Human Capital: The War For Talent And Its Effect On Real Estate

HUMAN CAPITAL THE WAR FOR TALENT AND ITS EFFECT ON REAL ESTATE A Corporate Occupier & Investor Services Publication

Occupiers are seeking real estate solutions that offer the best chance to capture the talent to drive corporate innovation.

2

HUMAN CAPITAL

EXECUTIVE SUMMARY Maintaining a competitive advantage in today’s business environment requires the continuous innovation of new products and services. Companies across all industries are competing fiercely for new ideas and new ways to engage customers and prospects. While there are a host of business challenges, from the slow growing global economy, to an increased regulatory environment, to new geo-political risks, perhaps the biggest challenge facing companies over the next decade is labor.

Finding the right talent to help the organization compete and innovate is, and will continue to be, a significant issue in the coming decade.

Real estate has a role in assisting the corporate enterprise with recruiting and retaining labor. Whether through workplace designs that help foster greater collaboration and give birth to new ideas, amenities that enhance work/life balance, or locations that appeal to a broad array of workers, real estate’s role with respect to the recruitment of labor has changed. Employees are demanding that certain elements be part of their experience and occupiers are responding with new and innovative ways to use real estate as a recruitment tool. Real estate strategies focused on recruiting and retaining talent are also contributing to significant changes in real estate market fundamentals across the U.S., and these changes could have profound implications for where and how people work for a generation.

CUSHMAN & WAKEFIELD

3

THE HUMAN CAPITAL CHALLENGE Occupiers are seeking real estate solutions that offer them the best chance to capture the talent they need to remain relevant and competitive in their industries. In The Conference Board’s 2014 annual survey, The CEO Challenge, human capital ranked as the most critical business challenge facing today’s global CEOs. The second and third most critical challenges identified were customer relationships and innovation, respectively. However, without the right talent in the right roles, corporations will not be able to adequately address any of the challenges or threats to their business.

LABOR COSTS FAR EXCEED REAL ESTATE COSTS:

Increasing labor costs are fueling concern over human capital. In a company’s cost structure, the expenses associated with personnel typically far exceed the expense of occupancy. Recruiting, training, and compensating employees can cost an organization anywhere from 35%-55% of its total costs, whereas real estate costs typically range from 5%-15%. The consequences of an unsuccessful strategy that impacts over 35% of costs can be significant to the business. Getting the labor strategy right is critical, and more and more corporations are putting that ahead of real estate cost. Those businesses that remain focused solely on the cost of their real estate when determining location are ignoring the larger corporate agenda and the future viability of the enterprise.

CHANGING DEMOGRAPHICS IMPACTING SUPPLY OF LABOR:

Businesses are also facing significant headwinds when it comes to the availability of talent in the marketplace. With the first generation of baby boomers retiring, a significant supply/demand mismatch is materializing in the U.S. labor force. While baby boomers are leaving the working age population, they will continue to demand a significant amount of material goods and services from the economy. In short, the demand on businesses will continue to grow, while the ability of businesses to produce will become strained.

4

HUMAN CAPITAL TOPS THE CORPORATE AGENDA 1. HUMAN CAPITAL 2. Customer Relationships 3. Innovation 4. Operational Excellence 5. Corporate Brand and Reputation 6. Global Political / Economic Risk 7. Government Regulation 8. Sustainability 9. Global Expansion 10. Trust in Business Source: “CEO Challenge 2014”,The Conference Board

“ Corporations that focus solely on the cost of their real estate are ignoring the larger corporate agenda.”

HUMAN CAPITAL

Chart A notes the projected net annual change in the U.S. labor force (ages 18-64) from 2000-2040. While the millennial generation will be entering the workforce and eventually grow to be the dominant age demographic (Chart B), the growth rate of the U.S. working age population is slowing. This being the case, the U.S. economy is on the verge of a prolonged period where the new supply of labor will not keep pace with demand. Thus, finding the right talent to fill vacancies in organizations will become more challenging and significantly more expensive. This supply/demand mismatch will increase the competition for talent, which in turn, will drive-up compensation costs and ultimately impact corporate profitability.

