The Drivers in Site Selection

Nov. 21, 2005
Directions and decisions that promote tenant/employee retention

Building owners, investors, and corporate tenants might have different processes in finding the perfect site for their facilities. But, their objective is the same: to locate a property that will attract a qualified tenant and resulting workforce to inhabit the building with some stability.

At Equity Office Properties Trust in Chicago, real estate professionals approach site selection from an investment perspective, but, as the company’s Chief Investment Officer Jeff Johnson notes, “Finding the building that we want to buy is partly the same as corporate site selection.

“We look at office employment trends and highly paid, highly educated workforces,” he explains. “We buy buildings we think are going to be attractive over the long term to high-end customers. The building might attract different businesses over time, but the tenant quality will stay the same.”

In order to land a suitable site either as an addition to a growing portfolio or a new location for a corporate headquarters or regional call center, there’s more involved than just lease rates, energy savings, and incentives.

It’s really a people equation - and a complex one at that.

“For office-based industries, access to quality labor markets continues to be the driving force in site selection,” says Darcy Mackay, senior managing director of CBRE Consulting in San Francisco. “Our clients are concerned where the labor markets are today and how they will evolve in the future. Whether you are an owner, an investor, or a corporate tenant, real estate is how we house the economy. Without those jobs, everyone is stuck with surplus space.”

Considering the People Factor
When helping a client locate feasible locations and sites, whether the client is an owner or investor looking to expand a portfolio or someone looking to relocate an office to a new location, site selection professionals first look at the human factor.

In doing this, they typically compile demographic research on population, incomes, age groups, workforce, labor availability, consumer expenditures, cost of living, and housing, to name only a few factors.

“Globalization and distributed workforce issues drive site selection, particularly on the ownership side,” notes Bob Hess, managing director of Cushman & Wakefield’s Global Consulting Group, Rosemont, IL. “People are constantly looking for the best talent and are looking at the workplace environment to see how it fits in - whether it should be an urban or suburban strategy, if you want to recruit talent from Chicago or establish back-office operations in India.”

For building owners, attracting the right kind of tenants is crucial, just as attracting the right kind of employees is crucial for tenants. “Employers want to very carefully analyze what their access to labor will be and what characteristics of the workforce will be within a reasonable commute distance,” Mackay notes. “In most markets, labor will be the primary driver in site selection.”

Johnson says Equity Office customers rely on office space to attract and retain employees, and that it is important to them to have a space that is better than their competitors. Locating quality buildings in a high-quality, well-paid employment market is a winning strategy, he says.

In selecting portfolio sites, Equity Office professionals keep specific data points in mind for a region: corporate profits, office employment, job growth, and office building absorption, to name a few, he notes. “Those are things that help us understand demand and help us confirm our thoughts on demand.”

Quality of life and lifestyles rule in site selection for tenants and the corporate users. Examine the psychographics, Hess says. Do the household type and residential patterns fit the actual location of the office space? “That’s more of a key driver than great space or low cost,” he adds. “Low cost doesn’t mean a lot until you optimize the other issues - workforce, accessibility, and image.”

Filtering Through Options
Once the people equation is mapped out, corporate objectives and philosophy come heavily into play. It’s all about the business drivers of a company and how those translate into that company’s real estate platform. Ask yourself these questions:

  • What am I trying to achieve?
  • How does that translate into space?
  • What are my or my company’s business drivers?
  • How do I translate my or my company’s business processes into the kind of real estate we need?

“Are you looking for space that will help you with your recruiting and retention, or are you just someone who wants to get the most for your rent for a back-office call center or service center?” asks Hess. “Real estate has to emulate a person’s perception of where he or she works. Think about the space as being a place important to [building occupants’] lives and lifestyle ... a place of pride.”

The kind of building being sought also comes into play. “A headquarters is not a data center, shared service center, or a claims processing center,” Hess stresses. “All those different types of functions have different business drivers and critical location factors: image, talent, and accessibility to transportation ... you need the ‘what’ and the ‘why’ before you get to the ‘where’ and the ‘how.’ What are you going to put in that space? What are the synergies?”

When looking at potential areas in which to locate a site, transportation options for the labor base is a major consideration.

When CBRE consultants work with clients, they study commute times for a geographic area where the majority of the workforce will commute. Mackay says they determine the appropriate duration for a one-way commute during the peak morning drive time, and also take the various available means of transportation into consideration. The workforce isn’t going to want to jump through proverbial hoops to get to and from work.

