Changing face of office space

At our recent VIP North America conference, we hosted a workshop called Global Demographics and the Rising Middle Class. It covered a number of important topics, but I would like to focus on one group and one topic, by one speaker: M. Leanne Lachman, president of Lachman Associates, and her comments about Generation Y and office space in the United States.

Gen Y is the one to watch. The baby boomers (ages 48 to 66) total 76.2 million people, which is 24.6 percent of the U.S. population. Gen Y (ages 17 to 34) is 25 percent of the population or 77.4 million people. This large group is going to be influencing all commercial real estate sectors for many years.

What was particularly interesting is how different Gen Y’s office preferences are from boomers.

Here are a few key stats that Lachman highlighted for us:

Gen Y Office Users

  • Less than 100 square feet per person (traditional average is 200 square feet)
  • No private offices
  • Counters replace desks
  • Creative interaction/fun spaces
  • Work from home/car/Starbucks
  • Green is preferable
  • Incubator/temporary spaces in demand

What are some of the real world implications of her insights? Everyone knows it’s happening now in San Francisco Bay Area where tech firms have made their office space more Gen Y–friendly.

However, even law firms, which are often considered a very conservative industry, are getting into the act. In July 2012, The Wall Street Journal ran a story on the topic.

From the WSJ article, a few interesting tidbits:

While the group areas expand, individual lawyer offices have shrunk by 20 percent to 25 percent, said Matthew Barlow, executive vice president and member of the law firm practice group at the brokerage firm Studley Inc.

Or this one:

Associates now get about 150 square feet, and at many New York firms, they share it with an officemate.

One more:

At Holland & Knight LLP’s new office in Washington, the firm has banished corner offices entirely, replacing them with lounge-like meeting areas.

An interesting question to consider: Is this just a current fad or a long-term structural shift in office use and style?

John Hunt is conference program manager at Institutional Real Estate, Inc.

Whacks on the side of the head

Sometimes it’s helpful to get out of our own head and peer into someone else’s. That’s what I’ve been doing lately in reading two of Bill Bryson’s books: The Life and Times of the Thunderbolt Kid and A Short History of Nearly Everything.

The first — The Life and Times of the Thunderbolt Kid — is a rambling collection of Bryson’s memories from growing up in Des Moines, Iowa, during the 1950s and 1960s. If you’re like me and you, too, grew up in the 1950s, you’ll recognize just about everything the story recounts. (It would seem we ALL grew up in Des Moines. Or was it just that growing up anywhere in the country during this time was defined by almost completely the same set of experiences?) At any rate, this is a fun read that will bring back a virtual flood of memories to those of us who shared those experiences. And for those of you who didn’t grow up in the 1950s and are wondering what it was really like, read the book. Because it will definitely tell you what growing up in the 1950s was really like for so many of us.

The second book — A Short History of Nearly Everything — is Bryson’s serious attempt at helping all of us laymen take a closer look at the evolution of scientific discovery from the beginning of scientific investigation through the present. And I mean just about every scientific line of investigation, from geology to cosmology to chemistry to physics to botany to natural history and on and on. Bryson can turn a phrase and make the incomprehensible seem well within reach of even the most insulated of us from the realms of the scientific. (And, let’s face it, most of us who choose to focus on the real estate investment business are just about as far away from the realms of the scientific as anyone could possibly be.)

Why bother? Sometimes, when I’m flying into a large metropolitan area like Los Angeles or New York City, I’ll scan out the window and look at the millions of residential rooftops spanning out to the horizons. At times like this, it often occurs to me that I’m looking at the homes of millions of people who don’t know about and don’t care about the things I do every day — and probably never will.

As Bryson states in several parts of the narrative, the Universe is an incredibly large place. So is the world we live in, despite the fact that it has been shrinking geometrically over the decades due to continued advances in transportation and engineering technologies.

In today’s highly specialized business environment, it’s easy to get myopic and find your thinking constrained by the “body of knowledge” that makes up our tiny little slice of the world. Stepping outside the boundaries of what’s normal and usual in our lives can provide us with the necessary “whacks on the side of the head” to get us thinking differently about the larger world in which we operate. And, as Margaret Heffernan (author of Willful Blindness and the focus of my previous blog post) would note, that’s an incredibly important thing to do if we want to avoid falling into the traps the blind spots in our brains have laid for us.

Next on my reading list: A Walk in the Woods, by — who else — Bill Bryson.

Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.

Cubicle lives

Have you ever wondered who invented the cubicle, if for no other reason than to hunt down the schmuck and have him tried for crimes against humanity? Millions of working people are incarcerated in minimum security cubicle farms.

