Houston-based Hines recently announced plans to add two new 18-story apartment towers to what was largely an office development called Overton Park, located in the Cumberland/Vinings area of northwest Atlanta. On the surface, the deal might not seem like a big one. But consider that the towers will add approximately 400 units and $80 million to the value of the project.
“We did it to enhance the overall quality and residual value of the project, and to be consistent with Hines' other live-work-play developments around Atlanta,” says Robert Voyles, senior vice president in Hines' Atlanta office.
But the project is also a mirror reflection of how America's growing labor force is increasingly demanding the so-called “live-work-play” environment, whether it is in the suburbs or closer to growing intown areas.
While many now call Atlanta “the poster child for mixed-use urban developments,” that was not the case until recently. But the city is following a national trend which is seeing the term “mixed-use” become one of the hottest buzz-phrases in the commercial real estate industry over the past year.
Labor gets concentrated
Urban vs. suburban: It is the age-old competition. Lately, urban markets fought back from a decades-old decline to attract a slew of new residents thanks to more convenience, and better residential and retail options.
“Generation X, and the larger Generation Y cohort behind them, have both shown a willingness to live and work in urban areas,” says Jacques Gordon, international director of investment research at LaSalle Investment Management in Chicago. “Although most new jobs are still being created in suburban locations, the nation's urban cities have stemmed a three-decade loss of market share and are now holding their own in the competition for jobs.”
“One key reason is that an urban lifestyle for the rapidly growing number of childless households (including empty nesters) has improved as crime rates have dropped and more residential choices are now available close to where people work,” adds Gordon.
Steven Scruggs, managing director of Jones Lang LaSalle's Dallas-based global client services group, says the suburbs still offer the hottest properties.
“It is definitely not downtown. There is still an emphasis on the suburbs,” says Scruggs. He cites two specific reasons: the availability of labor (“people want to work where they live”) and the technological infrastructure, electrical power capacity and plentiful parking that are part of the suburbs.
“A lot of startups, particularly in the bigger cities, are moving downtown. But established firms are out in the suburbs,” he says.
Mike Henderson, director of location analysis, advisory services for Cushman & Wakefield in New York, agrees that, in general, the suburbs are still hot but market-by-market differences abound.
“In general, companies have been concentrating their site selection decisions in the suburbs,” he says. “There are several exceptions, however, particularly in hot downtown markets such as New York, San Francisco and Boston.” Generally, the suburbs also feature lower real estate costs, adds Henderson.
For Ken Sandstad, president of corporate advisory services at Dallas-based Transwestern Commercial Services, it is all about where labor wants to congregate. Dot.coms tend to favor intown environments, but the suburbs are still busier in most metropolitan locations, says Sandstad. That is in part because the suburbs are closer to where the majority of workers live.
Shifting industries, new challenges
Certainly the commercial real estate industry has had a wealth of opportunities to build, buy, sell and manage a variety of properties geared to the prolific “New Economy” companies and their workforces. But the times continue to change.
“Job growth over the past three years has been broad-based, but clearly the big trend was the growth in New Economy firms and telecommunications companies in particular,” says Sandstad. The booming job growth in the telecommunications industry during the past several years resulted in robust office absorption rates, but there have been signs of a slowdown in the sector, he adds.
LaSalle Investment Management's Gordon predicts high-tech regions which offer both cheaper real estate and labor expenses, such as Raleigh, N.C., and Austin, Texas, will grow at the expense of bigger and costlier tech markets like San Franscisco, Boston and San Jose, Calif.
However, Mitchell Rudin, president of U.S. transaction services at New York-based Insignia/ESG, says many fast-growing cities that have dominated the many “Best Places to Live and Work” lists — including Austin, San Jose and Raleigh — are replaced on the lists this year by the largest metros such as New York, Chicago, San Francisco, Washington, D.C., and Boston.
