In the hunt for workers, employers hope office space can win over prospects

Offices are changing at a rapid pace.

In an effort to recruit and retain workers, companies want to accommodate the suit-and-tie crowd along with the T-shirt and sneakers crowd, even if they need to separate the two.

That’s all part of an effort to get to “cool,” said Bill Wright, an office specialist with CBRE|Hubbell Commercial. And the fact of the matter is clients spend a lot of time on the search, seeking out architects, furniture suppliers and contractors who can deliver the goods.

“And I think that speaks a lot to the rate of change. I believe companies want to see something that, while it's changing rapidly, is a bit proven, to know that it works, to be able to talk to someone who has maybe made the transition and understand what challenges they faced, what worked, what didn't work, what would they change, even if they're only a year into it,” said Danielle Hermann with OPN Architects Inc. 

Wright and Hermann participated in a video roundtable on the office market that the Business Record hosted earlier this year. They were joined by Ben Bruns of Weitz Co. and Jackie Johansen of R&R Equity Partners.

The search for cool is key to a challenge confronting many employers in Greater Des Moines. Employers are desperate for talented workers to fill a range of positions.

Johansen pointed out that one local employer decided to expand in Colorado rather than Greater Des Moines because it could not staff a larger local operation.

“More and more companies are competing for talent, so they're using their space as a way to attract and retain employees,” she said.

Other changes are occurring. Office users are placing an emphasis on furniture, to the point that those considerations outweigh hard construction costs in an office rehab, Bruns said.

“The furniture companies, or the big furniture companies, are starting to actually provide more services because they understand the role that they're playing in the process, and have in the last decade probably led the way in the research around the workplace,” Hermann said.

And companies are not shy about sharing their innovations with competitors, at least so far as office innovations that are intended to attract workers.

“In spite of this competition for talent, companies are open to bringing others through their space and sharing their ideas and how they got to where they got to from a decision-making perspective, so the next company can inform their decision that much better on that space,” Bruns said. “It's unique, I think.”

Companies want longevity of design, even though the offices are changing rapidly, Hermann said. The need is for office spaces that can be upgraded with ease over a longer period of time.

“How can you build to try and help future-proof those spaces against having to change? There are some good strategies out there to do that, but it just boils down to a lot of flexibility,” she said.

Construction companies are reacting to the need for flexibility.

“You're into a very flexible space that could be reconfigured over time,” Bruns said. “If you can make that space cool, and it fits the culture, go for it, right?”

And speaking of time, Wright also pointed out that the time-honored tradition of signing a long-term lease — 10 years, let’s say — at a fixed rate is losing favor to leases with annual escalators, as has been common for some time in larger cities.

“With the real estate prices rising, and seeing that kind of annual escalator, foreign or coastal-type real estate investors are taking a hard look at Des Moines,” Wright said. 

Issues Discussed
The growing influence of furniture companies in workplace research.
Changes in lease terms.
Using office space as a recruitment tool.

 


 

Panelists:

Ben Bruns, business development director, Weitz Co.
Danielle Hermann, associate principal & architect, OPN Architects Inc.
Jackie Johansen, director of acquisitions and brokerage, R&R Equity Partners
Bill Wright, broker, CBRE|Hubbell Commercial

Moderators
Chris Conetzkey, Business Record publisher
Kent Darr, senior staff writer

Watch the Video:
Want to watch the roundtable in its entirety? Go to businessrecord.com/AREM

 


 

What do you see as the dominant theme for the office market in 2017 and into 2018? 

Bill Wright: Cautious optimism. I’m optimistic on what’s going to be happening in our office market. We have some speculative development bets occurring, and frankly there hasn’t been a lot of speculative development in Des Moines. Historically we’ve upgraded with a lot of market intelligence as far as constructing new office buildings.

