Something is changing in corporate real estate, and quickly. CFOs are putting their foot down on cost.
Up until recently, corporate revenues were up, so higher real estate cost didn’t impact EBITDA so severely. We want to be cool, very urban and seen with all the right people in all the right places and that involves spending gobs of cash to be in trendy areas.
But with the little stock market scare a few months back and massive increases in real estate costs, corporate chieftains are ordering a rethink of location strategies.
SpaceX in CRE?
Elon Musk may have stuck the landing recently, but his rocket ships also represent a lot about CRE prices these days. We have lift off.
National Real Estate Investor (NREI) published an article Friday about the dire situation in real estate cost of late:
“The average rent per sq. ft. for San Francisco office space in February 2016 was $99.42, marking a 102.4 percent year-over-year increase, (emphasis added) according to online real estate database LoopNet. During the same period, the amount of available office space dropped by more than 21.0 percent. And 2015 brought record employment to California, mostly in tech sector office jobs. In the same year, San Francisco was cited as one of the most expensive cities in the U.S., according to the Council for Community and Economic Research. Tech giants are driving much of that momentum, as the biggest names in U.S. technology call the San Francisco Bay Area home.”
And there is massive competition from large, well established players. To wit, “in the Northern Peninsula and the Valley, in the last quarter or so Apple has expanded by another 1 million square feet. Google has leased over 500,000 square feet, and they have entered into additional building purchase agreements. Palo Alto Networks has expanded by 300,000 square feet. Facebook has taken on 200,000 square feet,” executives with office REIT Boston Properties noted in the company’s fourth quarter 2015 earnings report.
The Tesla Effect
Speaking of Elon Musk, many Americans understand the angst CFOs feel. Yup, they really want a Tesla model S, but the price tag causes nose bleeds. Chicks dig the car, but maybe it’s better to keep your money in your wallet.
In the corporate real estate world, CFOs want the cool, hip spaces, but the business case is getting harder and harder for their unit leaders to prove. We’ve heard the story on critical labor shortages, the absolute crucial requirement for cool coffee shops, and walk to work scenarios, but at what cost?
Now there is evidence companies are making the hard choices to look at different markets to cut costs. Morgan Stanley will move operations out of Manhattan to a number of other locations including Mumbai, India reports NREI in its recent real estate cost article:
“…technology firms are moving to the Midwest and the Southwest to enjoy lower office rents and more affordable housing for their workers. Those that wish to stay on the West Coast are moving north to Portland, Ore. or south to Los Angeles. These movements are even spurring spin-off market names such as “Silicon Prairie,” “Silicon Desert,” “Silicon Mountains,” “Silicon Forest” and “Silicon Beach.””
Even the most urban generation since World War II – the Millennials – are crying uncle and moving to more affordable locales. Bloomberg reports that Millennials are fleeing high cost Vancouver in droves for lower cost locales. Turns out that Millennials or not, they can run a Quicken budget. Plus, green grass and swing sets have a way of working their way up the list when diapers hit the scene.
And no less than the New York Times says that “From Des Moines to Omaha to Kansas City — a region known more for its barns than its bandwidth — a start-up tech scene is burgeoning. Dozens of new ventures are laying roots each year, investors are committing hundreds of millions of dollars to them, and state governments are teaming up with private organizations to promote the growing tech community. They are calling it — what else? — the Silicon Prairie.”
So perhaps it’s time for your company to rethink location. If you are located in a cool, but very expensive brand name city, at least look around a little.
Same goes for Oklahoma City, Des Moines, and many Great Plains towns. Also, check out Rust Belt cities like Cleveland, and even (gasp) Detroit. National Geographic says “tough, cheap and real, Detroit is cool again.” You might just be surprised. Being creative in a crazy real estate market can lead to some very interesting discoveries.
I’ve personally sat in location strategy meetings where we discuss cities that wouldn’t traditionally be on the A list. Many turn up their noses and suggest there is NO WAY we are moving to city X, which appears to lack the cool factor.
But given the ridiculous price increases and the huge battles for space in A list cities, Kansas City might look nicer than you think. It could be nice to be a big fish in a small(er) pond for once.
Maybe this is your brand of “space” exploration in new locations. See, you and Elon have something in common after all.