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January 2018
Amenities Packages Drive Occupancy and Employee Retention While Capturing the "Third Space"
By Graham Hildebrand

The National Trend: Amenities for the Millennial Workforce

The desire of companies to attract and retain the best and brightest employees has led office tenants to focus on amenities during their location decision-making. Demographic projections now show that by 2024, young adults will constitute 34.2 percent of the U.S. workforce, up from 32.0 percent in 2014; as a result, their desires and needs in terms of office location and design have become a priority for tenants and owners. Placing millennials at the center of office space decision-making began with technology firms, which have a disproportionate share of young workers, but has begun to trickle down to a wide variety of office occupiers. As a result, developers and owners of office properties have improved their amenities in order to attract and retain these tenants, and have begun to create micro-communities to serve those tenants.

MILLENNIAL-AGED WORKERS IN THE U.S. WORKFORCE

MILLENNIAL-AGED WORKERS IN THE U.S. WORKFORCE Source: Bureau of Labor Statistics, NKF Research; January 2018

In years past, developers typically allocated between two and four percent of their portfolio space to amenities, many of which were basic (a simple gym, a typical parking garage, a standard cafeteria). As developers seek to differentiate their properties and demand premier rental rates, they have increased the allocation of amenities space by 200 percent in many properties. With this increase in space allocation has come an increase in the quality and variety of amenities. Gyms have gone from simple to sublime, staffed by professional trainers with top of the line equipment and classes; cafeterias have given way to multi-station eateries with healthy options, including organic foods; a stale office lobby has been overcome by a dazzling rooftop deck that allows a tenant to host events on-site. Simpler items such as stocked beverage centers, coffee bars and dog-friendly office spaces have become commonplace across the U.S.

The popularity of “live-work-play” environments and the impact that this popularity has on workplace productivity and employee happiness has become a key decision driver for tenants in the market for office space. While companies have begun to adjust many internal company-level benefits – including parental leave and flex-time, among others – when it comes to attracting and retaining talent in a competitive work environment, first impressions matter. Potential building tenants now look to a property’s overall design and amenities to ensure an engaged and productive workforce. A recent Newmark Knight Frank study supports the notion that building design and employee accommodations are critical to productivity; an over-densified workspace that leads to just a two percent loss of productivity can completely wipe out cost savings achieved through densification. Conversely, a three percent gain in productivity by occupying space that is more efficient can recoup the added cost of upgrading to such space. Amenities support a complementary mission to office layout: achieving tenant satisfaction by creating more productive and happier workers.

Featured Market: Houston’s Amenities Rush

The Houston market reflects the current rush to implement premier amenities. Development has cooled in Houston from its recent high of 14 million square feet of office space under construction; however, the most recent wave of new trophy deliveries (and the repositioning/rebranding of existing Class A space) shows Houston’s developers have recognized tenants’ desire for premier amenities packages. These packages both attract office occupiers and allow owners to charge premium rents. Large-scale campus developments such as ExxonMobil’s Springwoods Village, Southwestern Energy’s Springwoods Village, and ConocoPhillips’ West Houston office project were designed to include a variety of employee amenities ranging from on-site fitness centers to daycare facilities to gourmet food options.

Within the Central Business District, Houston has seen new developments such as Hines’s 609 Main Street and Skanska’s Capitol Tower, as well as a $48 million “facelift” of the Allen Center complex, which focused on refreshing and increasing building amenities and capturing the “third space” that workers occupy between the home and the office. Amenities such as increased green space, upscale lobby entrances with retail, in-floor heating and cooling, full-floor dining options, rooftop gardens and modern fitness centers with showers are in place at these properties to ensure tenants are able to be efficient and engaged during their workday. At the same time, the property owners plan to achieve a higher return on investment through increased occupancy rates and rent levels. Due to their success with building design and amenities, both 609 Main and Capitol Tower are considered true trophy assets within the Houston market, and they are achieving the highest rents in the office market at almost $60 per square foot, full service.

What Are the Implications for Our Clients?

As office occupiers strive to retain talent and keep employees engaged, they need to be forward-thinking in their approach to doing business. While an older, dated building may have offered sufficient space in the past, tenants may find that an upgrade is warranted to satisfy their workforce, particularly if the upgrade can be accomplished at no increase in overall occupancy cost due to the increased efficiency of the newer space. Similarly, owners of obsolete office space who find it challenging to achieve occupancy may wish to consult with their advisors regarding the appropriate level of capital investment to make their assets market-competitive. Both parties win when tenants increase their satisfaction and employee retention while owners improve their return on investment with higher rents and occupancy rates.

Research

About the author: Graham Hildebrand is Director of Research for Newmark Knight Frank’s Texas markets.

For more information: Alexander (Sandy) Paul, Senior Managing Director of National Research, APaul@ngkf.com