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Talent Trumps Cheap Rent as Office Tenants Deploy 'Smarter' Workplaces to Recruit, Retain Top Employees

More Corporate Occupiers Eschew Cost Savings in Favor of Swank Co-Working, Satellite Offices in Competition to Attract Workers
March 17, 2016
Verizon and Grind this week opened their new coworking space inside Verizon's landmark former  headquarters building  in Manhattan.
Verizon and Grind this week opened their new coworking space inside Verizon's landmark former headquarters building in Manhattan.
Chelmsford, MA-based Kronos Inc. decided to pull out all the stops when it planned to relocate and expand its headquarters into 400,000 square feet of leased space in the neighboring Boston suburb of Lowell, adding a fitness center, daycare center, game room, restaurant and bar, and other millennial-favored perks as part of a $40 million renovation.

Kronos, one of the largest tech employers in Massachusetts, develops cloud-based payroll, scheduling and other workforce management solutions and competes fiercely for engineering and software development talent across the U.S. The company made recruiting and retaining that talent a top priority in its plans to modernize an office tower at Cross Point office park in Lowell, where it will occupy the entire building by mid-2017.

Following the trend of many newer workplaces, the renovated tower will sport an open floor plan for extensive day-lighting and cross-team collaboration. Kronos also studied employee commuting patterns before selecting Lowell, CEO Aron Ain noted.

The idea, Ain said, was to pack the new space full of amenities to provide 'Kronites,' as the company calls their employees, with an "ultra-modern, high-tech eco-friendly space that will help us attract and retain top talent, while accommodating future growth," said Ain.

Kronos is hardly alone in its effort to opt for high-end amenities and convenient location over cheaper rent as part of a larger strategy for attracting and retaining top talent. In a recent survey of 229 corporate real estate executives by CBRE Group, Inc., more than half of respondents cited talent availability over real estate costs as their top consideration in site section and other property decisions.

In fact, real estate costs -- typically the second-highest capital expenditure for companies behind payrolls -- ranked a distant fourth on the list of strategic concerns in the survey, picked by just 31% of respondents.

"The pendulum is swinging away from smaller workstations and lower rents to smarter workplaces and agile leasing structures," said Julie Whelan, co-author of the report and head of occupier research in the Americas. Picking an office location has become much more than just the bricks and mortar, she added.

"Costs are becoming too high for millennial talent to live their chosen urban lifestyle in many top markets; that is pushing companies to open innovative centers in what we call the 'urban b-list' markets such as Phoenix, Salt Lake City, Denver, Nashville and Atlanta," Whelan said. "Even within that second market tier, costs are starting to price out talent. Now we're starting to see some employers looking in markets like Pittsburgh, Huntsville, AL, New Orleans and Provo, UT."

Hoping to attract younger workers, numerous large companies have moved back from the suburbs of Chicago to downtown, including United Airlines into Willis Tower and Kraft Heinz into Aon Center. Walgreens, Sara Lee and McDonald's digital operation have all moved downtown.

"Facility costs are much higher downtown, but for these companies it's the price you have to pay in order to be near an urban community or ecosystem," said Andrew Davidson, executive vice president and managing director of corporate services for Chicago-based brokerage MB Real Estate. "If it's not the entire company, it's certainly their web design and marketing functions, the jobs aimed at a younger, more tech-savvy workforce."

Shared Economy Spreads to Office Sector

Led by coworking industry leader WeWork Cos., which aspires to 1,000 global locations and recently reached an estimated $16 billion in valuation, office sharing has become another popular option for larger companies, joining traditional shared-office stalwarts such as new start-ups and temporary quarters for traveling workers.

Large corporations such as Verizon are leasing satellite office space or exploring the rapidly growing trend of shared office and coworking space offered by companies such as WeWork and Grind to provide employee flexibility and convenience, Whelan said.

Three of the largest office leases signed in Chicago in 2015 were by WeWork, which along with MakeOffices, a shared-office company new to Chicago, have inked three of the year's largest leases so far this year.

In Lower Manhattan, Verizon has partnered with Grind by sponsoring a mentorship program in a coworking center focused on growing startup companies.

The partnership this week opened a new 10,000-square-foot coworking space in Verizon's landmark former headquarters building at 140 West St. across from One World Trade Center.
The creative space, designed by Gensler, provides open workstations, conference rooms and meeting space to accommodate up to 120 people a day.

Workers can brew free "direct trade" Intelligentsia-branded coffee (complete with pour-over and Chemex brewing instructions), and access the "booze cart," which arrives every Friday at 5 pm.

The Grind-Verizon suites are intended to serve as collaboration spaces for potential Verizon fulltime employees, Whelan said.

"The ideas they’re coming up with are helping Verizon stay cutting edge," Whelan said. "It's example of a company rooted in traditional real estate that's trying to be innovative and flexible in attracting talent, and using lower costs to get there."

"This goes beyond simply using the space as an annex office, or to reach new markets. That was my impression of shared space until I saw what Verizon was doing."

Quest for Hip Office Space Spreads to Suburbs

Contrary to prevailing wisdom, millennials aren't opposed to living outside the CBD or in suburban locals, especially as living costs continue to rise in the most popular urban areas.

Office-supporting employment is now projected to grow fastest in second-tier markets like Austin and Salt Lake City, locations that can mimic the collaborative offices and fancy amenities of San Francisco, Silicon Valley and Boston. For instance, Kronos Inc.'s new headquarters in suburban Lowell is a 35-minute drive from downtown Boston on a good traffic day.

"These high-cost clusters in venture tech markets in San Francisco aren’t necessarily the end-all, be-alls," Whelan said. "Suburban living is not dead."

Whelan and study co-author Matthew Toner emphasized that the survey results don't indicate that property costs are not necessarily taking a back seat to talent, but rather that recruiting and retaining talent is being given equal consideration. While square-foot-per-employee footprints are gradually rising again since the long recovery of the office market following the recession, 85% of CBRE's survey respondents cited space efficiency and restructuring as a top strategy for reducing occupancy costs.

Advisory services on workplace strategy and trends have become critical skillsets for CRE service providers as "people-centric" factors have eclipsed per-square-foot occupancy costs as priorities for company real estate professionals, Whelan said.

"Occupiers may not be taking the huge sprawling blocks they did previously, but they're planning smaller spaces much more efficiently," Whelan said. "For some companies, the question is, which secondary or tertiary markets where we could relocate that would give us the same dynamic?"

More companies are also willing to split their operations with location decisions driven more by where their talent wants to live and work, added Toner. "For instance, upper-level management, higher-end tech or design talent may want to live in a San Francisco or Soho or Boulder, CO," while the sales group or back-office functions are located in another market, Toner said.

Apple, always a trail-blazer, is preparing to occupy 76,000 square feet it leased in San Francisco's South of Market district, establishing a satellite office for employees who live in the city.
Editor's note:This story updated to correct the spelling of the last name of Julie Whelan, and to clarify that a WeWork co-founder's expansion goal is 1,000 locations over the next few years.

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