CREJ - Office Properties Quarterly - December 2017
The modern workplace is in a state of flux. The status quo of yesteryear – office suites designed with cubicle and private space – are rapidly transforming into open, collaborative environments. What is behind this sea change? Tenants are driving this evolution with the goal of attracting and retaining talent as a top priority. The environment in which people work is a huge factor in their work enjoyment and consequent employee retention. Ranked first among the nation’s most desirable places to live in a recently released poll by the Pew Research Center, Denver possesses a hypercompetitive labor market, with unemployment below 3 percent for the last eight consecutive months. In this competition for talent, employers place a heavy emphasis on millennials/Generation Z, who make up approximately one-quarter of the metro area’s current population, and as much as half of the total in-migration annually. This influence has greatly contributed to the workplace transformations on interior design and space configuration, as well as the current focus on providing superior access and amenities via location. Tenants also are eager for open and collaborative environments and reducing real estate expenses, with some tenants reducing occupancy footprints by 10 to 30 percent, creating substantial savings in rent and operating expenses. Added to this, the creation of alternative workplace environments increases productivity and communication, and fosters accidental collaboration (in contrast to traditional intentional collaboration), allowing for new insights and greater availability of information, without the limitations of space configurations or traditional work-group assignments. This new collaborative model can feel disruptive, and, yet, can lead to amazing innovations in products and processes. In Denver’s downtown submarket, new and existing tenants are displaying a healthy appetite for new space, driving development, absorption and lease rate appreciation. As of third quarter, the downtown submarket’s development pipeline had reached 2.3 million square feet in 12 projects, with an aggregate average of 56 percent preleasing. Downtown also led the overall Denver office market in absorption, recording 165,022 sf for the third quarter, and year-to-date absorption of 504,288 sf. Further, new Class AA deliveries in the downtown submarket are a driving force in propelling lease rates in Class AA/A and Class B properties to all-time highs of $39 per sf and $30.30 per sf, respectively. Asking rates in some of the newest, super premium buildings have breached $50 per sf, a level never seen in Denver. All this new construction allows for greater upgrades in overall office space and access to ultra-modern materials and finishes. Shrewd negotiators will leverage the expense savings of workplace densification to create options for occupiers not available in traditional office settings. All of these positive factors and rewards easily sell the concept to tenants, many of whom are eager to embrace these changes. However, there are challenges and some associated costs or risks to implementing an open workplace environment, which need exploration. The open workplace concept is still in its infancy, although already embraced by many firms. First, while there is some data to determine the long-range effects of open workplaces on productivity and employee retention, it is not complete and needs more analysis. Second, most firms associated with tenant improvements – real estate consultants, architects and contractors – are still honing their expertise in evolving workplace technologies. Third, there is a costly upfront capital requirement. For a modern workplace to work effectively, all new furniture and technology is required, at a significant cost. Savvy market experts and strong negotiators are needed to uncover possible capital sources for these improvements. What may be the greatest concern, especially as it relates to employee retention, is how to manage the change in a positive manner. The older workforce views offices as a reward for hard work and a step above a cubicle and, most importantly, the older workforce values their private office space (whether a cubicle or an office). Many employees are resistant to the open concept and believe it will hinder their productivity, rather than enhance it. The most extreme office concept, with open seating allowing each employee to choose a seat that works best on a particular day, is especially concerning to older workers who spent their careers in mostly fixed locations. This challenge must be managed correctly and with sensitivity in order to keep productivity and morale high, and attrition low. While creative tenants and technology firms have been quick to embrace the new open workplace, some “old guard” tenants have not. Law and energy firms have been the slowest to adapt to new workplaces, perhaps because these industries are still very paper heavy. There is a big push in our culture to go “paperless,” and the evolved workplace is geared for a relatively paperless environment, and yet this may not be the right fit for every tenant. Workplace solutions are here to stay, despite the concerns listed above, because the potential upside is so powerful and cost effective. The way people work has advanced, our work environments have rapidly evolved to match and densification is here to stay.