Developing Office Design for 5 Generations in the Workforce

Currently there are five generations of Americans currently active in the workforce. This impacts commercial real estate in unexpected ways; specifically, office design. It is common for the onus of office design to be on employers, but in recent years, developers have seen their role evolve to include this as well. 

 

Each generation stereotypically has certain design aspects associated with them: cubicles, private offices, open areas with standing desks, and more. The choices that developers make can influence what kinds of design choices employers are capable of making. If developers choose to have more or less open space, or to rely mostly on natural light, that will impact what  options are available for the final office design. How many conference rooms can the company have, can there be a coworking area with desks, loose chairs, and/or couches, is there space to include a ping pong table or a lunch room? Employers cannot make these decisions if developers do not allow for it through their own designs.

The Developers’ Role in Office Design

The-Developers’-Role-in-Office-Design

Benjamin Paltiel writes on this topic for Bisnow and the NAIOP saying:


Tenants themselves are behind today’s most productive and progressive offices…more landlords and developers are taking it upon themselves to collect data to inform and deliver the office spaces their tenants want…In an ideal world, landlords, developers and tenants would share an equal passion and drive for crafting innovative workspaces.

 

This growing trend demonstrates that the role of developers is changing. While employers and tenants are currently taking the helm of designing office spaces, it is clear that the developers themselves are increasingly expected to play a part in this process.

Generational Impact on Office Design

The five generations currently in the workforce were brought up due to their perceived differences when it comes to preferred workspaces. If developers are going to have to consider potential office designs when building commercial workspaces, then will they have to decide on which generation’s style to build around? Is it possible to compromise and combine these styles in some way?

 

Paltiel continues:

 

With a workforce that spans five different generations – traditionalists, baby boomers, Generation X, millennials, and Generation Z – companies today cannot build offices that appeal to only one age group. Instead, they need to consider the spectrum of work styles that their employees of all ages may have and design an office that can keep everyone comfortable and productive.

 

This is certainly easier said than done, but it is very clear: offices cannot be constructed to fit just one group. Office designs must be inclusive for each generation. The challenge comes in determining which aspects of previous and current office designs will the various generations support and be productive in. Unfortunately, there is no easy answer for this. 

Compromising Between Generations

Compromising-Between-Generations

Rivka Altman, a director of portfolio management at Invesco, discusses how prior assumptions about what each generation likes cannot actually be trusted. There are older workers who do not mind open coworking spaces, just as there are millennials who do not mind cubicles or private offices. This mindset is backed up by Shannon Woodcock, a managing director of workplace strategy at Savills. 

 

Woodcock is adamant when she states that:

A lot of the things we say that younger employees want – more light, more access to open space –  I don’t believe for one second that those are specific to younger people…Older employees need them just as badly, but they may not be voicing that need as much.

 

When deciding on the final office designs, employers must know their employees well enough to provide a workspace that all of them would be comfortable in. If developers do not have assistance from a soon-to-be tenant in this respect, then they must do their own research. They must know their target market, and what employees and cultures those companies tend to support.

 

Woodcock believes that developers (and employers) shouldn’t be fooled by age. While the conversation is about generations, age does not have as much of an impact on design preferences as people may think. Rather than age, the focus should be on “work style”. Keeping up with workplace trends will inform developers on what work styles will resonate the best with the types of companies that are typically interested in their commercial properties.

Going Forward

Predicting the culture and workplace preferences of tenants when you are developing a new property is certainly difficult. The most developers can do is research their target market, and understand the common cultural decisions that those companies tend to make. While every business is different, there are common threads, and these threads serve as a way to inform developers. Even differences in preferences can be helpful at times. Like many other aspects of business, diversification is beneficial.

 

The design choices that developers make based on consumer and industry research will impact the design choices that future tenants can make. Allowing for personalization that successfully captures the culture that these tenants are looking for is a sign of a well-designed, well-developed workspace. Every style mentioned here can resonate with certain companies, so as long as the research is completed, developers should be able to connect their workspaces with the companies that will thrive in them.

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Demographic Changes That Will Impact Real Estate

Demographic Changes That Will Impact Real Estate

As the years progress, audiences change, and this includes target audiences. When you work in residential real estate, your entire region serves as a target audience, so the best way to measure changes in that audience is to look at changes in the demographics.

While every region has its own unique shifts, the United States as a whole has its own trends. These nationwide demographic changes will impact local residential real estate over time. Richard Fry, a researcher at the Pew Research Center, decided to investigate these nationwide trends to determine how residential real estate will be affected. Specifically, he projected what the state of the industry would be by the year 2065.