We haven’t overbuilt, we’ve been smart, we’ve kept vacancy in mind, we’ve had local companies growing. Jackie Johansen’s company is developing the new building out in Country Club Office Plaza called Westfield Complex. You have a new building that Sherman Associates is building downtown. At this point in time, there’s probably more large-scale tenants looking especially down in the central business district than we’ve had in a long time.

The reason I’m cautiously optimistic is because we’ve had a change in the political climate, and sometimes that has an impact on the economy, and when there’s an impact on the economy, sometimes companies decide, “Maybe I’m not going to grow this year.” It’s great that we only have 3 percent unemployment, but another challenge locally is the search for talent for new employees, because companies can only fill office space if they’re able to fill those desks, and with 3 percent unemployment, there’s not exactly an abundance of people just running around looking for jobs.

Jackie Johansen: If I had to say it in one word, I would say “growth” would be the dominant theme for 2017 and 2018. So we continue to see strong leasing activity; we’ve had another year of positive absorption, and one of the things that’s interesting about that is if you look at the largest transactions from 2016, there are current companies that are here in Des Moines that are expanding their space, improving their space, sometimes to attract new employees into amenity-rich spaces, so a lot of those largest transactions are with companies that are already invested in Des Moines.

Second, we’re seeing lots of owner-occupied new buildings, some being announced, some that have just been completed, so that opens up second-generation space, which is also really healthy for the market and gives a price dichotomy for companies that want to come here; they have options.

Third, our investment sales are strong and rising. We are having more transactions and we’re also having the price per square foot for those transactions go up. And in 2016, the office investment sales were 55 percent of out-of-state owners. So we’re seeing out-of-state money, we’re seeing a little bit of foreign capital, but that will help us to attract even more of that type of investment into Des Moines, which is good.

And last, I’ll just mention that national trends are also pushing the leasing and investment sales to our market, because these gateway markets, they’re having rent growth, they’re having slowing absorption, so a lot of those companies are being pushed to secondary and tertiary markets because they’re looking for a better price point. They’re looking for a lower-cost lease, or a lower-cost sales option. Those are all good things that lead to growth in Des Moines.

Danielle Hermann: One of the things I wanted to touch on, and it really is a springboard for what Jackie was saying, our downtown corporate markets in the core are really looking heavily at mobility strategies, so it’s something that a year or two ago might have been kind of new to the market, or new for companies to be thinking about. But now we’re seeing those more savvy corporate environments come to us asking, “How do we become more flexible, how do we let our associates or employees be more mobile, and what does an environment like that look like?”

It’s interesting that within each company, those usually look a little bit different. Some companies will take that mobility strategy a little bit further than others. For some it’s more about hoteling and having flexible space for their employees to work in, where for others it’s more of a permanent environment in the way they can work on a day-to-day basis. How that continues to advance within office environments is really going to dictate what people look for so far as space. How much space they actually need is going to change the amount of space that they occupy, and then it’s also going to have a huge impact on technology and how we … use the technology on a day-to-day basis.

Ben Bruns: One thing that we’ve observed is that it doesn’t matter how much you spend on your new space, you want to make sure that it’s going to fit the culture of your organization. Companies are having success from a lot of different price points achieving that, which is fun to be part of. … I think that’s one of the cool things about the time we’re in right now, you know? All these different solutions. The fact that there are three generations in the workforce is forcing everybody to think more about how we make this as flexible as it possibly can be?

Hermann: You hear the term “future proofing.” The term is used a lot to talk about how we can build a space today that can take us into the future and not have to be either redesigning it, rebuilding it, every five years, because the technology trends and changes are happening year to year to year, but your work environments within a building may be on a 20-year life cycle. So how can you build to try and help future-proof those spaces against having to change? There are some good strategies out there to do that, but it just boils down to a lot of flexibility.

Bruns: I think that trend goes back to your question about what can bring a warehouse space into an office space. We’ve taken a lot of the sub-costs associated with fixing construction and curbed it down some, right? You’re into a very flexible space that could be reconfigured over time. If you can make that space cool, and it fits the culture, go for it, right? Because it will have that flexibility in the future, in comparison to something that has a certain floor-to-floor height, or a raised-floor office, which was a huge trend for a period of time.

