From SoCal Real Estate’s July 2018 issue
Companies are no longer willing to make do.
By Carrie Rossenfeld
As the office market continues to embrace creative space, corporate tenants are more focused on getting the most out of their real estate — and high-priced Southern California is no exception to the rule. While companies in this region are wisely using their corporate addresses to attract and retain talent, they're also looking for the most bang for their buck.
Voit Real Estate Services' SVP and partner Jeff Saywitz, based in the firm's La Jolla, California, office, focuses on tenant representation. Saywitz recently represented CPA firm Redwitz Inc. in negotiating a 10-year lease valued in excess of $10 million for its corporate headquarters and sales office relocation in February from 5520 Trabuco in Irvine Spectrum, Irvine, California, to the entire 17th floor at 3 Park Plaza in Jamboree Center in Irvine. SoCal Real Estate asked Saywitz what corporate tenants are looking for in this market.
"Tenants today are looking for spaces that mirror their corporate culture," he says. "Companies aren't looking to fit into cookie-cutter spaces or make do with the typical exterior office/bullpen interior model."
Perhaps the biggest challenge that comes along with meeting these needs is in getting the spaces built out with improvements performed and paid for by landlords, says Saywitz. While many landlords are trying to anticipate ever-changing design needs and account for it in their planning and budgets, increases in construction costs have made it very difficult to accommodate tenant needs.
"In the past, turn-key build-outs were commonplace," he adds. "However, now with an overall decrease in vacancies and tightening of the markets, many landlords are capping their exposure and offering allowances that oftentimes leave tenants subject to covering significant portions of those costs."
Flexibility is another big trend with corporate tenants. With the volatility of the economy and influx of technology-based companies, many corporate tenants are looking for spaces and lease situations that will allow them to be flexible and adjust to changes in their business models. "This can put landlords with larger portfolios and looser corporate structures in a better position by aligning themselves with their tenants' growth patterns," Saywitz explains, adding that technology-based tenants are the ones leading this charge.
In corporate lease negotiations, as always, everyone is concerned with the bottom line and making sure they get the best deal possible without leaving any money on the negotiating table. "To that end, tenants today are very concerned about improvement costs' exposure to overruns," Saywitz says. "We still push for turn-key deals whenever possible and are largely successful in doing so, but even in those scenarios it is important to fully understand all costs associated with build-out and have them all competitively bid, whereas previously it may not have been as critical."
Naturally, inflexibility is a major turnoff to today's corporate tenants, but because of upticks in the market and declining vacancies, many landlords are now in a position to dig in firmer on what they will allow in terms of flexibility, whether in actual lease terms or improvement costs. "Many are now insisting on longer terms in order to amortize those costs over a greater period of time, locking tenants into longer commitments with uncertain market conditions down the road," Saywitz says. "This can also include higher annual escalations, all of which can be deterrent to tenants in the marketplace."
The demand for flexibility from landlords is part of corporations' current workplace strategies, which are shifting to meet the needs of today's hyper-connected and mobile workforce, according to CBRE's 2018 Americas Occupier Services Survey. The survey found that 52 percent of corporate executives anticipate implementing some level of unassigned seating in the workplace within the next three years to promote space efficiency and flexibility. An even greater percentage — 59 percent — say they plan to enhance the employee experience through the introduction of mobile apps that help them to navigate the workplace and foster collaboration.
This shift is happening throughout Southern California, according to Andrew Ewald, first VP of occupier services in San Diego for CBRE. "Most corporate executives are seeking an office environment for their employees that is highly productive and efficient through a flexible workspace design," says Ewald. "Executives are recognizing that their workforce is demanding the ability to work in a variety of ways throughout the day. This trend, coupled with advances in mobile technology, allows employees to engage with clients and colleagues in new ways to increase collaboration and productivity in their business."
Ewald tells SoCal Real Estate that the general consensus is that this free-address environment we're seeing in the workplace is relatively universal with all markets, but some — like San Diego — are still early in the process due to the high number of entrepreneurs and startups in market. These firms are still trying to understand the data and drivers and whether adding free address or flexibility in the workplace makes sense for them, and to what extent. "The curve is that many adopters in all business types and markets will be on board with this over the next two years," Ewald says. "It not slowing down with the balance of the nation."
This trend toward free address, flexibility, and mobile-app usage is being seen across all industry types, Ewald adds. "I can certainly speak from example with CBRE on the real estate front. We're loving our free-address environment. It helps with productivity for our labor and mitigates operating costs."
Some notable companies in San Diego that are embracing free address include public accounting firm Moss Adams, an early adopter of this model throughout its office spaces, whose San Diego office is very similar to CBRE's recently finished space in UTC; biomedical firm Illumina, which has a strong San Diego presence, particularly in Torrey Pines; and Red Door Interactive in Downtown San Diego.
"We're seeing this from digital marketing, life sciences, real estate, and tax/finance companies," Ewald says.
While there is a definite shift to more open corporate environments, there has been some pullback from the idea that all corporations need to be completely open. "The positive thing is that companies are adopting the model that fits their company and culture. For example, Illumina is not 100 percent free address, while CBRE and Moss Adams are. Many firms are taking a division or segment of a division and starting to test it so that they can understand what it means for their business as a whole."
The misnomer, he says, was that companies needed to be completely free address or open environment, but companies are now realizing they need to have a balance. "If you take away from private space, you have to give back tenfold. If you're converting to a benching style, you also need to provide privacy. You need to find that sweet spot. Different cultures and demographics of labor force have different needs. Owners are seeking a specialized place that works for their business."
Ewald has also seen a strong positive migration to urban centers and amenity-rich environments, either inside the four walls of a company's office space, in a community as CBRE did with its move to the UTC mall, or to downtown submarkets. "Business owners are aware of what they need to recruit and retain for talent, and labor is demanding something different. They want to be in a live/work/play environment, do some shopping or grab dinner with some friends after work, so they are seeking inside space, office properties, or markets that are highly amenitized. These are places where employees get more for working for that company."