The coveted building is located at 717 Fifth Avenue on East 56th Street. Anbang will buy it from Blackstone Group, the leading U.S. private equity firm. The cost would be between 400 million to 500 million U.S. dollars. It is said that Anbang would only buy the office portion, which starts from floor 5 to 26. The first four floors for retail are not included.

This Chinese insurer has made headlines with the acquisition of Waldorf Astoria, the landmark hotel on Park Avenue last October. Under the agreement, Anbang purchased the iconic luxury hotel for 1.95 billion dollars from Hilton Worldwide Holdings.

Anbang Insurance Group Co. is one of China's comprehensive group companies in insurance business. According to corporate sources, Anbang has been developing stably and reached a total asset of 800 billion yuan (about 130 billion U.S. dollars).

Anbang is not alone. Other Chinese companies are also caught in the craze of buying into Manhattan commercial real estate, which is regarded as a "safe heaven."

In June 2013, the family of Zhang Xin, chief executive officer of Chinese real estate developer Soho, together with a Brazilian partner bought a 40 percent stake in General Motors Building for about 700 million dollars. Shanghai-based Fosun International Ltd. bought the One Chase Manhattan Plaza, the landmark building of lower Manhattan in December 2013 from J.P. Morgan Chase & Co. for a consideration of 725 million U.S. dollars.

Also, the Bank of China reached a deal in December to buy a Manhattan office tower for nearly 600 million dollars.

Chinese companies believe that they could achieve stable returns from the U.S. commercial real estate. "Given the strong performance in the past, the group intends to realize long-term stable investment return by investing in high quality real properties in North America. Going forward it will increase the share of overseas assets in asset allocation, taking Europe and North America as priority areas," Anbang said after its Waldorf acquisition.

The recovering of U.S. economy has boosted the rents and transactions of office buildings, especially in big cities like New York. And foreign buyers are going after top-of-the-line properties in Manhattan.

The New York City property investment sales market saw 442 deals close last year, shattering the previous record of 346 deals in 2007. The year of 2014 was also the second most active year in terms of dollar volume, with 39.8 billion dollars in business volume, second only to the 48.5 billion dollars struck in 2007, according to a report of Jones Lang LaSalle, a real estate consulting company.

Looking forward, "foreign capital is likely to continue to aggressively pursue opportunities, seeking long-term capital appreciation in what is viewed as the world's largest and most stable market. The dollar is also rising against major currencies. Dividends and future sale prices will be exchanged in appreciated dollars to foreign investors. With many local private market and private equity funds also actively looking for new properties, there will be no shortage of demand for Manhattan office buildings, " Commercial Real Estate service company Colliers International said in a recent report.

For many Chinese companies, overseas investment is also a kind of asset allocation diversification. Anbang said it has developed a well-structured global strategy to seize the opportunities brought by economic globalization and deliver services to customers around the world following their steps of "going global. "

Tech Industry Driving Chicago Real Estate Market

After years of struggles that followed the financial crash of 2008, Chicago’s economy is finally starting to get into gear. According to a report issued by the Illinois Department of Employment Security in September, the Illinois unemployment rate fell from 9.2 to 6.7 percent in just one year, marking the largest year-over-year decline since 1984. Preliminary data released by the IDES and the Bureau of Labor Statistics show there are also 40,600 more jobs this year than in 2013, most of them in leisure and hospitality, trade, transportation and utilities, and professional and business services.

 

In the context of this economic resurgence, Chicago’s real estate industry is also experiencing a revival, as office vacancy has now dropped to pre-recession levels, according to most recent data collected by Marcus and Millichap. The demand for office space is primarily driven by tech companies seeking downtown locations, mostly in the River North and River West submarkets. California-based Google, Inc. is one of many tech companies set to move to downtown Chicago. The company will occupy about 360,000 square feet in a 10-story building at 1000 W. Fulton Market by early 2016.

 

Job growth in the tech sector helped boost the office market this year, while strong rental demand in suburban office space brought rents higher. Marcus and Millichap reports that a total job growth of 1.6 percent is expected in 2014, with 70,000 new jobs added to the market. More than 2 million square feet of office space is currently underway in Chicago, with another 8 million square feet still in the planning stages. The largest project currently under development is the 1 million-square-foot River Point tower in the West Loop, a 52-story building slated for completion in 2017. According to Marcus and Millichap, developers are expected to add roughly 400,000 square feet of office space in 2014, after no new office space was completed during the last four quarters.