Do you guys see companies that are maybe starting that process that come in with some misconceptions, or things that you guys have to regularly set straight at the beginning of that process?

Hermann: There are a few. Usually it’s more just questions in general than it is an educational process. They know they need to change, they want to change, they may even be educated and have seen a lot of other companies who know what they’re doing, but how do they get there? And how do they get to what’s right for them as a company, and then how do they bring their employees along for that ride? And then the other one is privacy, because with the increase of collaboration and flexibility comes this greater need for privacy. How do you balance those things?

Johansen: I had an interesting experience in this topic recently where we were taking (clients) around to different buildings, and they clearly understood how you could take the space, the interior space itself, and turn it into a virtual office playground. But what about the bones of the building? Was there too much granite? Were there too many other people in the building that wore ties? And some of those little nuances pushed them away from some really great options.

Wright: You know the Hy-Vee corporate campus is very suit-and-tie-oriented. They’ve looked at their situation and said, “Well, I’m not necessarily going to change our entire culture, but I can create a satellite office, I can create a second location where I can, in turn, create that environment that’s going to be attractive.” It’s not just companies that have 85,000 employees, like a Hy-Vee does. I mean we’re seeing this on an everyday basis. A company looking for 2,000 square feet that says, “OK, how do I get cool? I see what everyone else is doing; how do I get cool?” We see that day in, day out.

Does the furniture play a bigger role than in the past?

Hermann: Absolutely, and the interesting part of that is that the furniture companies, or the big furniture companies, are starting to actually provide more services because they understand the role that they’re playing in the process, and have in the last decade probably led the way in the research around the workplace.

Wright: I see more and more companies, when they’re looking for office space, they want to see some examples of what another company did so they can grab onto that. I never used to see that 10 years ago, and now there are two tours. There’s the tour to look through your office space, and there’s the tour to look … at examples.

Hermann: And I think that speaks a lot to the rate of change. I believe companies want to see something that, while it’s changing rapidly, is a bit proven, to know that it works, to be able to talk to someone who has maybe made the transition and understand what challenges they faced, what worked, what didn’t work, what would they change, even if they’re only a year into it.

Did Principal Financial Group Inc. get the ball rolling on all of this with its campus rehab project?

Hermann: I think there was a slower start. There were other companies like John Deere and some of these others companies that were starting to look into these things a decade ago. Certainly Principal’s work has taken all of that and just pushed it farther forward faster.

Johansen: More and more companies are competing for talent, so they’re using their space as a way to attract and retain employees.

Bruns: How cool is it that, in spite of this competition for talent, companies are open to bringing others through their space and sharing their ideas and how they got to where they got to from a decision-making perspective, so the next company can inform their decision that much better on that space. It’s unique, I think.

Do you have a sense of whether it’s helping to recruit people from outside of the area?

Johansen: Well, I’ll give a quick little example of that. So we have a tenant ... Regency West Office Park, ITA, hopefully you’ve been through their space, it’s beautiful. But they are very open door, they welcome different organizations, different companies, so they do mini-tours, and I can’t tell you how many people have come up to me after the tour and said, “Are they hiring?” So that might just be a creative HR tactic.

How do you explain R&R just sort of out of the blue deciding to build 180,000 square feet of speculative office space?

Wright: A lot of developers have just looked at this market, and they haven’t taken those huge plunges, and that’s my concern on the multifamily segment of our marketplace right now. I mean, there’s apartments everywhere. And we’ve never done that in the office market.

Jackie, can you you talk a little bit about Westfield?

