As tenants look for innovations in office design, they unwind some strategies that defined the market in the recent past.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JANUARY 2016[dropcap]A[/dropcap]lex Holton is a senior vice president at JLL responsible for infrastructure renovations and office tenant improvement projects in San Francisco and the greater Bay Area. He is the lead for the Northern California Tenant Representation team within the Project and Development Services group, overseeing the project management services for corporate and technology occupiers in the region. Notable projects include The Wharton School of Business, Yammer, France Telecom, Twitter, Pocket Gems, Morgan Stanley Real Estate Advisors, Invesco Real Estate, The Paramount Group and Wells Real Estate Funds. Holton also oversees the LEED and sustainability consulting services in the Northern California region.
Prior to joining JLL, Holton worked in woodworking and construction fields and instructed for the architectural wood shop at UC Berkeley. In the early years of his career at JLL, Holton sharpened his skills in property management, managing office buildings in Walnut Creek, Dublin and San Francisco. Today he oversees an annual average of $30 million in hard construction costs for office tenants locally. His experience ranges from mission critical facilities and lab spaces to Class A building lobby renovations and unique and high end office spaces.
TR: A recent study by ULI stated that cross the country, 80 percent of our commercial real estate is over 30 years old. Do you find that statistic to be correct in the Bay Area, as well, and if so, does that mean that a large portion of the industry is sitting on a lot of obsolete real estate or is there a second or third life for many of these properties?
HOLTON: I don’t doubt ULI’s stats. My sense is that San Francisco and Silicon Valley is much more heavily weighted to the millennials as the technology sector’s hiring surge in Silicon Valley and San Francisco in particular over the last few years has brought many technically skilled 20-somethings here to cash in on the boom. As a result, a lot of our older buildings have already moved into their second or third life as creative space. The general consensus and 10-year look-ahead seems to be that markets outside of San Francisco will see opportunity for development as the millennials age, start families and move toward a more suburban lifestyle.
TR: Some studies have concluded that the trend of reducing the square footage allotted to employees will continue to shrink. Do you agree? There has to be a limit of what companies can do before their employees just start a rebellion.
HOLTON: While the cost of real estate and construction has certainly driven a reduction in workspace for each individual, I don’t agree that much more compression of square footage per employee will happen or is possible. We’re actually seeing a shift in the other direction toward more private and quiet spaces for employees to think or complete heads-down work. Further, the infrastructure limitations of most older buildings in restroom fixture counts, HVAC capacity and even structural capacity is putting a cap on what is possible for density. We’re also seeing more efficient use of space within employee space itself. More companies now deploy sit/stand desks, for example, offering employees greater flexibility within their space.
TR: Is it safe to assume that certain functions within an organization and certain roles in some companies require a customized approach to this issue. Not all workplace strategies are created equal, right?
HOLTON: Absolutely, and we spend a lot of time with our clients and their architects (and often workplace strategy experts) to understand what workspaces different groups need, what adjacencies will help drive product and business development and increase collaboration. Engineers tend to prefer quieter spaces for their work, while sales teams enjoy a more active environment.
TR: Construction costs have been creeping up ever since the recovery has entered full steam. How is the impact of this felt in tenant improvement projects? Are there some anecdotes that you can share with us?
HOLTON: We run into issues with this with almost every one of our tech clients and projects. What the dollar buys you today in the wake of last year’s Title 24 energy code changes and the stressed construction labor market is probably 20-30 percent less than 4-5 years ago. Therefore companies end up spending a large portion of their construction budget on the functional aspects of the build (mechanical, electrical, plumbing) and can afford less of the bells and whistles that give the ‘pop’ or ‘wow factor’ that’s the subject of the office space envy we see in this market. Value engineering isn’t just a stop gap to get a project in line with budget, it’s become an integral part of the design process.
TR: What is the outlook for construction costs in the next 12 to 24 months? Will it have an adverse impact on the market in a way where certain improvements will be halted or cancelled?
HOLTON: Construction costs should be expected to continue to increase into 2016, though perhaps not at the rate they increased in 2014 and 2015. That said, I don’t anticipate many interior projects to be cancelled or halted. The same may not necessarily be said of ground up developments, especially if the leasing market starts to soften.
TR: What are some interesting trends that are emerging throughout the industry that the we should note?
HOLTON: I would say the push toward more private space is a big one. Most of our tech clients are investing in sit-to-stand desking for their employees, and there’s definitely a trend toward more residential furnishings and design to increase the comfort of the office. Many companies are starting to dial back on the frills of the office in lieu of investing their capital in their workforce. The concept of having an amazing office to attract and retain talent isn’t out the window for many companies, but we do see many of our clients being more frugal with their spend on improving leased office space.
TR: How unique are those to the Bay Area, and are you seeing a faster deployment of ideas from our region to the rest of the nation and even the world?
HOLTON: Right now, I’d say the Bay Area is the international hotbed of tech and development and as such we’re on the leading edge of a lot of the trends in workspaces.
TR: What concerns you the most about our market today?
HOLTON: The cost of construction, lack of available, talented local labor and the heavy competition for space makes it a very challenging market to build in. When contractors and subs aren’t as hungry for the work, and material suppliers aren’t meeting their deadlines and commitments there is a ripple effect through the construction process that adds cost and delay to projects that has a material impact to companies that are on a timeline and budget in their growth.
TR: Are you optimistic about 2016? Why?
HOLTON: With so many leases already in place, but their TI’s yet to be built and so many large tenants out in the market, we believe 2016 will be another strong year. There is however an undertone of hesitation in the market and a lot of fast growing companies are starting to do more of a reality check around their headcount projections and some are continuing to investigate expansion in cheaper markets. The collective thought is that it may be 2017 before we start seeing a more pronounced impact to the real estate and construction markets here in San Francisco if these companies scale back their growth and start to put more space out on the sublease market.
TR: What are we not asking that we should be asking?
HOLTON: With all the focus on the tech industry we often forget about the FIRE and law industries who have kept San Francisco afloat for many decades. They too are affected by market conditions, and we see many relocating back office functions and personnel to other markets in response to the competition for space and escalating cost to build in major markets like San Francisco. The question of sustainability is one that has also faded into the background to a certain extent. It isn’t optional anymore to build to LEED or Cal Green standards now that new code has been enacted, and so there is really more of an expectation that we’re all building and operating sustainably.