As we get deeper into the real estate cycle, it seems that every product type is competing in an amenity arms race. Value-add investors remain on the hunt for new and innovative improvements to help their products stand out from the crowd. Office and multifamily buildings now look like resort hotels. Industrial buildings are adding gyms while hotels are adding office space. What is the economic cost to add these amenities and what are tenants willing to pay for in their office environment? Here are a few takeaways for how to determine what office tenants want so you can invest effectively from a panel of experts who spoke at CRE.Converge 2019 in Los Angeles.
Markets Will Dictate the Amenity Landscape
Lauren Gilchrist, senior vice president, research, JLL, directs the firm’s Philadelphia research platform. She shared that what tenants are building into their space, versus what landlords are willing to add to the building as a base package, is impacted by market. This is evident in Philadelphia, which is considered a secondary market versus a gateway market such as San Francisco or New York. With a vacancy of 9 to 11 percent, landlords are looking at ways to monetize the excess space even if they are not directly charging rent, viewing the amenity packages at the base level as attraction tools. One example is a landlord who converted an entire 35,000-square-foot vacant full floor in a downtown Philadelphia office building into a space tenants could use for events and meetings by putting in couches, a conference center, and outdoor spaces as well as wine lockers.
Employees Want Communal Activities
Jason England, director of leasing and marketing for Argent Group, shared that in Salt Lake City the firm staffs their lobbies and lounges with employees who are called “cruise directors.” Their employee base is less interested in what is in their own space but rather looks to what the building offers in terms of communal space and amenities so that they can get out and meet people, and even bring their families into the work environment. For example, in one building Argent has held family-focused events such as an Easter egg hunt, schedules music performances and more so tenants can engage with each other. Argent also hosts a culture committee with tenant representatives so that they can discuss what is important to each tenant and plan activities for the entire building. The bottom line is that the buildings are 100 percent full.
The Increasing Role of Concierge
In Argent’s case, the value of their concierge service to the tenant is so important that when tenants bring on a new employee they are introduced to the on-site concierge with the knowledge that the concierge is there to help them with whatever they need. Matthew Ahrens, executive vice president with Rising Realty Partners, added that they hire a third-party concierge service for two of their downtown buildings. Located on site, this person can provide dinner reservations, tickets for shows and more.
Coworking has Elevated the Work Environment
Gilchrist shared that historically the building was the service. But when you can work from anywhere, where you work becomes increasingly important. People are now coming to the office because the interface and experience is so much better. The panelists agreed that coworking has elevated the user experience around a sense of community. Now an office building needs a personality and human touch, to the point where the formula for success is no longer location but amenities that are relevant and active.
Jeremy Reding, AIA, principal with DLR Group, is a LEED AP and WELL AP. He noted that where LEED is focused on the building, the WELL Building Standard is a way to measure the user experience, incorporating air, light, acoustics and more at the human level. With WELL, tenants and employees are more aware of what is going into the space and WELL allows them a way to measure it.
For example, services are part of WELL. This impacts such things as snack bars and food service. WELL encourages good decisions, so rather than have the candy bars out on the counter, they must be a certain distance away with healthier choices such as vegetables and fruit more readily available. If there are drinks available, the tenant makes sure that the sugary drinks are harder to access or screened from vision, while drinks like water are more visible.
Costs Still Rule
Gilchrist shared results of a recent survey in their Midwest office. For landlords investing an average of $5 million in capital improvements, the survey found a 16 percent increase in occupancy and an 11 percent increase in overall asking rents. However the panelists all agreed that the overall investment needs to be done selectively by location and market.
Argent confirmed that tenants aren’t necessarily willing to pay for what will make a building cool. An owner must be selective and get the right team members involved to get the most bang for their buck.