Presented by: Western Real Estate Business, December 2018
Author: Nellie Day, Featuring Susan Dwyer, Corporate Studio Director, H. Hendy Associates
There is perhaps no other factor that has been as big of a gamechanger to commercial real estate — and many other industries — as technology. If 2018 had to be summed up by one word, that would quite possibly be it. “Technology is so integral to today’s success that we are now spending as much time on new developments as we are on existing developments to best position our projects as we and our tenants take advantage of these technological innovations,” says Mac Chandler, executive vice president of investments for Regency Centers.
Tech-Savvy Investors
Tech was a top influencer in nearly every aspect of commercial real estate, starting with the obvious: the increasing popularity of online shopping. This has not only altered the retail brick-and-mortar landscape, but revolutionized the West’s industrial market as logistics, manufacturing and distribution space is at a premium.
“Ecommerce is driving tremendous industrial growth in the West due to its adjacency to major international ports and its growing population,” says Michael Cho, principal at Olive Hill Group. “In fact, industrial growth hit an all-time high in 2017. Logistically, retailers are now demanding properties near urban centers to accommodate changing consumer expectations, which include having food and items delivered to their homes within few hours of ordering. This has also driven growth in new models for established retailers, such as the increasing number of CityTarget stores on the West Coast.”
Naturally, Target isn’t the only shape-shifter in today’s tech-driven retail landscape. Shopping center owners like Regency are and have been hard at work integrating more innovative features, including digital signage, smart parking and interactive concierges. Others are working on their “transition” to ensure a seamless flow between their physical and digital identities.
“The tech disruption to the retail industry, or ‘apocalypse’ as many have deemed it, should have negatively impacted our business but, on the contrary, we are being asked by our clients to help them interpret these trends in a physical manifestation,” explains Sean Slater, principal at Retail Design Collaborative. “Comfort, beauty and flexibility are becoming critical in most property developments, as is the integration of digital platforms. As customer purchase fulfillment takes place in physical locations ranging from co-working to retail spaces, we are tasked with creating unique, branded experiences to complement the goods and services being sold.”
This essentially means that today’s companies must ensure their message or storytelling — another buzzword of 2018 — doesn’t get lost in translation. This is much in the same way omnichannel ensures a seamless experience regardless of where you buy or pick up your item.
“A holistic approach to a brand from mission statement to website to sales portal to showroom is required at this phase of the retail revolution,” Slater continues. “Any gap in that chain can lose customers.”
Multifamily investors are also maximizing technology. This extends from an asset’s marketing to the application process and innovative on-site amenities, as Max Sharkansky, co-founder of Trion Properties, can attest.
“There has been a huge push toward online processes in multifamily,” he observes. “One of the ways we enhance our value-add investments is to create an online portal for each property so residents can conveniently fill out application forms, pay rent and request maintenance. We have also implemented software and online processes to streamline our own internal operations and investor relations.”
Of course, if 2018 has taught us anything, it’s that Millennials demand more. “The primary renter demographic is now composed of Millennials and Gen Z, which has contributed to a higher demand for sophisticated, techsavvy amenities… especially in competitive Western markets such as Los Angeles and the Bay Area,” Sharkansky continues. “For example, we are including Sonos speaker systems and an Alexa in each unit of our new multifamily development in Los Angeles. We have found that this one-time investment significantly increases tenant interest.”
Creatively Speaking
Naturally, the tech sector has also greatly influenced the office environment, particularly creative office space. After all, the creative minds behind all these new technologies have to find inspiration somewhere throughout their workday.
“Offices are becoming more than places to process work — they’re becoming tools for driving and retaining talent and purpose-driven environments that support business processes and functions,” says Susan Dwyer, project director at H. Hendy Associates. “Trends include centralized and decentralized collaboration zones that foster teamwork, as well as ideation and impromptu meetings and activity- based work environments where employees can ‘untether’ and choose where to do their work based on tasks and preferred workstyles.”
Dwyer also notes 2018 brought a few unique challenges for creative office architects. “This year, interior architects like myself were challenged with how to effectively space plan due to regulations that impact how, and to what capacity, we can transform commercial office spaces for our clients,” she continues. “For example, no matter how efficient we design a workplace, we may be confined by local parking regulations that have larger square feet per person ratios than what the business truly requires.”
This has been particularly prevalent, Dwyer asserts, in Southern California regions like Orange County where businesses often require 150 square feet to 200 square feet per person, but the local parking requirements still sit at one parking spot per 250 square feet per person.
“Southern California’s limited public transportation also limits our ability to downsize a client’s office space,” she says. “Businesses believe in the ‘looks great, works great’ mentality. The demand for workplace optimization has unleashed the creativity of many professionals and is challenging them to consider how to deliver inspiring spaces that go beyond the 6 x 6 workstations in the New Year.”
Any trends or regulations affecting the tech or creative fields are particularly poignant on the West Coast, which boasts some of the nation’s largest tech hubs, including Seattle, San Francisco, Silicon Valley and Los Angeles’ Silicon Beach, which has grown significantly over the past few years.
“Tech jobs are driving much of the growth in the U.S. job market, particularly in emerging hubs like West LA’s Silicon Beach,” Cho notes. “Silicon Beach is home to a thriving tech economy with more than 500 tech and startup companies, including heavy hitters like Hulu, Headspace, ChowNow and YouTube. Google’s growing presence in Silicon Beach will bring more than 3,000 employees to its hangar in Playa Vista in early 2019.”
Investing in the Future
Aside from technology, many experts also acknowledged we’re in an extended cycle. Though this wasn’t necessarily a bad thing, it does promote caution when it comes to making any rash decisions.
