Quick Hit: Disruptive Trends in Office and Retail

Quick Hit: Disruptive Trends

in Office and Retail

OFFICE

• Office:

• Density – pressure on parking ratio’s, building infrastructure (watts/SF, HVAC, restrooms, etc)

• Cost of tenant improvement build-outs – typical TI allowances not keeping up with cost of construction

• --Mike Richmond, Cushman and Wakefield Commerce

OFFICE

• I feel like never before, employers are focusing on making their office space a tool to attract and recruit the best employees and also to brand their company and culture.

• --Tab Cornelison, CBRE

OFFICE

• New "co-working" office environments:

• The "sharing economy" has now extended to the workplace and office market, with "co-working" office space providers opening offices in markets across the country. In the past, "executive suites" or traditional "office share" providers such as Regus (with 3000 locations now worldwide) were the primary alternative for small business owners and entrepreneurs seeking professional office space with flexibility.

• National providers such as WeWork and Level Office are quickly redefining the co-working/shared office sector, providing collaborative and creative workspace environments geared toward millennials and the tech sector.

• In Utah, we have seen new entrants such as Evolution Office and Box Office securing space in new projects and offering an alternative to the Regus model. You can expect to see companies like WeWork, Level Office and others enter the market in the months ahead, especially given Utah's reputation as "Silicon Slopes".

• Transition to Open/Modular Configurations = Higher Parking Ratios:

• At a time when municipal planners are unwisely restricting and reducing parking requirements, the market and office users across all sectors are moving to more open/modular configurations, maximizing the number of employees in each space.

• Although many hoped that new Transit Oriented Development (TOD) trends would alleviate pressure, even TOD locations and anchor tenants are requiring higher parking ratios than over. For example, 25 years ago parking ratios averaged 3 stalls per 1000 square feet leased in typical suburban office settings. By comparison, today's parking ratio requirements being dictated by large office tenants range from 5-6 stalls per 1000 square feet.

• Expect this trend to continue, as companies seek to optimize space utilization.

• Increasing Tenant Improvement Costs

• With the rising costs of construction (both labor and materials) typical tenant improvement allowances provided on both 1st generation and 2nd generation spaces are proving to be inadequate, requiring a greater degree of creativity and more challenging underwriting with both Landlords and Tenants. It has become increasingly difficult, with smaller office requirements (1,000-7,000 square feet) not having the benefit of the economies of scale needed in order to construct space on budget and effectively.

• --Brandon Fugal, CBC Advisors

OFFICE

• The rise of co-working. Just saw an article in GlobeSt.com that I haven’t read yet on WeWork and how they are taking down more and more space.

• The increase in density and parking ratios in buildings that don't really accommodate it.

• Mobility and remote work and how that will impact how companies use space and manage shadow vacancy.

• --Paul Anderson, CRESA

OFFICE

• One trend that I have specifically noticed in the market in the past 6-9 months has been the increase in tenant improvement costs and the effect it’s having on deals. This has made tenants hesitant to sign leases on first generation space when TI costs are coming in $20 to $30 per square foot over the budgeted allowance. I’ve seen this single handedly kill more deals than anything in the market over this time period. Therefore, I’m seeing more proposals with tenant’s asking Landlords to amortize TI’s into the rate, but this is tough because a significant portion of these tenants don’t have good credit so the Landlord hasn’t been able to justify doing this because of the credit risk. I’m not sure how much longer this will continue, but it’s something to keep watching.

• I’ve also seen a significant slowdown in the Thanksgiving Point submarket, while sublease space has significantly increased in this submarket and in the Draper/South Valley submarket.

• --Jordan Wall, CBC Advisors

OFFICE

• Large tenants taking full buildings and subleasing space to control their destiny. It is a good disruption from Landlords’ perspective.

• --Dana Baird, Cushman and Wakefield Commerce

OFFICE

• Mass Transit

• New banking regulations on financing real estate

• TI design and impact on costs

• Office design trends regarding density and increased average tenant size on building design

• Financing and overall return to the investor.

• --Scott Wilmarth, CBRE

OFFICE

• BTS: The trend of occupiers looking for TOD sites with employee amenities and public transit has altered our marketplace in the past few years. Companies have shifted from location around CEO homes and beautiful locations to sites with I-15 access, public transit adjacency and food service has shifted in our marketplace. Developers with those sites have seen tremendous development over the past 3 years, outpacing any construction heights on record.

• Paradigm Shift – South Valley vs. Cottonwood Submarket

• Real Estate Decision Makers: To put another spin on above - Real estate used to be a C-suite decision, but is more likely to be weighted to HR's needs - recruiting and retention -than the desires of the CEO.

• Crazy trend that will change real estate over the next 10? Driverless cars - assuming the technology continues to improve and the cost to utilize the service is low, we will see parking ratios go down by as much as 80%. People will still drive because they want to, but if you pay $10,000 to own a car every year, but could have one at your fingertips for $1,000 per year and could be productive while in transit, would you?Hope this helps.

• --Jeff Rossi, Cushman & Wakefield Commerce

OFFICE

• Tenants are doing an ”office space grab” by taking more space than they need in order to accommodate future growth. There’s a lot of sublease space out there.

• --Eric Woodley, Woodley Real Estate

OFFICE

• One thing I've noticed is the change in working mentality with open space, groups and collaboration has increased density putting more pressure on parking. So buildings that are not even 10 years old are struggling to accommodate a denser workforce. I would add that call center (Goldman, Green River Capital, etc.) users are not afraid of high-end Class A and B buildings where before they were a C user and this is contributing to the parking issue.

• --Nick Teseros, Newmark Grubb

RETAIL

• 1. Internet: Positive and negative. Omni-channel is and will be the buzzword for the foreseeable future. Retailers who can figure out how to have a seamless online and brick and mortar experience will be the winners. Consumers are willing to research and buy online, but like the option of returning to a store. 75+ percent of customers who return a product to a store buy something else often spending more in store than the cost of the item(s) returned. Shipping costs and distribution are a major issue for all companies, especially so for Amazon. Amazon is in the early stages of building its own distribution network (instead of using UPS, FedEx)

• 2. Grocers: Overall grocery sales are up, but cost of food is down which has put enormous pressure on grocer's bottom lines. Organic grocers (e.g. Whole Foods) have seen and continue to see their margins under attack as companies as diverse as Kroger, Wal-Mart and Sprouts have moved aggressively into organics which has put a lot of pressure on Whole Foods. Whole Foods is now opening new low priced organics stores (called 365)

• Scott Verhaaren, The Boyer Company

RETAIL

• 3. Restaurants: Many predict a restaurant recession is coming or already here. Full service/sit down has been hit hardest and fast casual is now being impacted. Causes range from overbuilding (now more restaurants per capita than historical norms) to brand fatigue. Consumers view full service as less healthy than fast casual and are constantly looking for the latest and greatest in restaurant concepts. Some evidence shows that the younger millennials prefer cooking and are shunning eating out.

• 4. No brand loyalty: Consumers are more interested in quality and price. Brand loyalty is for the most part gone.

• --Scott Verhaaren, The Boyer Company

RETAIL

• 5. Economy: Stagnant wage growth, increasing costs of health care (now and looming) combined with millennials seeming interest in experiences instead of things has had a negative impact on retail sales. Baby Boomers are now entering the phase of their lives where they are out of the acquisition years which is also impacting sales.

• --Scott Verhaaren, The Boyer Company