Current Demographic Changes

Current Demographic Changes

Click to enlarge image

Through his research, Fry was able to find 5 demographic changes that will impact what housing units residents are willing to spend their money on, and why. In no particular order, here are his findings:

 

  1. If you are looking at demographics decades into the future, then present birth rates will naturally have a significant impact. Currently, young Americans are not having children at the same rate as the generations that came before them.

    In 1980, 43% of women 18 to 29 had at least one child. Today, that number has dropped to 30%.

    Millennials are waiting to have children, and this directly impacts the types of housing units that will be in demand in upcoming years. This also affects where those units will be purchased or rented.
    downtown assets
  2. Currently there is a trend that shows that Americans and many millennials are moving away from the suburbs to live in the city. This is also impacted by millennials waiting to have children. This focus on work will decrease demand for suburban housing, and increase the traffic towards city apartments.

    Demand could bolster the market’s already-frothy prices for downtown assets, and perhaps discourage some development in the suburbs.

    When more millennials do begin to start families, it is possible that this trend reverses. For now, however, urban growth is worth the investment for the years leading up to that potential family formation.
  3. Birth rates don’t just impact where people choose to live; they also impact household size. Around the country, household sizes are increasing. Not only are millennials not having children as easily, but with economic hardships increasing foreclosure rates, families find themselves living together under one roof. Students and graduates are continuing to live at home, and older parents are moving in with their adult children.

    An increase in average household size is much of the reason why demand for new housing has been so sluggish, even as the wider economy has recovered.

    With families coming together like this, demand for new homes naturally decreases. However, if you are in the homebuilding business, homes that can accommodate multiple generations will help facilitate these new family dynamics.
  4. While studying current Americans can provide insight into future changes to residential real estate, there are also benefits to looking outside the United States. Currently there are over 350 million Americans in the US, but Fry predicts that the population could grow to 441 million by 2065. Fry attributes this growth to immigration.

    Taking middling, reasonable assumptions about immigration – 1 million immigrants per year – the American population should grow to 441 million by 2065. Now let’s suppose we switch off immigration…By 2065, we would only have 338 million Americans. Without immigration, there’s very, very little population growth at all.

    The highs and lows of real estate demand will be determined by immigration, and how it grows or declines over the years. The policies that influence immigration will then have an indirect influence on real estate demand. It also follows that areas that typically have a high percentage of immigrants will see increases in demand, as immigration into the country increases.
  5. The final of these demographic changes connects everything together. Residential real estate will be impacted in multiple ways by racial and ethnic diversity moving forward. Currently the US population is made up of 60% non-Hispanic white residents. According to Fry, however, white Americans are not having children at the same rate as other races. This will have an impact on future household sizes.

    Only 16% of the white population in the U.S lives in a multigenerational household, compared to 29% of the Asian American population, 27% of the Latino population and 26% of the black population.

    When building residential housing in the future, it is necessary to consider the population and its racial/ethnic background, how that will impact household size, and where people with those household sizes tend to live (city vs. suburbs).

Look at changes in the demographics

Going Forward

The real estate industry needs accurate information to understand who is willing to spend money on what housing units. Knowing where people choose to live, and what they need out of their living quarters will provide the necessary insights for developing the right housing units, and selling them successfully.

The Beat Goes On in The East End

Walnut Capital brought plans before the city’s Planning Commission today for what it’s calling Bakery Square Refresh. The Refresh project involves the demolition of the small retail building on the outparcel on Penn Avenue and construction of a two-story, 12,400 square foot retail building that will connect to the original Nabisco bakery. The $5 million Refresh is being designed by Strada Architecture and PJ Dick is the contractor. According to Walnut’s CEO, Gregg Perelman, the new construction – which will be home to several restaurants – is to be ready next October when Phillips occupies its new space in Bakery Square Three. That means construction will start around the first of the year.

The 2-story Bakery Refresh will be adjacent to the Nabisco bakery building. A new green space will be created along Penn Avenue. Rendering by Strada Architecture LLC. Use courtesy Walnut Capital.

Around the corner from Bakery Square, Echo Realty is moving forward with its Shady Hill Center. The project involves 220 units of apartments, to be developed by Greystone Real Estate Partners, a 500-car parking garage, and the replacement of the Giant Eagle with a new 37,000 square foot store. Carl Walker Construction has been selected to build the parking garage.

