Commercial Investment Real Estate May/June 2017 - Page 18
A N A LYSIS
Ofﬁ ce Outﬁ tter
Changes in the ofﬁ ce sector make investing less cyclical and more secular.
by Scott Crowe
May | June 2017
Traditionally, most tech-related companies were located in
gateway cities such as San Francisco, Seattle, and New York
City, with wide exposure to highly educated talent pools through
strong university systems. As tech ﬁ rms ﬂ ooded into these mar-
kets, demand for workspace rose, as did apartment rents.
Expensive rents, combined with new tech-related jobs that are
outpacing the talent pool in these gateway cities, has created a
spillover effect into smaller, demographically similar markets like
Austin, Texas; Raleigh, N.C.; and Reston, Va. Tech companies
have found that establishing smaller hubs increases employable
workforces, greatly reduces rent, and decreases overall cost of
living for employees.
The growth of computing power is a primary driver of the
change. More work is automated through computers analyzing
data, while discussing and collaborating on the output is a more
signiﬁ cant component of each employee’s time.
COMMERCIAL INVESTMENT REAL ESTATE
or commercial real estate investors, the ofﬁ ce sector is in
a classic late cycle phase. Traditionally, ofﬁ ce net operat-
ing income holds up well late in the cycle due to long-
term leases, which build up a large mark to market on
the delayed ability to fully participate in a rising market. Now,
however, a rigorous secular trend affects the demand for ofﬁ ce
properties that bears further examination.
In the battle to attract and retain top employees, ﬁ rms are
using appealing, well-located ofﬁ ce space as a recruitment and
talent-retention tool. This new dynamic especially holds true for
tech ﬁ rms, where a veritable war for talent is taking place. Battles
are being won through appealing workspaces, ﬂ exible working
environments, proximity to home, and improved amenities.
The efﬁ cient use of space has meant that tenants allocate fewer
square feet per employee, allowing upgrades to higher quality
space for the same total cost. This talent-retention tactic has
moved beyond the tech industry, changing the aesthetics, func-
tionality, and culture of workplaces.