 

Chicago is also performing well when it comes to the retail industry, as the jump in employment and rising incomes are driving consumers to spend more. The retail market encountered a significant halt with the closing of 72 Dominick’s grocery stores in December 2013, but as of now all but one of the former stores have been purchased and are in the process of re-opening. Marcus and Millichap reports that more than half of the space vacated during 2013’s final quarter has been absorbed, as the market is attracting buyers from Canada, Europe and South America, and demand for retail properties surpasses the supply. The boost in employment is another factor in the rise of retail sales, and builders have nearly 500,000 square feet of space under construction to be delivered throughout 2015.

 

The drop in unemployment and the rising number of tech jobs in the region are also contributing to a growing demand in apartments in the downtown area. Roughly 6,000 rental units are currently underway, most of them located in the West Loop, the city’s tech core. Developers are expected to bring 3,100 multifamily units online in 2014, including 130 units of student housing, 80 senior apartments and 96 affordable rentals. The largest project finalized in the first quarter of 2014 was the 450-unit Hubbard Place apartment community at 360 W. Hubbard in the Streeterville/River North submarket.

Office Real Estate Trends In Vogue Right Now

The commercial property market of the United States has made a significant comeback. But along with the recovery, came several changes that have now become trends in the industry.

In the 48th annual conference for the National Association of Real Estate Editors, experts discussed the various trends office building are adopting to become more attractive. Culture Map compiled a list of the most interesting trends that are taking over the real estate market and we sieved through the list to bring out the commercial real estate developments.

1. Bike Racks

As more companies strive towards hiring millennials (people aged between 18 and 33) bike racks have become an office building staple.

2. Pet Facilities

Pet friendly buildings have become all the rage, not only in multifamily structures but office buildings too. Dog-walking and pet-sitting services have become much popular with prominent developers adding these facilities to office buildings.

3. Fitness Facilities and Environment

With a large number of Americans struggling with obesity and other lifestyle-related health problems, access to fitness facilities and indoor work environment quality has become important. Most office building these days have gym facilities and access to parks and greener areas nearby. Indoor air-quality and temperature regulation have also become vital.

While these were some of the popular tangible trends taking over the office real estate market, a prior report by Urban Land Institute and PWC forecasted some emerging trends that will take over the commercial real estate market in 2014.

"Commercial real estate is reaching an inflection point" where "valuations will no longer be driven by capital markets," the report stated.

It also added that industry bigwigs believe, 2014 will be a year of "space market fundamentals and property enhancements."

Indeed, commercial real estate market has come roaring back in most of the states and experts expect it to keep mapping a steady growth.

"Money has come back into the real estate market," Bob Solfelt, vice president and general manager with Golden Valley-based Mortenson Development, a partner on the Mall of America project told Minnesota Post.

"There are investment partners, both equity and debt, that make some of these projects feasible."

Roof Decks and Other Trends for 2014 Office Space

MANHATTAN — The Financial District will unseat the Flatiron to become the city's startup hotbed in 2014 — and don't be surprised if more commercial real estate projects include rooftop decks and show up in Brooklyn's hip neighborhoods, experts predict.

New York City's commercial office market is all about where the new jobs are, making the tech world and creative industries the anticipated trendsetters for the coming year, according to commercial real estate experts.

Computer programming services and management- and technical-consulting firms have seen the largest recent growth in the city. There were roughly 244 custom computer programming firms added to the real estate landscape between June 2012 and 2013, representing a 5.6-percent increase.

The number of management- and technical-consulting firms and advertising and public-relations shops swelled by nearly 7 percent, according to Heidi Learner, chief economist at Studley, citing Bureau of Labor statistics.

This trend is likely to continue and others are predicted to emerge in 2014, according to DNAinfo.com New York's look into the commercial real estate crystal ball:

1. The spotlight will stay on the tech industry

The Cornell NYC Tech graduate school, which started classes in September in a temporary space at Google's Chelsea office, is slated to break ground in early 2014 on its $2 billion campus on Roosevelt Island. Along the East Side of Manhattan, up through Harlem, there’s been a focus on creating office space and incubators for biotech firms big and small.

2. The World Trade Center site will become an office hub again

4. WTC cut its ribbon at the end of 2013 and 1 WTC is scheduled to open in early 2014, Learner said. As these buildings open — along with the Fulton Transit Center, which is expected to be finished by June 2014 — more companies will have their eyes on opening in or relocating to the area, many predict.

3. This will make the Financial District the new Flatiron

With Condé Nast’s media empire set to be the anchor tenant at 1 WTC — leasing 1 million square feet in the glittering glass building formerly known as the Freedom Tower — and the hot advertising agency Droga5 moving from Midtown to a 90,000-square-foot space on Wall Street, the area is poised for a makeover.