Johansen: Our history is to develop an office park so the entire office park can can be anywhere from 12 to 27 buildings, and they share a fitness center, and they share a very large training center, and some of those kinds of things. But again, we listened and people said, “We don’t want to leave the building to work out. We don’t want to leave the building to go grab a cup of coffee.” So we’re trying to accommodate everything that we can into one building, that also still sits in the park where there’s already large training facilities and conference facilities and fiber rings and those kinds of things. So we’re getting a lot of interest, a lot of questions. You add the construction costs and the amenities, you know the upgraded amenities, and that pushes your rent up. Companies are more open to that right now, because it helps to attract people and keep people.

Bruns: And to build off that, on the cost side, one of the areas that’s seen the most escalation in the last year and a half to two years is interiors. The part that was sort of lost in the shuffle was the fact that you have to have enough people to put in place. There have been significant upticks in that particular part of what we do, and I think that’s one of the reasons why you’re starting to see tenant improvement costs, as you look at rents, creep up to the point where it’s a tipping point.

Wright: It used to be that a 10-year lease was rare. What I’ve seen, especially in this new construction ... you’re seeing longer lease terms. Tenants are willing to commit. If they get the right space, they’re willing to commit longer.

Johansen: The walkability is so important in the properties that are in center and western Des Moines. We talk often with clients about, out west you have the opportunity to jump in your car and go to any restaurant you want, or to go run errands. Now, is that the same as walking across the skywalk, walking to go to a boutiquey restaurant that’s new to the area? It’s not the same. There’s pros and cons that are different for the downtown and out west. But in my experience, that rent gap is closing. So it used to be that there was really a differential, but especially if you factor in parking costs, that differential is really evening out.

Wright: In the brokerage role, if I had a suburban building, I would tell you, “Well, this is a great place, because it’s close to where you live,” Well, now so many of those people are living downtown, you can’t use that (pitch) as much anymore.

To go back to the Westfield building, what kind of interest are you seeing from tenants, and ... is it from folks who are moving, local companies who want to expand and move, or is it from out of town?

Johansen: It’s a little bit of both, so ... there’s always the conversation for those tenants that are already in Des Moines, especially if they’re downtown, “Is it worth my walk, is it worth my while to move from downtown out west for a building like this?” You know basically it feels like a corporate campus, but it’s a multitenant building. So we are getting a lot of interest from businesses that are downtown, but we’re also getting other areas of interest from Omaha, from different parts of the nation. I would say our first phone calls have been local companies.

There was a lot of vigor in the office market last year. Has that waned at all?

Wright: I don’t think it has, as of this morning. In my opinion, there’s more. ... You know you can define a large prospect as 25, let’s say 20 to 25 thousand feet or larger; there’s more of those going around right now looking at new opportunities, and some of them are not going to be in 2017, some of them may be 2018 or 2019, 2020.

How much of a role do increases in construction and labor costs factor into the decision making?

Bruns: The biggest challenge we have is keeping to a customer’s budget. So you understand the culture, you understand the why that goes behind it. They figure out where to go, what they want it to look and feel like, and then how to hit that price point that makes everything work for them. And I think there’s some opportunities right now to leverage a little bit of a — it’s not a soft market, but a little bit of a slowdown. I think the design community saw it in the middle of last year; there was a period where there wasn’t as much stuff going on, and that typically affects us about six months later.

What are some trends you have seen coming from the coasts that maybe we’ll start seeing here? 

Johansen: I’ll jump in. I mentioned earlier about what happened in these gateway cities, and I really do think that we’ll feel the impact of that. Sometimes when we watch what’s going on with investments in sales and leasing, and they’re having such rent growth and such a sharp decline in their absorption rates, and I really do feel like we’ll get more and more of that out-of-town company that’s looking to lease space, because we’re so much more affordable here.

I’ve also spent quite a bit of my time looking for investors for R&R properties here in Des Moines and Omaha, and getting the investor to be open to the Midwest is where we start. Getting them physically here in Des Moines just turns the switch.