Don’t even think about rounding up a posse of vigilantes, though. Robert Propst, the man credited with inventing the cubicle while working at office furniture manufacturer Herman Miller, exited the mortal stage back in 2000. Before he did, though, Propst decried his role in its invention, calling cubicle systems “monolithic insanity.”

The evolution of the work cubicle was especially lamentable for a man whose intent was to break down the office hierarchy with a workstation whose original design was a far cry from the version that eventually swept the nation.

Propst’s first iteration of the workstation was called the Action Office, and there were no walls, two desks, two different types of chairs and a filing cabinet. The desks were adjustable so they could be turned into standing desks. The idea was to afford the worker freedom of movement and the flexibility to adopt the work position best suited for the task.

But it belly flopped during its 1964 introduction. The first Action Office was too large. Businesses couldn’t figure out how to fit the requisite number of units into their existing square footage, and they didn’t have any interest in expanding their office space.

Back to the drawing board went Propst and his team to redesign the Action Office based on customer feedback. Out went one of the desks and one of the chairs, and up went the walls so people could be packed like canned sardines without disturbing one another. That’s when the Action Office started looking like a cubicle, though it was officially called Action Office II. One of the project’s co-designers reportedly quit because he was so appalled by the factory-farm direction Action Office II had taken.

When the new iteration of the Action Office was brought to market in 1968 it became an instant smash hit. Lots of people in little spaces created economies of scale. Per-person office space has been shrinking ever since. CoreNet Global, a consortium of office users and workplace professionals, forecasts that per-worker space will decline from 225 square feet in 2010 to 151 square feet in 2017.

Meanwhile, we listen to managers incessantly exhorting us to “think outside of the box,” even as we sit in one.

Mike Consol is editor of The Institutional Real Estate Letter – Americas.

Half full or half empty?

“Is the glass half full or half empty?” It’s a common question asked to determine whether someone is an optimist or a pessimist. Using observation and data, an informed basic nature can feed into collective general sentiment, and investments are often made in response to waves of such sentiment.

And, since the global financial crisis struck in 2008, it feels good to start catching waves of positive property market opinion with a report titled “Optimism returns to the global real estate market,” Jones Lang LaSalle’s Global Market Perspective first quarter 2013 report, which begins by stating:

The global real estate market steps into 2013 with a more confident stride. An exceptional rally in the final quarter of 2012 has served to demonstrate the strength of investors’ appetite for commercial property.

But after the past several years of stop-and-start recovery, any optimistic investment sentiment is a reminder of just how much property markets move in cycles, with some cycles cutting more deeply than others.

This lets us know that the outlook allowing us to view the glass as half full or half empty should always be tempered.

Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Democracy at work

The European Union (EU) recently held a summit to reach agreement on the next seven-year budget. On the one side were the real-terms cutters and the nil-growthers; on the other, the pro-spending, pro-growth solidarity growthers. They came to a messy compromise in the end, as they always do, but were there the first signs of a realization among the EU’s leaders that this keep-them-up-till-the-early-hours-until-they-agree way of coming to unsatisfactory multilateral agreements cannot continue? That this way of conducting business is almost as bad as the make-them-vote-until-they-give-the-right-answer way of seeking democratic approval from electorates for EU treaty changes?

And then there’s the European Parliament. MEPs are not happy with the outcome of the EU budget negotiations — they want more spending, not less — and are threatening to hold a secret ballot as a show of force. A secret ballot is normally taken as a sign of a healthy democracy, but in this case may be used to “hide” votes from national governments as a means of helping to circumvent the budget decision made by the EU’s national government members. Who are the ones paying the bills. What price democracy here? Who is working in whose interests in this EU?

David Cameron, the British prime minister, has doubtless made few friends with his seemingly incessant anti-EU rhetoric. His much-delayed speech on Europe and the EU contained not just the expected threats of treaty and terms renegotiations and a yes/no, in/out referendum in the United Kingdom on EU membership but also a reasoned argument on why the EU needs to change the way it does things, and how.

Intriguingly, Cameron’s speech was not greeted with the customary disdain or anger by fellow Europeans — with the predictable exception of MEPs — but with consideration, indicating that at least some of his arguments may be finding some resonance in at least some EU capital cities. And the agreement reached on the EU budget provided further evidence, perhaps, of a move toward a more rational approach to Europe’s financial affairs.

The United Kingdom’s EU referendum will only happen if the Conservative Party wins the next general election in May 2015, which on present performance is a big ask. Another big ask that could also affect the referendum is the result of the yes/no, in/out independence referendum in Scotland, due to take place in autumn 2014. Referenda are not common in the United Kingdom — you wait for ages, and then two come along at once.