Neither will remote clients. Thus, for a business where clients are scattered across the country or the world, transportation in and out of a potential location is another factor. Is the airport good? Can you get there from here? Is travel to that location cost-prohibitive?

It’s also necessary to consider how much competition you will have in a region - for attracting employees on the tenant side and attracting tenants from the owner/investor perspective. A saturated market can spell trouble for both categories of site selectors.

When expanding a portfolio, Equity Office often seeks to be a big fish in a small pond rather than a small fish in a large ocean. The company avoids areas where competitors own a sizable share of the market, Johnson says.

“We’re all about serving our tenants’ needs. We don’t think we’re serving their needs if they can pick our building or 20 other ones,” he says. “We’re looking for supply-constrained markets where there isn’t an abundant amount of oversupply of office buildings.”

For example, while Dallas has a high number of skilled and educated office workers - a plus for Equity Office investments - the market has become oversaturated with office space. In fact, according to Johnson, the company sold a number of buildings in the Dallas market and has turned its attention to Austin, TX, only a few hours away. Why? The city has supply constraints, a favorable topography, a governmental presence, and an atmosphere for additional development, Johnson says.

“We want to help [our customers] in a place where they have a harder time finding a building,” he says. “We can’t add a lot of value when they have 10 alternatives.”

Getting Specific
Once a general location has been established, it’s time to narrow down to a specific range of sites. “We can start with the metro areas and those characteristics and then drill down to the site location options in that area,” Mackay says.

At this point in the process, many site selection professionals will prepare a survey of available properties that closely meets a client’s criteria. Typically, such a process involves analyzing a wide array of market information, including sales and/or lease comparables and a competition study. Often, these surveys include detailed information on such factors as market trends, vacancy rates, lease rate trends, impacts, incentives, and construction activity.

“Rent growth is a very good way to track how supply and demand over time has been, and new construction,” Johnson says. “In the office business, you can go out and count the cranes to see if a new supply is coming or not. Supply and demand is a good formula. You are always satisfying a tenant who has a need and not just a want.”

Mackay says these factors become more important the more specific your site selection decision becomes. “The more granular you get with the site selection process, the more you are able to drill down and look at the energy matrix, the lease rates, flexibility in entering and exiting a lease,” she says.

The latter is important. Today’s business environment does not support the 20- and 30-year leases of bygone eras. Companies today are looking at leases and options both from ownership and tenancy perspectives. “The pace of business these days is so ungodly fast that everyone wants flexibility,” Hess notes. “No one wants to sign long-term leases. People don’t stay in buildings for 15 years anymore, or even 10.”

Drilling down further, you run into even more minute factors that can vary by market. In San Francisco, for example, there’s a high premium on “view space.” “If you can see the water, the rent is premium. There is more demand for the space,” Johnson says.

Across the country on the other coast, Manhattan is another story. There you get into transportation issues and the proximity to trains. The address in New York [City] is another mark of distinction. “A Park Avenue address has an awful lot of prestige,” Johnson says. “People will pay just to be on Park Avenue.”

Square-footage also can come into play and vary by market. Johnson says San Francisco breeds smaller tenants, so a good size for an average office there is roughly 16,000 square feet of rental space. In Chicago, the average is closer to 20,000 to 22,000 square feet; and in New York City, 25,000 to 30,000 square feet.

Energy costs are another selection factor that is regionally driven. In the Northeast, energy costs tend to be high in relation to the rest of the country; for both owners and tenants in that region, an energy-efficient building becomes extremely important. In an area with lower energy costs, occupants might not be as concerned about energy as with other characteristics of the building.

In addition, a building and the services around it are important. If tenants and their employees don’t like where they work, they aren’t going to stay. You need to consider this in relation to the costs of recruitment and turnover, Hess points out.

Again, it all comes back to labor. Other factors are important, but labor remains the critical driver for any site selection process. Mackay points out that real estate usually falls in the second or third slot on a list of cost items for a company. Why? Because payroll costs far exceed real estate costs.

“Labor arbitrage savings will usually far exceed savings in a lease rate or any other type of real estate cost if it is a cost-savings-driven site selection,” she says.

The site selection process is one that starts out broad and gets more specific the closer you get to the end goal - securing an appropriate site. Hess likens it to a funnel.

“It’s a whole continuum that starts broad and narrows, and at the bottom of the funnel is a piece of real estate,” he says. “At some point, you get a footprint and you go out and look for space. But, you have to be targeting the right people.”

Robin Suttell ([email protected]), based in Cleveland, is contributing editor at Buildings magazine.

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