Wright: A trend that is somewhat new to our office marketplace would be annual escalations in rents. For the first 10, 15 years I was in the business, we would typically see what I call a flat-line structure. You sign a lease, the rent is flat for five years. Perhaps there’s a 25 cent or a 50 cent bump in year three. Well, now we’re starting to see annual escalators, and first it was 1 percent and now it’s more common to see 2 percent escalators. It really lends to the rise in the value of real estate. With the real estate prices rising, and seeing that kind of annual escalator, foreign or coastal type real estate investors are taking a hard look at Des Moines.

Do you think the live, work, play sort of trend that’s really taken off in Washington, D.C., and you see it in Seattle and you see it in Austin, you see it in some of these emerging cities, is the trend going to reach here?

Wright: The density of our market is such that I think if it works, it’s going to be in limited cases. We have ample land, and there’s land supply for many decades to come here in the Des Moines metro. So I think it’s going to have limited success. In the downtown and East Village, we’ve built that sense of community and those amenities and those cultural attractions, and now with all of this housing downtown, I think that kind of replaces the single project that’s a live, work, play project. I don’t see those types of projects having a lasting success, because we’re just not dense enough of a market.

Bruns: I think employers are increasingly thinking about how to create an immersive experience. There are lots of opportunities to make that happen.

Conetzkey: We haven’t had a lot of those major businesses moving to Des Moines yet. I wonder if the labor force is one of the main hurdles still?

Wright: Certainly when major corporations are looking at “Where am I going to open a new office?” they’re spending a lot of time with the municipal economic development departments, and there’s a lot of time that’s going to be spent on what the job force is.

Johansen: And one of the large companies in town was looking to do a new corporate campus in, what, about the last year or two, ended up taking it to Colorado and not expanding here because of labor force. So it is making an impact.

Conetzkey: We talked about construction costs. Is that something you are thinking we need to expect to increase over time? 

Bruns: Our market is projected to actually retract a little bit from a volume perspective in the next couple of years, so there will be a little bit of sanity that comes back to the marketplace. To be able to take a breath is probably an OK thing too. 

Hermann: For any of the companies out there that are thinking about or starting to make a change, or move, to take a moment, pause, take a breath, and think about what’s really important to them and plan that process, not just from the real estate side but also from the design and construction side.

Johansen: The one thing that we can be absolutely sure of is the economy ebbs and flows. So around the corner, that might be three years, that might be five years from now, we will be in a different situation than we are now. I think working and collaborating with one another and finding creative projects to ride through those down times with grace is something that will be needed in the future.

Wright: There’s a lot of smart, intelligent thinking going on, and for someone that’s involved in sales, that’s a true benefit.

 


 

KEY POINTS

Furniture a big part of the equation
Furniture companies are playing a big role in office design, even moving beyond desks and chairs to designing walls and partitions. In many cases, their services can trump those of the construction companies that make tenant improvements and the architects who design the spaces and play a major part in bringing the “cool” factor to the contemporary office.

Window shopping
Clients are asking more and more to see the space they intend to occupy as well as offices that others have improved, just to get some idea of the changes that can be made in an effort to appeal to different generations of an existing workforce as well as to provide an enhancement to prospective employees.

Rent escalation
Property values are getting a boost from annual escalators in lease agreements. Those escalators, of between 1 and 2 percent, were rarely a part of agreements that were signed 10 years ago, but they have been common in larger markets. With rents increasing on an annual basis, the value of a property increases and, as a result, draws the attention of outside investors.

Little point in an office makeover if you can’t fill it with people
The driving force behind nearly every decision to remodel existing space, move to new space or even to expand operations in Greater Des Moines comes down to the availability of workers. At least one company decided to expand in Colorado rather than in Greater Des Moines for the simple reason that it couldn’t find enough workers locally.

Greater Des Moines sells itself
If brokers are just talking up Greater Des Moines to a potential new office user, chances are their words fall on deaf ears. Get those clients to visit the metro, and, faster than you can snap a pecnil, they are sold on the area. Greater Des Moines is a sight to behold, provided the viewing is in person.