If the voters in Scotland opt for independence, the plan is that the negotiations on secession of the country from the United Kingdom would be concluded by March 2016 — making it highly unlikely that Scotland could participate in the United Kingdom’s EU referendum in 2017. Could that fascinating psephological mix of event and happenstance skew the result of either referendum one way or the other? Who knows?

How ironic it would be if the generally pro-EU Scots (because Scotland has necessarily benefited from being a net long-term recipient of the EU’s solidarity and regional support funds, just as it has received financial support from the UK government for time immemorial, as it is deemed to be a “poor” country that requires structural assistance) voted for independence and helped by omission to bring about a no/out answer in the rump United Kingdom’s EU referendum.

And a newly independent Scotland would probably have to apply afresh for membership of international bodies like the EU, the United Nations, the IMF and the World Bank and renegotiate thousands of international treaties and agreements, with all the risks that that entails. Spain, with its Catalonia independence pressures, would be keen not to set a precedent. A fascinating period of European/British/English/Scottish history-in-the-making lies ahead.

What does all this mean for European real estate markets? It means uncertainty, at least in the short and medium term until we have a resolution, and markets don’t like uncertainty.

The EU hates it when the least favorite and apparently least committed member state — the United Kingdom — makes all the running on transformational change but, hey, Cameron will say, someone’s got to do it.

Richard Fleming is editor of The Institutional Real Estate Letter – Europe.

Enhancing the brand

At our annual Visions, Insights & Perspectives (VIP) – North America conference in Laguna Niguel, Calif., I had the opportunity to sit in on the Environmental, Sustainability and Governance (ESG) Practices panel. The panel members covered the usual statistics and web analysis when it comes to sustainability, environmental topics such as energy, renewables, etc., as well as governance statistics.

The thing that most stuck out and had the most conversation during the panel was: Why should we build ESG?

This was very important to the managers on the panel because they look to see if they will run into ESG issues in an investment as they make sure the investments are done in a sustainable way and make sure the cultures are compatible.

Apparently, the United States is a latecomer to the ESG game, but just recently it has been shown that American workers are willing to take a pay cut in order to work for/with a company that have the same environmental views as they do.

So how have people integrated their ESG policy?

Companies have started using sustainability reports such as the Global Real Estate Sustainability Benchmark (GRESB) and becoming more interested in having/investing in LEED certified buildings and workplaces.

The best way to describe the future of ESG was stated by a panel member: “Sustainability isn’t about diminishing the brand; sustainability is about enhancing the brand.”

For an example of a sustainability report, view Prudential Real Estate Investors’ 2011 Sustainability Report.

Denise DeChaine is special projects editor at Institutional Real Estate, Inc.

Capital flows into clean tech

According to the Sustainable Energy in America 2013 Factbook, a report by Bloomberg New Energy Finance and the Business Council for Sustainable Energy, total new investment in U.S. clean energy is estimated at $44.2 billion in 2012. This amount, which includes investments in most renewable and energy efficiency technologies but excludes natural gas, is well above the $10.4 billion figure from 2004; however, it is a 32 percent decline from 2011, largely because of uncertainty about the fate of certain federal incentives for renewables. The chart below breaks down the different types of investment — venture capital, private equity, asset finance — flowing into the U.S. clean energy sector.

The United States is the dominant leader in venture capital and private equity for clean energy. Since 2004, U.S. venture capital/private equity firms have invested $36 billion in clean energy.

In contrast, the public markets have suffered in recent years. Poor clean energy stock performance, chronic oversupply among upstream manufacturers and uncertainty surrounding future incentives have constrained public market appetite. Year-on-year growth has not been positive since 2006–2007, and total public market investment amounted to only $1.6 billion in 2012, far from the record-high $7 billion in 2007.

Bloomberg New Energy Finance maintains the NYSE BNEF Americas Index, an index of clean energy stocks for companies in the Americas. The index has 80 percent exposure to U.S. companies with the remaining 20 percent in other countries, including 9 percent in Brazil. In the period leading up to the market crash of 2008, the index outperformed the S&P 500 Index but returned less than indices that track clean energy stocks in Europe, Middle East and Africa, and in Asia and Oceania. Since the trough bottomed out in March 2009, the Americas index has outperformed the other two regions on a normalized basis, but all three have underperformed broader market indexes.

In 2011, asset financing — the funding of projects and plants — experienced a spike in 2011 as developers closed financing prior to the expiration of key incentives. A portion of the record-high deal volume also was supported by the Department of Energy’s $16.1 billion loan guarantee program, which ended in September 2011.

