Development Magazine Spring 2015

Changing Workforce Demographics

20 West Kinzie, a 17-story, 385,000-square-foot Class A business accelerator developed by The Alter Group in Chicago’s River North district, offers the collaborative workspaces and urban amenities that can help attract and retain millennial employees. Its newest tenant is Modest Inc., a mobile commerce company described by the Chicago Tribune as “Chicago’s most-anticipated technology startup.” Photo: Jon Shaft

The millennial influence has enormous, unique implications for work styles and workspaces.

WHY SHOULD WE CARE about millennials, the generation born between about 1980 and 2002? Those of us in the real estate industry have been told time and time again that to ignore them is to do so at our own peril. But why? The answer is simple demographics.

Within the next 20 years, more than 70 million baby boomers (those born between about 1946 and 1965) will be retiring. While millennials will take their place, there won’t be enough of them with the necessary skills to fill the void. New research from the McKinsey Global Institute (MGI) suggests that by 2020, the world could have 40 million too few college-educated workers and that, in advanced economies, up to 95 million workers could lack the skills needed for employment. It comes down to this: Companies simply won’t be able to find enough knowledge workers to fill their rosters.

According to a study from researchers at Georgetown University, the U.S. will face a shortage of 5 million workers with the necessary education and training by 2020. In the fields that will drive job growth — health care, STEM (science, technology, engineering and mathematics), community service and education — nearly 80 percent of the occupations will also require high levels of postsecondary education. Cognitive skills, including leadership, communication and analytics, will be more in demand. All of this means that the competition for workers will be fierce. And those workers will, increasingly, be millennials.

Understanding Millennials

What do we know about millennials? Although it seems certain that more has been written about them than any generation before, the conclusions are often contradictory. One article says “millennials travel more, spend more and complain more,” while another says they are “browsers, not spenders.” Some of the books that purport to do a deeper dive on the subject are even more heavy-handed, with titles that give them away: “The Dumbest Generation,” “Not Everyone Gets a Trophy,” “The Culture of Narcissism” and “The Narcissism Epidemic.”

outdoor balcony of an office building
exterior view of an office building

The Alter Group’s 10-story, 227,600-square-foot Class A office building, One11 West Illinois in Chicago’s River North district — the city’s tightest office market — was completed in 2008. Designed to appeal to technology firms with millennial employees, it is now occupied by anchor tenant Salesforce.com. In 2014, millennial coworking firm WeWork, which dubs itself “the platform for creators,” leased 25,280 square feet, bringing the building to 97 percent occupancy. Mark Ballogg, Ballogg Photography

Where should we, as real estate professionals, go for deeper insights? A first stop might be the hard numbers. Millennials are the largest generation — 80 million strong — with the greatest combined purchasing power in history, as much as $2.45 trillion worldwide by 2015. But those numbers are deceiving. One-third of 18- to 34-year-olds are still living with their parents. This is the first demographic group to enter adulthood with extraordinary amounts of debt ($1 trillion of college debt alone, or roughly $30,000 for every member of the class of 2013).

As a result, they are settling down later and renting rather than purchasing housing. The level of homeownership for the 18-to-34 age group has declined from 43 percent in 2005 to 37 percent in 2013. Millennials thus have contributed to an estimated loss of 1 million U.S. households that should have been formed over the past 10 years. On the flip side, developers of multifamily housing have seen vacancy rates in the country’s 50 key markets drop to 4.2 percent in the third quarter of 2014, causing a building boom in this sector, with 8,700 more units coming to downtown Chicago alone by 2016.

What impacts are these economic doldrums having on millennials? For one thing, they value things that seem at odds with Gen-Xers (those born between about 1966 and 1980) and boomers. In 2012, Boston Consulting Group’s (BCG’s) Center for Consumer and Customer Insight issued a report, “The Millennial Consumer: Debunking Stereotypes,” the result of a survey it conducted with Barkley and Service Management Group of 4,000 U.S. millennials (then ages 16 to 34) and 1,000 non-millennials (ages 35 to 74). Much of what they found was not surprising: Millennials are “digital natives” who use technology and social media to build their community; they put a premium on speed, ease, efficiency and convenience in all their transactions; they trust their peers more than institutions and corporations. But underneath that, BCG suggests, is what makes millennials even more interesting: their hunger for connection and shared experience, their feelings of stewardship for the planet and their belief in collective action.

This is the key point: Millennials want community. They want their day-to-day experiences to be rich and connected, just like their online lives. As Mark Stapp, executive director of the Master of Real Estate Development program at the W. P. Carey School of Business at Arizona State University, puts it, “We have emerged from a purely transactional economy — doing the deal, buying the thing, having it — to a mentality that is more … transformative, experiential…. [Millennials] will have fewer kids, want walkability, access to cool local restaurants. They want something real and they want to be connected.”

Millennials at Work

A number of misconceptions about millennials and their work patterns must be dispelled: that they are spoiled, accustomed to an undue number of creature comforts, unwilling to work like their parents and unable to deal with the adult world.