Data on employment and unemployment was released on the national and regional level within the past week. The job creation data for Pittsburgh showed modest improvement, with 5,500 more jobs in August 2019 than one year before. Unemployment fell by 0.3 points to 3.9%. The good news inside the Pittsburgh metro data, which came from PA’s Department of Labor, was the net growth of employment. The workforce grew by 18,400 from August-to-August, while the number of unemployed fell by 1,000. Retiring Baby Boomers are putting great downward pressure on the workforce supply in Pittsburgh. That the number of people working grew by more than 1.5 percent suggests that the gains in employment are offsetting the demographics for now.

US job growth was better in September than in previous months, according to the Census Bureau’s report on October 4. There were 136,000 new jobs in September. Estimates for July and August were also revised upward by nearly 60,000 jobs. The headwinds on the economy are certainly growing, but US employers are still adding to payrolls.

WeWork and Pittsburgh’s Construction Economy

The spectacular collapse of WeWork over the past 30 days has garnered few headlines in Pittsburgh. That makes sense, if you consider that the company isn’t headquartered here, has few employees here, and is only beginning to build out its first co-working space in Pittsburgh now. But the story of WeWork’s rise and fall sent a chill through me, reflexively dredging up memories of the bursting of the dot.com bubble in 1999-2000. WeWork’s story may be an isolated case of a founder’s vision intoxicating investors but, if it is not, the problems that WeWork’s business exposed could be more structural.

The highlights of the story are that WeWork was the Apple or Uber (more on that) of the co-working trend. In New York and Chicago, WeWork was the largest single leaseholder in those cities. Sit with that for a moment. Its rise, and the vision its founder spun, attracted one of the wealthiest venture capital sources, SoftBank’s Vision One Fund. The company was preparing for an IPO next month. Goldman Sachs was telling investors that the company would be worth $60-90 billion once public. The Securities Exchange Commission’s S-1 filing showed that WeWork was a one-company bubble. As the business media and public investors began to digest the company’s financials, the wheels fell off. There was no sustainable business model. Within a couple of weeks, the CEO was fired/resigned, selling his stake for $750 million. This unicorn of commercial real estate saw its value decline by $30 billion, and is likely heading to zero.

There is an excellent interview in New Yorker magazine with an NYU Stern Business School professor who first rang the alarms on WeWork in August. (Note: the professor’s language is salty)

What is frightening about WeWork’s story is what it says about investors. The biggest losers in the collapse will be WeWork’s 15,000 employees. Right behind them is SoftBank, which provided $11 billion to WeWork from its Vision One Fund. As a capital source, SoftBank will be fine. Its investors will also be fine, but the Vision One Fund, which raised $100 billion for unicorns like WeWork and Uber, is damaged. It’s the latter unicorn that should alarm Pittsburghers. Uber has seen about $9 billion from SoftBank and the fears are growing that Uber is another company that is peddling an unsustainable business model and unlimited growth without a foundation. Uber’s footprint in Pittsburgh is several times the 105,000 square feet that WeWork signed on for at 600 Grant Street. Of greater concern is what might follow if Uber’s value falls dramatically too.

The concern is not about individual tech companies flaming out, it’s that investors will flee from emerging technology companies in general. Stocks aren’t really an asset class in the way that bonds or commercial real estate is. Value isn’t as sturdy. But stock investors aren’t spooked by the occasional corporate flameout. It happens. When there are several spectacular flameouts in a short time period, however, investors naturally suspect that the problem is the industry rather than the companies. That was what burst the dot.com bubble. Tech companies lost 80 percent of their value on average. That made growing and expanding difficult. Investors don’t have a lot of places to put their money with comfortable returns today, but that has lulled many investors into forgetting that the risks aren’t always commensurate with the returns. It’s a frothy time and investors are susceptible to pitches that forecast solid returns. The problems come when it takes a highly risky investment to get a solid return.

That’s the chill that WeWork sends through me. Pittsburgh has seen a new era of prosperity arise from the successes of emerging technology. Emerging technology relies upon fresh investment to capitalize growth and the ultimate profitability that is sustainable. Many of the most promising technologies being developed in Pittsburgh are unfathomable to the average person (and maybe even the average genius at a VC firm). Artificial intelligence, robotics, advanced manufacturing, and autonomous vehicles are mysterious to most of us, and that includes some segment of the investor class. It’s important that investors remain confident that the breakthroughs being researched and developed in Pittsburgh can make it into the marketplace some day. Otherwise, our up and coming success stories could end up becoming the Lycos or FORE Systems of the 2010s. Keep an eye on the WeWork story. It may have ripples that reach Point State Park.