Besides big firms like these, many startups that moved to the Flatiron — which had been the buzz-worthy neighborhood for the office market in 2013 — are now looking to Downtown, Learner said.

“Midtown South [the area home to the Flatiron] is where small, creative tech tenants flocked to because of the loft-like spaces conducive to collaboration,” Learner said. “But I expect [the Financial District] to be a go-to area for some of these newer startups now, particularly if they have a large number of their workers commuting from Brooklyn.”

The average price per square foot for office space in Lower Manhattan was $52.49 in the fourth quarter of 2013, compared to $66.24 for Midtown South, according to Studley's preliminary figures.

Lower Manhattan also has nearly 20 hotel projects under construction or planned, with more than 1,700 new rooms slated to open in 2014. A slew of new retailers, including a Fairway market, are expected to open in the Spring two blocks from the World Trade Center, according to a report by Cushman & Wakefield.

4. Williamsburg and other hot Brooklyn neighborhoods will get more office space

DUMBO, which is already a hotbed for Brooklyn's tech and creative companies, is going to have company.

Office projects are planned in Gowanus, Bushwick and Crown Heights, noted Dave Maundrell, president of aptsandlofts.com, which was tapped to be the broker for a 400,000-square-foot building for “creative types” set to rise near the Williamsburg waterfront, stretching from Kent to Wythe avenues between North 12th and 13th streets.

“There’s more office space planned for Brooklyn than you could imagine,” he said. "And when you put in office space, then you need cafés and coffee shops and other new services."

Office rents in Williamsburg are going for roughly $50 a square foot, he said.

5. Maturing startups will get some help with acoustics

Many of the city’s new wave of startups prefer space with concrete floors, exposed ceilings and open floor plans — not the best design when it comes to noise levels. So, companies are now looking for ways to include sound-absorbing materials to create a more balanced work environment, said Scott Spector, principal of the Spector Group, an architecture and interior design firm.

“Everything was bouncing off the walls,” Spector said. His go-to troubleshooting moves include adding furniture with more cushions or installing fabric panels on walls, since firms still want to keep the look raw. "They don’t want corporate,” Spector said.

6. Offices will embrace the roof terrace

From large companies to boutique firms, many offices now want roof terraces, much like residential buildings, said Spector, whose firm recently designed a terrace for a spirits company on Park Avenue near East 47th Street, and for a financial services firm that recently moved into the Starrett-Lehigh Building on West 26th Street near the Hudson River.

“It’s a place to get away,” Spector said of the terraces, that also provide a pleasant green space to look at when working inside.

7. Bike storage will become a must-have

As more New Yorkers bike to work, companies are requesting larger bike storage spaces, and some landlords are creating common areas for bike storage to save their tenants added real estate costs, Spector said.

"It’s a green initiative, but it’s also about retaining certain employees,” said Spector, who has been designing bike spaces for firms in Brooklyn, Downtown Manhattan and Midtown South.

8. The number of face-to-face social networking spaces will increase

In 2013, coffee shops, hotel lobbies and urban plazas increasingly became places where freelancers schmoozed and conducted business. In 2014, workplaces are picking up on the trend by creating “in-between places” and more lounges where people can meet and brainstorm in smaller groups, said Billy Hallisky, senior designer at Luckett & Farley’s Media + Entertainment Group, which specializes in creative-media workplaces.

“It’s these common spaces, these interstitial spaces — everybody is on the move, give people a chance to peel off into the hallway — that’s where the work is being done,” he said.

9. Offices will add gallery spaces

For offices that have the real estate, more of them will transform space into galleries that can be used for workers as well as for community events, Hallisky predicted.

“It makes you part of the community,” he said. “You can have temporary installations of any kind, even if it’s a kids’ art show. It’s a wonderful opportunity to get to know people in the community better.”

One space he worked on at an office in Riverdale, for instance, recently had a show of photos by children, taken on their parents' iPhones.

10. What will the new office workers drink? Cold-pressed juices

Cold-pressed juice bars are leading the charge of food retailers snatching up space in Manhattan, said Joseph Robinson of Bond New York.

"Cold-pressed juice is looking hot right now, and I think it's going to continue because a lot of people are looking for healthier options and it [is food that] can be done quick," he said. "The days of all the burgers and pizzas are getting pushed aside."