Yet the research tells a different story. A new survey from Coldwell Banker Commercial Affiliates of more than 2,000 adults shows that millennials are willing to commute to work nearly twice as long as their older counterparts. They also are the most willing to share workspace and are less likely to prefer working at home than either the Gen-X or boomer generations.

atruim in an office building

After Kemper Insurance abandoned its headquarters in Long Grove, Illinois, the four-building campus was redeveloped as the Kemper Lakes Business Center and is now 95 percent leased. Toon Laietmark, twistemotion.com

The primary repercussion of this is that shared offices, collaborative areas, and training and social spaces are revolutionizing the built environment. In the same survey, 59 percent of millennials said they would be comfortable sharing their workspace with someone else, compared to only 46 percent of Gen-Xers. Additionally, more millennials (77 percent) believe face-to-face business meetings are important than Gen-Xers (67 percent). According to Coldwell Banker Commercial, most millennials (55 percent) prefer an office with an open floor plan to one with cubicles or private offices. They also want more training and feedback, which means conference spaces and café-like breakout areas will be key.

Then there’s the issue of mobile workers. The survey found that nearly two in three millennials (63 percent) are as comfortable working from a mobile device as a desktop computer. As the number of people connecting to the Internet from mobile devices rapidly increases, it’s clear that the concept of traditional office space is shifting rapidly.

Lost in Transition

The millennial way of working can be viewed a lot like college. Here’s how one worker put it: “Professors give me assignments and deadlines. How I complete those tasks is entirely up to me. They don’t say, ‘You will write this paper between 9 a.m. and 5 p.m. while sitting at this assigned library table.’’ The designers at furniture maker KI and architecture and engineering firm HOK see this as proof that collegiate design is the way to go for workplaces in the future.

According to their report, “Collegiate Design: The New Driver for Workplace Design,” “recently hired graduates are often ‘lost in transition.’ Not only are new hires baffled by the relevance of their physical space (‘cube farms’), but also by the work styles expected of them.” The report suggests that corporations should address shifting work styles by taking design and workspace planning cues from colleges. KI, which also sells college office and dorm furniture, offers a chair that includes a USB port and is designed so that the user can sit with legs criss-crossed or draped over one side. A “collegiate” workplace also favors distributed work or a “work anywhere, work anytime” policy. That often means accommodating a variety of work styles and tasks, including heads-down, concentrative work, collaboration, off-site and mobile work.

The Next Real Estate Cycle

Beyond the changing workplace environment, what other impacts will millennials have on commercial real estate development? Certainly we are seeing a boom in urban development, both in new construction and in Class B and C conversions in urban infill areas. All of this is driven by millennial tastes for 24-hour locations with abundant amenities and entertainment options.

While much has been written about this trend, what hasn’t received as much publicity is the other rail of millennial-focused development: high-density, transit-oriented suburban development. Large companies such as State Farm Insurance, Charles Schwab and ExxonMobil are signing up to anchor large-scale “urban suburbs,” massive build-to-suit communities with new residential and retail offerings in areas such as Atlanta’s Central Perimeter, the Woodlands in the Houston area and Bloomfield in suburban Denver.

Elsewhere, developers are transforming former single-occupant suburban corporate campuses into next-generation suburban office parks. The abandoned Kemper Insurance headquarters in Long Grove, Illinois, now known as the Kemper Lakes Business Center, is 95 percent leased. So is Tallgrass Corporate Center, the former Tellabs regional headquarters in Bolingbrook, Illinois. In the Chicago area, Rockville, Maryland-based BECO Management plans to create a new office park on 84 acres in Chicago’s Libertyville submarket, on the former 1.1 million-square-foot Motorola Mobility campus, which was vacated when the tech firm decamped for downtown. BECO will rename the campus Innovation Park Lake County. (See “Developing a New Workplace Paradigm at Innovation Park.”)

This new model of suburban development features higher densities (and parking ratios) as well as on-site amenities, including high-end restaurants, and transit connectivity so employees don’t necessarily have to drive to work. As Mark Stapp explains, “we’re seeing the urbanization of our suburbs, multimodal population centers around various geographies and places. Development patterns are changing. We’ve moved from a transactional ‘build something, same product, new market’ to development opportunities that are highly place based. They have to have contextual importance and connectivity.”

Chicago, for example, is a public transportation-friendly city with an extensive transit system. While this has mainly benefitted the downtown area to date, initiatives are underway to update the aging infrastructure, remove barriers to transit-oriented development and provide greater connectivity for the area’s suburbs. In Atlanta, $61 billion has been earmarked for transit-oriented projects, and 70 percent of that will go toward improving existing transportation facilities.

Looking Ahead

Ultimately, the millennial issue cannot be overstated. Commercial real estate professionals need to understand the new generation because it has direct implications for the bottom line. Leadership consultant Mick Ukleja, coauthor of “Managing the Millennials: Discover the Core Competencies for Managing Today’s Workforce,” puts it simply: “The average turnover cost of an entry-level employee is 50 percent of their annual salary. So if the salary is $50,000, each turnover costs the organization $25,000. If the company employs 10,000 people and there is a 10 percent turnover (which is not and will not be uncommon with current conditions), the company loses $25 million to the bottom line.” Considering that turnover rates for millennials have been estimated to be nearly two to three times those of older workers, it is incumbent that we see how vital real estate is to recruiting and retaining millennial knowledge workers over the long term.

From the Archives: Business / Trends Articles from the Previous Issue

By the Numbers: US Labor Market Setting New Peaks 

With the U.S. labor market recently recapturing the 8.7 million jobs lost to the recession, now is a good time to examine which metropolitan areas are leading in job growth and which are lagging behind.

book cover

Getting and Keeping the Right Team Remains No. 1 

In today’s highly competitive and transforming marketplace, the recruitment, retention and recognition of contributions made by talented professionals remains the No. 1 priority for real estate companies nationwide. That is one of the key takeaways from the recently released “2014 NAIOP Commercial Real Estate Compensation Survey,” completed in partnership with CEL & Associates, Inc.