The focus of asset financing has shifted several times since 2004. In the period of 2004 to 2007, biofuels received 40 percent of all asset finance as developers constructed ethanol plants — motivated both by a federal mandate for biofuels blending and by the fact that ethanol could serve as a substitute for an oxygenate that was banned in 2005. Wind gained prominence in 2008 to 2010 as it was the cheapest form of generation for utilities fulfilling compliance with renewable electricity mandates, and plunging costs for modules helped turn the focus to solar in 2011 to 2012.

Drew Campbell is senior editor of Institutional Investing in Infrastructure.

What is the future of the office?

Space trends in the office market suggest that traditional office space use is on the decline. Square feet per employee has been decreasing for several years. According to a NAIOP report, the average space per employee was 225 square feet in 2010 and fell to 176 square feet in 2012 — and it is projected to reach 151 square feet per employee in 2017.

So how is the commercial property market responding to these changes?

Well, some start-ups are embracing the potential for technology to take advantage of the new office reality. Liquidspace is a start-up firm that is like Airbnb for office space. The company’s mobile app provides an inventory of available office space — desks, conference rooms, etc. — that can be rented by the hour or by the day. As noted in Wired:

Liquidspace aspires to more than app-based classifieds. The logic behind the company looks a lot like the cloud-based software business model, except that instead of selling unused capacity on servers, LiquidSpace is trying to help enterprise-level companies leverage unused office space, both their own and everyone else’s. The more they can make use of unused space “out there,” the less they have to spend leasing and maintaining their own. Think of it as “office space as a service.”

Technology is changing the way we work and live and shop. Will flexible office space remain a fringe practice, or will it take hold with the corporate mainstream? Just as Airbnb hasn’t toppled the traditional hotel, Liquidspace is unlikely to replace the traditional office. While there are benefits to the “office anywhere” rent-by-the-hour desk space — especially for business travelers — I expect most companies will prefer to house their employees together and will continue to lease the space to do so.

Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

Investors want more core

Investors know there’s no such thing as a sure thing, and that past performance may not be indicative of future results … but in today’s low-yield environment, many investors’ sights are locked in on core assets. Long-term investors such as pension funds, sovereign wealth funds and REITs are attracted by the predictable long-term, and usually inflation-linked, income streams offered by these high-quality properties. In 2012, core properties produced a net return of 9.8 percent, according to the NCREIF Open-end Diversified Core Index. Not bad when the 10-year Treasury rate is hovering around 2 percent.

Look for the competition for core assets to heat up even more in the coming months. According to Tax-Exempt Real Estate Investment 2013, the 17th annual survey of U.S. plan sponsors conducted jointly by Institutional Real Estate, Inc. and Kingsley Associates, investors plan to significantly increase their targets to core strategies. Investors who set targets based on real estate strategy categories reported an average core/core-plus allocation of 53.9 percent for 2013, up from the current actual allocation of 48.1 percent, resulting in a 580 basis point gap.

In addition, the survey revealed that investors plan to commit $41 billion of new capital to real estate this year, with 27.3 percent ($11.2 billion) earmarked for core/core-plus properties.

The bottom line? In primary markets, investors can expect intense competition, higher prices and shrinking yields. Some investors, dissatisfied with these yields, will move to next-tier markets, while some will look to capitalize on the “core craze” by investing in value-added build-to-core strategies. And others, those with a contrarian bent, will note that when the herd starts to move in one direction, it’s time to take a different path.

Look for more information and analysis from the 2013 survey results in the March and April issues of The Institutional Real Estate Letter – Americas. A published copy of the complete survey results will be available in April.

Larry Gray is editorial director of Institutional Real Estate, Inc.

Planning to invest in Asia?

This past week, we had our annual Visions, Insights & Perspectives (VIP) – North America conference in Laguna Niguel, Calif. As in the past, the conference was well attended and we had the pleasure of interacting with leading institutional investors and top-notch asset managers. As in 2012, a portion of the conference was dedicated to Asia. I had the opportunity to interview, on stage, an asset manager with more than 20 years’ experience acquiring and managing properties in Asian markets for leading international and U.S. investors.

Here are some of the highlights of our discussion:

  • In China — the second largest economy and a manufacturing powerhouse for the rest of the world — the new leadership appears committed to economic expansion and urgently needed reforms.
  • In spite of favorable demographics, India is not as vibrant as its neighbor to the northeast. Operational inefficiency, corruption and nepotism in Asia’s largest democracy are factors that have plagued foreign investors.
  • Improvements in transparency and availability of data are not necessarily enough to put Asian markets on par with those in Europe and the United States.

Our conclusion was that despite difficulties and uncertainties, Asian markets deserve a place in an institutional portfolio, mainly due to high growth and the diversification effect they offer international investors.

Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.