“Technology has partially freed up the need to be bound by a particular location, and people want to work in a place that's interesting, fun and physically beautiful,” says Rudin. “The major cities certainly satisfy the first two criteria.”
Everyone, it seems, is quickly finding with technology there are definite opportunities and uncertain risks.
According to Gordon, the most dramatic change occurring in these “tech cluster regions” is the high-tech boom and now bust has created uncertainty regarding the cost of housing for employees and office space. “This makes it more difficult for these companies to predict expenses, and with a slowing economy this puts more pressure on these companies to control costs,” he says. “We are going to see much more sensitivity to inflated rents in the tech cluster regions in the year ahead.”
Transwestern's Sandstad notes the high-tech boom resulted “in buildings in previously marginal or secondary locations filling up now because of the rapid rate of absorption in many markets. The question is, how will those same buildings fare in the next cycle or when general vacancies increase?”
‘Smart growth’ takes center stage
“Quality-of-life” issues frequently crop up in corporate location decisions, but more cities today are experiencing infrastructure problems, including traffic, air-quality and even water-quality issues. To what extent does that play into some of the job-growth patterns we are experiencing nationwide?
“I think it puts the ‘smart growth’ debate at center stage in more and more communities,” says Gordon. “Traditional 1950s zoning, which separates land uses, made sense in a manufacturing era. It does not make sense in a service-based economy driven by knowledge workers.”
But Sandstad takes a slightly contrarian view, saying companies may become focused on only a limited number of specific concerns. “In our experience, general infrastructure problems have only a limited impact on corporate decisions and job-growth patterns,” he says. “For example, infrastructure is just one consideration in the relocation or site selection process. Many companies are now focused much more on a city's attractiveness to prospective employees.”
Henderson cites several quality-of-life issues that should rank high on any company's shopping list. “Quality of life can be very subjective, but some key factors are housing costs, transportation, particularly traffic congestion, personal taxes and school quality,” he says. “If companies need to relocate employees to a new city, these issues can be critical in order to maximize employee relocation.” Similarly, a city's declining quality of life can mean workers want to move out of the area, adds Henderson.
University towns have become a magnet for growth, says Rudin of Insignia/ESG. “Such towns, which not only offer skilled pools of high-tech labor but also have become incubators for new businesses, are becoming more and more attractive as corporate headquarters sites,” says Rudin.
That said, here is a quick look at how a few specific major metro markets around the country are adapting to changing economic and labor trends.
High-tech's hold on the largest city in the Southeast has definitely loosened of late, as dot.com after dot.com has either gone under or left town altogether. But the numbers don't lie: The city has reaped the rewards, and the pain, of tremendous growth over the past decade.
And still, local brokers and developers alike have not lost much of their seemingly endless optimism. According to recent numbers compiled by Bethesda, Md.-based CoStar Group, Atlanta's downtown office market vacancy rose to a still tight 5.2% in third-quarter 2000. Overall, suburban markets saw vacancies decrease to 11.4%, but with 11.5 million sq. ft. under construction.
Voyles notes Atlanta is known for at least three key attributes:
Diversity. The economic base of Atlanta is extremely diverse. It is not only the seat of city, state and regional federal government, but is the home of several major universities and colleges. Also, Atlanta is the national headquarters of 14 Fortune 500 companies, and is home to the Southeast regional offices of nearly every Fortune 500 company.
Hartsfield International Airport. Atlanta is a transportation-oriented city, first with the railroads and then with the interstate highways (Atlanta has three major interstates connecting in the heart of the city). Atlanta is also home to Hartsfield International Airport, which is consistently ranked as the first or second busiest airport in the world. Voyles says the easy access to transportation fuels the office market with “connectivity” to international markets.
Quality of life. Atlanta enjoys one of the highest quality-of-life ratings of any major U.S. metropolitan area. Despite recent challenges caused by traffic and sprawl, Atlanta is bouncing back with many exciting new intown urban developments as well as the creation of 24-7 city submarkets in Downtown, Midtown Atlanta, and Buckhead.