(Left-right) Rich Yohe, Bernie Kobosky and Scott Poillock at the MBA’s golf outing.

In construction news, A. R. Building has started construction on about $20 million in new apartments – Fox Plan and Evergreen Road – in Monroeville. The Buncher Company started work in the 20,000 square foot second phase of retail at Jackson’s Pointe north of Zelienople. Massaro Corp. was awarded the $1.5 million revolving door/entrance renovations at Fifth Avenue Place, the enabling project for Highmark’s $20 million lower level upgrade. W. K. Thomas & Associates started construction on a $1.2 million new facility for Butler Eye Care.

An Interesting Take on Growing the Workforce

The shortage of skilled workers in construction has been a problem for several years and the impact on construction costs has reached the point where commercial real estate development is being slowed, according to NAIOP. There is a CoStar post about the issue that is very interesting in that it puts contractor groups on opposing sides of what you would think would be a unifying issue.20190422_174002

At issue is the Department of Labor rule, which resulted from an executive order in 2017 that expands apprenticeship programs to allow trade groups and employers to establish separate training from industry certifiers. The revised National Apprenticeship Act exempts construction from its rules for now, but developers are pressing for the rules to be expanded to include construction, and the nation’s largest contractors group is supporting them. Associated General Contractors of America (AGC) has been advocating for growing the construction workforce, including pressing for supportive legislation. AGC supports the revised rules, even though the rules allow apprentices to be paid minimum wage.

The last point is what has developers hoping that the rule change is extended to construction. It’s also what has union-affiliated contractor groups in opposition to the expansion of the rules. Union apprentices are typically paid two or three times minimum wage while working their way to journey-level. Opponents of extending the rules to construction also worry that independent apprenticeship programs won’t adhere to industry standards for certifications and will lead to poor work or unsafe conditions. The arguments are summarized in this excerpt:

Proponents of expanding construction apprenticeships argue the initiative will address the dearth of these kinds of workers and help close the job gap, adding to the workforce pool for contractors and reducing their costs as well as those of developers. The lack of construction workers such as pipe layers, sheet metal workers, carpenters, concrete workers and pipe fitters/welders, as well as logistics employees, has hurt the commercial real estate business.

That’s driving up development costs and hampering the expansion and profitability of warehouse and distribution centers, according to NAIOP, the national trade organization for the industry, which issued a report on the issue earlier this year.

But there is a debate on apprenticeship expansion, with opponents charging it would create a separate, and inadequate, certification system from existing programs, with poorly trained workers who could endanger themselves, others and do substandard work.

As the labor department proposal is written now, it excludes construction, an industry that has for decades had apprenticeship programs in place for trades such as plumbers and electricians. Those programs are registered with the labor department and are funded by unions and employers, as part of collective bargaining agreements.

History has shown that government making rules to solve temporary market conditions rarely solves the problem, and usually creates unintended negative consequences. If you are developing a commercial project right now, the costs of construction – and the schedule – are becoming unfavorable. The pro forma rents aren’t going up as fast as construction costs. Investors will have to accept less of a return or the project won’t pencil out. That’s not a great thing but that is an inevitable consequence of economic prosperity that lasts as long as the current expansion. In truth, wage gains have been held off for much longer than in any previous business cycle; and the magnitude of wage growth is much lower than the typical 4-5% that accompanies a recovery. During the recovery stage of this business cycle, wages barely grew and only moved above 2% since early 2018. Business cycles run from imbalance to imbalance, from lean conditions to fat. It’s not fun to be the development that builds during fat times but, then again, it’s also not fun to try to lease up during lean times. It’s the nature of business cycles. At some point, things will slow down and costs will fall back. New development will follow.

Note: In the Sept. 26 BreakingNews email blast, PJ Dick was omitted from the list of contractors proposing on the $15 million Flats on Forward in error. The list of contractors should have read PJ Dick, A. Martini & Co, Mosites and Rycon.

Housing Market Responds to Lower Rates – Pittsburgh Construction Market Awards

Recent reports on sales of existing homes and new construction show that buyers are motivated by the lower long term interest rates that inspired the two Fed Funds cuts this summer. August’s construction numbers were strong for multi-family and single-family construction. The rate environment seems unlikely to have made such a difference. Rates were already historically low. However, one of the major home buying demographic groups – Millennials – has proven to be very skeptical about home ownership; therefore, even small drops in the 30-year mortgage rate seem to be having the emotional impact that pushes shoppers to become buyers.

