Commercial Investment Real Estate May/June 2017 - Page 18

INVESTMENT A N A LYSIS Offi ce Outfi tter Changes in the offi ce sector make investing less cyclical and more secular. by Scott Crowe F 16 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. Alternative Marketplaces 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.