But it is no secret the rest of the world is now learning about Atlanta's serious infrastructure challenges, so do the assets still outweigh the liabilities?
“Infrastructure challenges are certainly there for the region,” says Voyles. The City of Atlanta has sewer moratoriums in certain markets. There are challenges related to continuing highway construction as well as future challenges for lack of water resources. Each of these issues is being aggressively addressed by the City of Atlanta, the Atlanta Regional Commission, the Metro Atlanta Chamber and the state government through various joint state and business initiatives, according to Voyles.
“Most of us in the commercial development industry are advocates for ‘smart growth’ and are developing projects that reflect a commitment to ‘live-work-play’ environments throughout the Atlanta metropolitan area,” adds Voyles. “I, for one, am more optimistic about the future of the region than any time in the last 10 years.”
So now the question is: Is an economic slowdown in the offing, and how would one impact Atlanta's real estate market?
“We do believe that there will be some slowdown in the Atlanta market over the next 18 months,” says Voyles. “This is due to a general softening in the overall national economy.” However, Voyles believes Atlanta could rebound faster from a slowdown in part because of the city's economic diversity and access to transportation.
Voyles cites several major Atlanta submarkets as the next growth areas. He cites the inner-city markets, the Perimeter market along Interstate 285, Midtown and Downtown as areas that will perform strongly during the next 10 years.
John J. Goodman, executive vice president and branch manager of Julien J. Studley's Chicago-based Midwest region, saw many a change in Chicagoland over the past few years. In particular, Chicago's downtown, fueled by a great economy, continues to experience a renaissance of all kinds of commercial building.
“Economic expansion has been extremely evident in downtown Chicago over the past two years,” says Goodman. Last year, approximately 40% of office leases totaling 15,000 sq. ft. or larger were done by companies moving to Chicago, he says. Vacancies declined to 10.7% in fourth-quarter 2000, while the city's unemployment rate in November 2000 was 3.9%.
However, Goodman senses a slowdown on the horizon, given the decline of New Economy and dot.com companies. “In downtown Chicago, more than 10 companies have reported sizable layoffs, and several other significant firms have shut down altogether,” he says. “However, the highly skilled labor that will come out of these ‘dot.bombs’ will provide excellent employment resources for other companies.”
Not to be overlooked by any means, Chicago's suburbs are still hot properties. In fourth-quarter 2000, Chicago's suburban office vacancy rate was 16.9%. There is almost 4 million sq. ft. of office space under development in the metropolitan area. Goodman notes some of Chicago's fastest-growing companies during the last two years are located in the suburbs, such as WebStreet Securities in Deerfield, Career Education Corp. in Hoffman Estates and National Equipment Services in Evanston.
Looking further into actual employment trends, the transportation and public utilities workforce grew by 2.7% in Chicago over the past 12 months, according to the Bureau of Labor Statistics. Service firms grew by 1.9% in the same period.
“We expect the growth in the service sector to have the most impact on real estate in the downtown market as a majority of the professional service firms have a large presence here,” says Goodman. “Also, these companies stand to gain quality employees released from the New Economy sector, contributing to future expansion and/or the absorption of high-quality dot.com space.”
Both residential and retail activity closely followed office growth in downtown Chicago. “Living in the downtown area has increased dramatically,” says Goodman. “In addition to new development, many projects are older commercial properties that are being converted into residential uses. Retail and entertainment have followed to help create a more ‘24-7’ living environment.”
Specific projects include the reopening of State Street to vehicular traffic, and Block 37 — bordered by State, Randolph, Dearborn and Washington — is slated for the construction of a mixed-use project with a Lord & Taylor department store and a Marriott Suites hotel. Borders Books was completed at the northwest corner of State and Randolph. And with help from the city, Sears is moving into the property on the northwest corner of Madison.