Wells Fargo Economics has a great short commentary on residential construction. An excerpt is below:

Higher builder confidence and an improving trend in single-family permits
indicate that new home construction is finally beginning to catch up to the higher pace seen in new home sales. Total housing starts jumped 12.3% to a 1.36 million-unit pace, the highest since June 2007. The headline number surpassed all expectations, but was driven to a large extent by a 32.8% surge in multifamily starts. New apartment construction, which is notoriously volatile on a month-to-monthbasis, had briefly dipped below trend the past two months, so a catchup in August is not surprising.
Still, single-family starts were quite solid, rising 4.4% to a 919,000-unit pace,
the highest since January 2019. Only three times in this long and gradual
housing recovery have we seen single-family construction at a higher pace
than in August. Single-family starts rose 3.6% and 5.3%, respectively, in the
South and West, the two largest regions for residential construction. They
were up 8.7% in the Midwest and down 1.7% in the Northeast. Nationwide,
year-to-date single-family starts are down 2.7% over the same period last
year.

In regional nonresidential construction news, decisions were made on several large projects that had been pending. The Gilbane/Massaro joint venture was chosen for the combined $200 million central utility plant/Human Performance Center at the University of Pittsburgh Victory Heights. Rycon Construction was awarded the $40 million UPMC Magee central utility plant/maintenance building. Rycon was also successful on the 200,000 square foot Phillips buildout at Bakery Square. Thomas Construction is starting construction on the $11.3 million Hoyt Science Center expansion at Westminster College.
CM proposals are being taken from Landau, TEDCO, Volpatt and Whiting-Turner on the $3.5 million CMU Mellon Institute Group 1920 lab renovations. Highmark is taking proposals from AECOM/Tishman, Mascaro, Massaro, PJ Dick, Rycon, Turner and Whiting-Turner on its $20 million lobby and exterior upgrade.

Construction Job Openings Hit a High

One of the bits of economic data that gets less mainstream media attention is a survey call the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS measures how many openings there are and why, creating a “quit” rate that measures what percentage of turnover is due to workers quitting their job. The correlation between a higher quit rate and a good economy is very strong. The quite rate is high right now, a condition that is exaggerated by the shrinking workforce demographics. In the construction industry it’s a perfect storm of higher demand for construction and fewer workers.

The AGC’s chief economist, Ken Simonson, commented on the release of the JOLTS data last Friday. Here are Ken’s comments:

Job openings in construction at the end of July totaled 373,000, an increase of 59,000 (19%) from the July 2018 total and the highest July total in the 19-year history of the series. This was the 14th consecutive month of record job openings for a given month. (The data are not seasonally adjusted. Because hiring and openings in construction vary considerably from month to month, comparing openings across months is not meaningful.)

The industry hired 442,000 employees in July, 8,000 (2%) fewer than the number hired in July 2018 but the second-highest July total since July 2008. While the dip in hiring may be an early sign of cooling demand, it may also be an indication that employers could not find enough suitable candidates—which is consistent with the jump in openings at the end of the month. Combined filled and unfilled positions (hires + openings) in July were a record for the month.

There were 167,000 layoffs and discharges in July, and increase of 29,000 (21%) from July 2018 but roughly in the middle of the range of July layoffs over the past seven years. Layoffs have exceeded or matched year-ago levels for nine consecutive months, a possible indication of a slowing market—or of the industry hiring more workers without acceptable skills. The rate of layoffs (layoffs as a % of employees) has remained near the low end of each month’s range over the past seven years, suggesting there is no strong trend toward cooling demand for construction.

The quit rate in July was 2.8 per 100 employees, slightly less than the July 2018 rate (3.1) but still the second-highest rate since 2008. This suggests employees are finding opportunities elsewhere. The data do not show if they quit for other construction jobs, jobs in other industries, or are leaving the workforce. But a high quit rate is indirect evidence of continuing opportunities for employment in construction.

In sum, I think the data are consistent with a continuing strong construction market and with the results of the 2019 Autodesk-AGC of America Workforce Survey, which found that 91% of the 1,935 respondents expect their firms will hire hourly craft personnel in the next 12 months (19% for expansion, 72% for replacement). That result was very similar to the 2018 survey and the January 2019 Sage-AGC Hiring and Business Outlook Survey.

Click here to see Ken’s slideshow on the construction market.