Today's workers are demanding a better quality of life, and commercial real estate is heeding the call by building live-work-play communities. projects.
On its face, the deal might not seem like a big one. 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. However, consider that the towers will add approximately 400 units and $80 million to the value of the project.
The property 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. The city is following a national trend that has seen 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 have 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 it, 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 30-year loss of market share and are now holding their own in the competition for jobs."
But Steven Scruggs, managing director of Jones Lang LaSalle's Dallas-based global client services group, says the suburbs still offer the hottest sites.
"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 for New York-based Cushman & Wakefield's advisory services, 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 Chicago-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.
Shifting industries 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 that high-tech regions that 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 that many fast-growing cities that have dominated the many "Best Places to Live and Work" lists - including Austin, San Jose and Raleigh - have been 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 that with technology there are definite opportunities and uncertain risks.
According to Gordon, the most dramatic change that has occurred in these "tech cluster regions" is that 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 that the high-tech boom has 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 is that reflected in 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 that workers want to move out of the area.
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.
Atlanta 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.
Ed Voyles, senior vice president in Hines' Atlanta office, notes that 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 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 that 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. But local governments and business initiatives are responding, he adds.
"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 at 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 quicker from a slowdown in part because of the city's economic diversity and access to transportation.
Chicago John J. Goodman, executive vice president and branch manager of Julien J. Studley's Chicago-based Midwest region, has seen 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. He also notes that 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."
Meanwhile, Chicago's suburbs are showing signs of a slowdown. The suburban office vacancy rate was 17% at the end of the year and asking rents had declined, says Goodman. Still, several of the cities fastest-growing companies - such as WebStreet Securities in Deerfield and National Equipment Services Inc. in Evanston - make their homes in the suburbs, he adds.
Looking further into actual employment trends, the transportation and public utilities workforce has grown by 2.7% in Chicago over the past 12 months, according to the Bureau of Labor Statistics. Service firms have grown 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.
Both residential and retail activity have closely followed office growth in downtown Chicago. "Living in the downtown area has increased dramatically," says Goodman.
Projects in recent years include the reopening of State Street to vehicular traffic. Goodman also points to new entertainment venues, which have come 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.
Los Angeles It is always something on the Left Coast. If it is not earthquakes, it is wildfires in the rolling hills. Now, it is a serious problem with the pricing of the state's power supply. Still, the area's quality of life attracts more new residents than any metropolitan market on the planet, for lots of reasons.
Victor Coleman, president and COO of Los Angeles-based Arden Realty Trust, a major office REIT, has 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.
As for the dot.com startups that took a beating last year, Coleman says a popular theory floating around the area is that 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. Coleman notes that 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 that the city has to offer. Generally, these benefits are not as easily found in the downtown area.
New York 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 purchase of Rockefeller Center by a Tishman Speyer Properties-led group for $1.85 billion. Meanwhile, The Related Cos., Apollo Real Estate Advisors and The Palladium Co. are building the AOL Time Warner Center, the new $1.8 billion, 2.1 million sq. ft. home of AOL Time Warner and major retailers.
Still, most local brokers have been complaining for the past two years that 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, COO 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," he says. "Salaries are higher and it has cachet."
So exactly what industries are attracting the labor pools? Last year, job growth was concentrated primarily in new media and financial firms, says Harbert. This year, there should be more diversity, he predicts, adding that 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 Apple has grown enormously, further dividing the city into the haves and have-nots. But still, it has not hurt the city's image too much. People still want to live and work there in droves.
"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."
San Francisco What is the outside world's perception of the City by the Bay? It is Silicon Valley and the highest cost of living in the country, right? Actually, San Francisco offers much more.
Matt Slepin should know. Slepin is the head of real estate recruiting in the San Francisco office of international recruiting firm Heidrick & Struggles. His job is to place some of the country's top real estate executives, so he knows a thing or two about what areas are "in" and "out," and it helps that San Francisco is his backyard.
"The overall Bay Area market has been really hot for people, so it has not been confined to one or even two specific locations," says Slepin. The city's Financial District, which is generally the home of more traditional companies, has experienced a huge increase in rents, and the South of Market area has been a stronghold for dot.coms, he adds.
Office demand in the area remains strong, while housing demand has grown to near ridiculous proportions. Housing costs have gone through the roof. Consequently, it is very difficult to recruit people to the area, he says.
Frank Robinson, vice president of real estate at San Francisco-based McKesson HBOC, says that for the past several years the industries generating the highest job numbers have been the high-tech & biotech industries - software, start-up dot.coms and telecommunications.
"But we are starting to see a shift to the more mature companies and industries," he says. "It is a result of the recent fallout in the dot.com industry. All of a sudden a salary sounds better than working just for stock options!"
Are executives more likely to relocate today than in the past? "Yes and no," says Slepin. "First, executives are more likely to change jobs today than in the past. The old paradigm of staying in one company, or even several companies, throughout one's career is generally over."
However, employees often have spouses who are reluctant to leave a job with which they are satisfied. Also, people are often hesistant to move their kids for what may be a relatively short stint at a new job, and housing prices often make workers think twice about moving, adds Slepin.
"Although people are still coming [to San Francisco], it is clear that traffic congestion and the lack of affordable housing is causing some very good potential people to look elsewhere," says Robinson.