Goodman also points to new entertainment venues, which came to Chicago by way of an enhanced theatre district, precipitated by the completion of the new Goodman Theatre on Dearborn between Randolph and Lake.
“Further signs of future retail include an incredible amount of hotel development attracting business and leisure travelers to the downtown market,” says Goodman. Recent hotel openings include the Le Merdien with 350 rooms, the Peninsula Hotel with 350 rooms, a Fairfield Inn with 185 rooms, a Park Hyatt with 185 rooms and an Embassy Suites with 350 rooms.
It is always something on the West Coast. If it is not earthquakes, it is wildfires in the rolling hills destroying multi-million-dollar mansions. Now, it is a serious problem with the state's power supply. Still, the area's quality of life attracts more new residents than any metropolitan market on the planet, for a lot of good reasons.
Victor Coleman, president and COO of Los Angeles-based Arden Realty Trust, a major office REIT, developed a keen sense of the local market's dynamics.
“The labor markets are still gravitating to the Los Angeles suburbs that represent the most appealing quality of life,” says Coleman. “The Westside, Tri-Cities area and the South Bay continue to draw increasing numbers of businesses and the home buyers who can afford the premium residential rates in these areas.”
As for the dot.com startups that took a beating last year, Coleman says a popular theory floating around the area is those companies will move to cheaper office space located in the downtown area.
Coleman cites the healthcare, entertainment and aerospace industries as those with the highest concentration of job growth in Southern California. Meanwhile, a whole host of technology companies, such as those focusing on software and bio-tech development, are growing in the area, notes Coleman.
“Healthcare, entertainment, financial services and government represent a much broader tenant base and, as a result, the technology downturn has had a negligible effect on our and other landlords' portfolio occupancy,” he adds.
The so-called “new urbanism” trend — people flocking to more close-knit, mixed-use developments — is also for real in Los Angeles. “Suburban centers that cluster entertainment, office and retail and where people can gather for a 24-hour lifestyle are the wave of the future,” says Coleman. He notes there is some multifamily construction downtown, but says Los Angeles residents tend to live in areas close to the entertainment, natural recreation and other services the city has to offer. Generally, these benefits are not as easily found in the downtown area.
What's not to love about the Big Apple? After all, the biggest deals of the year seem to perpetually occur there. Witness the recent Rockefeller Center purchase by a Tishman Speyer Properties-led group for $1.85 billion and the start of construction on Time Warner Center, the new $1.8 billion, 2.1 million sq. ft. home of AOL Time Warner and major retailers, by The Related Cos., Apollo Real Estate Advisors and The Palladium Co.
Still, most local brokers were complaining for the past two years office space is too tight in the city, and there continues to be concern in Manhattan that companies are migrating to the suburbs to find cheaper space.
But Joseph Harbert, CEO of New York-based Insignia/ESG, says ultimately the bulk of the area's labor force will continue to be based in Manhattan. “Manhattan is still the most attractive venue for career people,” says Harbert. “Salaries are higher and it has cachet. Companies may move to the boroughs to save money, but they will then not be able to tap into the labor pools available for workers living in New Jersey and Westchester.”
So exactly what industries are attracting the labor pools? Last year, job growth concentrated primarily in new media and financial firms, says Harbert. This year, there should be more diversity, he predicts, adding the decline in the new media sector should result in the opening up of needed office space.
Without a doubt, the cost of living in the Big City grew enormously, further dividing the city into the haves and have-nots. But still, it has not hurt the city's image too much. People in droves still want to live and work there.
“Lack of affordable housing has driven prices up in Manhattan, but this has not appreciably affected the labor pool,” says Harbert. “Downtown Manhattan has begun to develop the shopping and neighborhood infrastructure to make it more desirable as both a residential and commercial office destination. Overall, New York is very healthy. Services are good, crime is down. It is still one of the most desired locations for individuals and corporations.”
Ben Johnson is an Atlanta-based writer.