“Real estate owners and investors are more cognizant that we are late in the cycle,” says Joe Giordani, vice president and producer with NorthMarq Capital. “They are avoiding secondary markets for this reason. Last time around, when the markets got heated and cap rates compressed, owners went to tertiary markets to chase yield. This time, they are being more cautious and would rather focus on core infill markets for lower risk and ultimately a lower return with a longer- term view.”
Rising interest rates are another factor that has given some investors pause, as has the increasing costs of construction, labor and employee healthcare.
“We saw a new construction increase of more than 13 percent yearover- year,” Sharkansky cites. “Cap rates have stabilized and are currently ranging between 4.4 percent and 4.6 percent. That said, the market will continue to favor landlords and sellers. We foresee the multifamily sector in Western markets continuing to see an increase in activity overall, and we anticipate that more investors will turn to long-term investment opportunities.” Terrance Hunt, vice chairman at NKF, has witnessed another multi-quarter of 2020. The Class A, creative office building will feature floor-toceiling windows and operable glass doors that provide direct access to exterior terraces, fire pits, collaboration areas and a rooftop deck with a catering pantry. The vertically stacked and terraced building will offer panoramic views of the Hollywood Hills, the Pacific Ocean and Downtown Los Angeles.
EPIC has already been fully leased to Netflix, which will occupy the building in phases beginning in January 2020. The online entertainment streaming firm’s lease extends
through 2031.
“We are thrilled that Netflix has selected our ground-breaking EPIC project to accommodate its next phase of growth,” says Victor Coleman, chairman and CEO of Hudson Pacific Properties. “Netflix is part of an elite class of high-growth, high-innovation companies leading the revolution in content production and distribution that is reshaping the Los Angeles studio and office markets.”
EPIC is on track to receive LEEDGold certification. Netflix employees will have access to electric car charging stations, bike storage, showers and lockers. Additional green building features include solar-paneled windows and a dedicated VIP rideshare that is designed to accommodate next-generation office needs like autonomous vehicle drop-off and drone deliveries. The building is within walking distance to the LA Metro Red Line, as well as abundant residential, restaurant and retail amenities.
The project is also near a variety of high-profile, creative corporate neighbors. Netflix signed a coterminous lease extension for 325,757 square feet of office space at ICON and 91,953 square feet of office space at CUE, two additional Hudson assets situated on the Sunset Bronson Studios lot, across the street from EPIC.
“EPIC is part of our continuing investment in LA and Hollywood,” adds David Wells, Netflix’s CFO. “We’re thrilled to be able to continue to grow our team [in this area].”
ICON and CUE are also slated for LEED-Gold certification, boasting similar green features to EPIC.
“With its growing presence at ICON, CUE and now EPIC, we have created a customized, state-of-the-art, creative urban campus that holistically supports Netflix’s unique culture and business needs,” Coleman says.
Google Goes Green
Google is another high-profile tech company snatching up sustainable space in California. The internet giant has pre-leased a 245,738-square-foot, build-to-suit office development in the North Bayshore submarket of Silicon Valley’s Mountain View. Located at 1625 Plymouth, the highly amenitized, LEED-Platinum certified building will feature multiple outdoor deck spaces for functions and activities.
The developer, Broadreach Capital Partners, secured a $150 million fixedrate permanent loan for the project. The loan, provided by New York State Teachers Retirement System and secured by HFF, coincided with the building’s warm shell completion and its delivery to Google ahead of the tenant improvement buildout.
CBRE asserts that capital markets are increasingly incorporating noted green building certification programs, such as LEED and Energy Star, into loan pricing and alternative financial instruments like green bonds. Green Building Adoption Index co-author Rogier Holtermans further notes that buildings certified by Energy Star and/or LEED have been shown to transact for about 10.1 percent more than non-green certified buildings.
Like Hudson, Broadreach has more than one noteworthy sustainable office project in its construction pipeline. The firm has also partnered with Rockwood Capital to build Ameswell Mountain View, a $250 million mixed-use development in Mountain View. The project will contain a 220,000-square-foot, Class A office building and a 255-room modern luxury hotel.
The five-story LEED-Platinum office building with glass curtain wall will feature expansive 47,000-square-foot floor plates, ceiling heights up to 16 feet, and full-height windows to take advantage of the unobstructed views of San Francisco Bay, the East Bay and the Santa Cruz mountains. Building amenities include a large roof deck, terraces and breakout areas to connect tenant space with the outdoor environment. Structured parking will contain three parking stalls per 1,000 square feet of office space.
Ameswell Mountain View is situated at the convergence of US 101 and State Route 85. About one-third of the 10-acre development site is devoted to open space with walking and biking trails and recreational areas. “Ameswell is characterized by its outstanding location and access,” says John Foster, Broadreach’s managing director. “It is less than a mile from Castro Street and the Baby Bullet Caltrain Station and offers immediate access to US 101, Highway 85 and the Stevens Creek Trail. Surrounded by the five largest companies in the world by market capitalization, Ameswell is arguably one of the most desirable locations in Silicon Valley.”
With high-profile tech tenants like Netflix and Google up for grabs, the benefits of doing good and building green are more transparent than ever nowadays. The race for the nation’s top talent is on, and green building adopters in gateway markets like San Francisco and Los Angeles stand to gain a fair amount of attention and marketshare if they can continue to provide the type of product that attracts the innovators of tomorrow.
“In today’s highly competitive job market, if companies want to attract and retain highly skilled, talented employees, they must demonstrate a commitment to environmental, human and economic sustainability,” Ramanujam says.