National research directors from major commercial real estate brokerage and data firms gathered at NAIOP headquarters for an annual meeting where they discussed current and future market conditions for office, industrial, retail and apartment products. The topic of future demand for office space (square feet per employee) was among the first to emerge. Participants contributed the following at the 2012 National Research Directors meeting on September 20, hosted by the NAIOP Research Foundation.
All agreed that a balance between common spaces where employees can interact, and “heads down” space where employees can focus individually will be the ideal, but how will this pencil out relative to square feet per employee? According to the CoreNet Global Corporate Real Estate 2020 survey of 500 corporate real estate executives, the metric has changed from roughly 225 square feet in 2010 to 175 square feet in 2012, and is projected to reach 150 in 2017. Forty percent of the respondents indicated they would lease less than 100 square feet per employee by 2017. James Cook, director of research, Colliers International, does not believe these metrics will apply across the board noting, “Where office space is cheaper on average, square feet per worker is higher. CEOs lease the amount of space they can afford. I believe we will see a decrease in average square feet per worker, but not to 100 square feet.”
Regardless of the metric, the need for flexible space configurations is a critical element of design as Suzanne Mulvee, principal, PPR/CoStar, noted: “The average lease has decreased from 5,000 to 3,600 square feet and there is increased demand for work tables due to the use of communal work space in new configurations.”
Ray Wong, director, Americas Research Operations, CBRE, Canada, commented, “We are seeing a shift in how employees work; they don’t need walls because they don’t talk to each other — it’s all about texting. Newer buildings can accommodate this type of usage so their rents will come down.”
Most agree that we will see more hybrid environments going forward, as technology will not trump the need for direct interaction among employees. As David Porter, vice president, Multifamily Research, CoStar, pointed out, “Demographics are key. Younger workers are starving for communication — they want to feel they are a part of something. Face time is important to them and phone calls are white noise.”
Below are a handful of observations made by the participants:
The Changing Retail Landscape
E-commerce continues to impact retailers, forcing them to rethink their distribution systems. In terms of start ups, Mom-and-Pop stores will not return to the market until housing values recover. As middle market retailers struggle, luxury and discount firms are expanding, announcing several new store openings in the year ahead. Grocery consolidations are increasing, with non-union players, such as Whole Foods, entering new markets. “Other well known retailers, such as Sears, continue to struggle and will likely file for either Chapter 7 (liquidation) or Chapter 11 (reorganization),” noted Garrick Brown, director, National Retail Research, Cassidy Turley-Terranomics.
New Ceiling Heights for Warehouse/Distribution Centers
In discussing the industrial market, Aaron Ahlburn, senior vice president, Americas, Jones Lang LaSalle, commented on the push to achieve clear heights of 36 feet in warehouse/distribution centers and dedicated fulfillment centers due to e-commerce. “Supply chain efficiencies need to be built into the new fulfillment centers,” he said. Ahlburn also noted that there is more export traffic out of the West Coast ports due to agricultural goods packaged for shipment to China from the United States, especially wheat and pork.
Regarding movement on the top tier of industrial ownership, Ahlburn remarked that Blackstone is a new player; Kilroy is selling; Weingarten is exiting to refocus; and ProLogis is pairing back their tertiary holdings.
Unlocking Pent Up Demand in Multifamily
Many industry professionals suspect there is pent up demand for apartment units among young professionals, many of whom are living with parents, riding out the recession. “The amount of demand is difficult to quantify and the timing of the release depends on a stronger economy,” noted John Chang, vice president, Research Services, Marcus & Millichap. “In 2014 and 2015, we may see high vacancies when the development cycle is booming and people are moving back into home ownership at the same time,” said Chang. However, another cohort that is growing and will contribute to demand for rental housing are seniors (ages 65 and up). Based on the latest projections by the Bureau of the Census, the population aged 65 and over is expected to grow by 14.2 to 14.7 million between 2010 and 2020. Some forecast that this group will leave their suburban homes for a smaller, more urban living experience that provides access to needed services and amenities. “Enlarging the potential renter pool even further and presenting demand potential are the 40 to 50 year olds, relocating from a single family home due to divorce, death or a conscious lifestyle choice,” said Porter.
Senior Vice President, Americas
Jones Lang LaSalle, El Segundo, Calif.
Newmark Grubb Knight Frank, Carmel, Ind.
President and CEO
NAIOP, Herndon, Va.
National Retail Research Director
Cassidy Turley-Terranomics, Sacramento, Calif.
Vice President, Research Services
Marcus & Millichap, Phoenix, Ariz.
Director of Research
Colliers, Indianapolis, Ind.
Senior Vice President, National Research
Studley, New York, N.Y.
Vice President of Knowledge and Research
NAIOP, Herndon, Va.
Vice President, Strategic Communications
CoreNet Global, Atlanta, Ga.
Dr. Youguo Liang
Prudential Real Estate Investors, Parsippany, N.J.
Chief Operating Officer
Real Capital Analytics, San Jose, Calif.
Director of Research, Canada
CBRE, Vancouver BC
PPR, Boston, Mass.
Vice President, Multifamily Research
CoStar, Washington, D.C.
Director of Research
NAIOP, Herndon, Va.
Director, Americas Research Operations
CBRE, Toronto ON