New York Area Fourth Quarter 2013 Office Market Report

Expanding Tech Firms Help Boost New York Occupancy

Progressing job growth, particularly in the robust technology sector, together with improving financial markets, will lift the number of new leases in the New York City office market. Recently, Yahoo announced it is consolidating its three sites in Manhattan into 176,000 square feet in the former New York Times space on 43rd Street. Upon inking the new long-term lease, Yahoo announced plans to continue expanding its staff in the coming years. Other expansions include YouTube, which recently announced it will open a new 25,000-square foot creative studio in Chelsea in 2014. Due to limited supply, these large corporations are paying premium rents for quality space. The rise in rents is driving many smaller firms and startups to the Garment District, where developers are repositioning old manufacturing floor plates for traditional office and tech tenants. The finance sector, the former primary driver of significant office space demand, continues to recover from job losses incurred during the recession. As the stock market gains traction and volatility decreases, financial firms are expected to bolster headcounts by 4,000 positions this year. As a result, many financial firms will backfill underutilized space and potentially expand into larger footprints.

After a frenzied investment climate during the last quarter of 2012, the market has entered a period of equilibrium. Many owners who purchased during the downturn are taking profits after a significant gain in the value of their assets, while other investors are divesting to reallocate capital into other strategies. As these assets come to market, they are targeted by high-net-worth individuals, local syndicates, and foreign investors who are competing aggressively to purchase assets located in primary office districts in the city. Value-add plays have also been a prime opportunity to achieve outsized returns for buyers positioned to assume the risk of converting old properties in the Garment District and lifting rents to the current market rate. As properties convert, investors seek to capture the influx of tech tenants who will pen seven- to 10-year leases. Properties repositioned for these tech companies are trading with first-year returns around the high-4 to low-5 percent range.

2013 Annual Office Forecast

• Employment: Robust job growth will continue through year end as 85,000 workers find jobs, lifting payrolls by 2.2 percent. Office-using employment will expand over 29,000 positions in 2013, increasing headcounts by 2.3 percent. Last year, 29,000 office workers were added in the metro.
• Construction: Developers will deliver over 6 million square feet of office space this year, expanding inventory by 1 percent. In 2012, approximately 1.3 million square feet of office space was added to inventory.
• Vacancy: By year end, vacancy will fall to 10.7 percent, an annual decrease of 70 basis points from 2012. Vacancy declined 40 basis points in the previous year.
• Rents: As conditions tighten this year, operators will lift asking rents 4.5 percent to $49.83 per square foot. In the previous 12-month period, asking rents for marketable space increased by 3.2 percent to $47.69 per square foot.

New York Metro Area Fourth Quarter 2013 Apartment Market Report

Deal Flow Jumps as New York Operations Remain Solid

The pace of job creation in the five boroughs has eased from one year ago, but the rental housing market remains healthy. Strong demand drivers will persist through the end of this year, while supply growth will also accelerate. With employment rising and other economic indicators providing encouragement to builders, the city is in the midst of a development cycle. Groups will continue to push projects through the approval process as 2013 winds down in advance of a change in the Mayor’s office in 2014. Notably, the city council is expected to vote on a massive re-zoning of the 73-block Midtown East area before the end of 2013. In the boroughs, development is booming in Queens, especially in Long Island City, a location that offers residents a relatively short subway ride to Midtown Manhattan employers. Roughly 8,000 units of housing are anticipated to come online in the borough over the next three years.

The investment market continues to flourish as significant gains were recorded in transaction velocity and dollar volume over the past year. A rise in long-term interest rates early in the third quarter had little effect on deals, and a more significant move in long-term interest rates will have to occur to trigger a broader and more profound re-pricing of assets. Until then, a keen bidding climate will persist. More than three-fourths of all transactions in the city over the past year took place in the $1 million to $20 million price tranche, a segment of the market dominated by private investors, including many local parties. Attractively priced acquisition debt and heightened competition among lenders will sustain a robust level of property purchases within this pool of investors in the months ahead. In the midst of a period of solid economic growth, the market remains supple, constantly shifting shape as new neighborhoods come to the fore. An extension of the 7 train to 10th Avenue next year, for example, will open up a new area of the city for developers and investors, while the ongoing development in Queens will also elevate the borough’s appeal.

2013 Annual Apartment Forecast

• Employment: Employment in the five boroughs will expand 1.8 percent in 2013 through the creation of 70,000 jobs, primarily in education and health services, and leisure and hospitality. In 2012, 78,200 positions were created in the city.
• Construction: In 2013, developers will bring online approximately 7,000 rentals in the five boroughs, an increase from more than 5,000 units last year. The building cycle will continue, as more than 15,000 units of multifamily housing are on track to receive permits this year.
• Vacancy: The vacancy rate in the New York metro will rise 10 basis points to 2.6 percent in 2013; a decrease of 10 basis points was recorded last year.
• Rents: Average rents will advance 2.5 percent in 2013 to $3,455 per month. A gain of 11.5 percent was registered during 2012.

http://www.marcusmillichap.com/Services/Research/#1