A: GROWTH OF WORKING AGE POPULATION SLOWING (NET CHANGE IN U.S. POPULATION AGES 18-64)

2,500,000 2,000,000 1,500,000 58% Drop

1,000,000 500,000 0 2000

2005

2010

2015

2020

2025

2030

2035

2040

Source: U.S. Census Bureau

B: DEMOGRAPHICS OF WORKFORCE SHIFTING (COMPOSITION OF U.S. WORKFORCE) 2010

2020

37%

Millenials

Gen2020

Gen X

Millenials

Baby Boomer Traditionalists

Gen X

51%

Baby Boomer

Source: U.S. Census Bureau

Gen 2020 (After ‘98) Millennials (‘77 - ‘97) Gen X (‘65 - ‘76) Baby Boomers (‘46 - ‘64) Traditionalists (Before ‘46)

CUSHMAN & WAKEFIELD

5

DEFINING AN INNOVATIVE MARKET Certain markets provide occupiers with a better chance to support talent and innovation. The U.S. Department of Commerce, in conjunction with the Purdue Center for Regional Development and the Indiana Business Research Center, has developed a methodology for assessing the capacity of a region’s innovation capability. The innovation “potential” of a region can best be determined by assessing a distinct set of economic inputs and outputs that have the potential to yield greater innovation within an economy.

The best markets for occupiers tend to be those that offer the least compromise between labor quality and cost.

There are markets that offer high innovation potential with a below average costs. Austin, TX ranks the highest when comparing innovation potential to rent. Other markets with favorable innovation to cost comparisons include: Seattle, Raleigh / Durham, San Diego, No VA / Suburban MD, and Manchester, NH.

Please see the back cover for more information on how the Cushman & Wakefield analyzed 61 real estate markets using Innovation Index is calculated. the U.S. Commerce Department criteria and compared the top 20 to the U.S. average (see graphic below).

KEY MARKETS FOR INNOVATION

6

INNOVATION INDEX SCORE 128.3

RENT $36.75

SILICON VALLEY

$60.20

SAN FRANCISCO/OAKLAND

116.4

$55.74

FAIRFIELD COUNTY, CT

112.7

$50.99

BOSTON

111.8

$43.16

AUSTIN

110

$29.37

CENTRAL NJ

109.7

$34.48

SEATTLE

109.6

$26.36

RALEIGH/DURHAM

107.5

$33.60

SAN DIEGO

107.4

$37.36

No VA/SUBURBAN MD

$19.91

MANCHESTER NH

105.1

$58.35

WASHINGTON DC

103

$26.61

MINNEAPOLIS

102.4

$27.65

PHILADELPHIA

101.4

$27.35

BALTIMORE

100.3

$47.40

US AVERAGE

100

$30.16

SALT LAKE CITY

99.7

$23.09

NEW HAVEN

97.9

$27.04

PORTLAND

97.8

$31.94

DENVER

97.1

$26.05

DALLAS

96.5

$26.48

ATLANTA

94.2

$36.90

LOS ANGELES

94.2

$76.00

NEW YORK CITY

93.1

$31.00

No NJ

93.1

$41.98

HOUSTON

90.8

$38.08

CHICAGO

90.4

107

Source: U.S. Department of Commerce, Cushman & Wakefield

HUMAN CAPITAL

WHAT MAKES A MARKET INNOVATIVE:

Successful innovation requires a host of factors that allow new ideas to be brought to market. Having the right human capital is critical for innovation. However, talent alone does not mean that innovation will occur. Other factors are required for innovation to succeed.While Chicago, New York, Northern NJ, Atlanta, and Dallas all rank high in human capital, according to the index methodology they do not have the right mix of other economic components to rank higher, such as overall job growth, an increasing percentage of high-tech employment, and venture capital investment, among others.

A low index score does not eliminate a market from consideration for corporate expansion. Innovation, as a component of location strategy, must be assessed at the industry and company level to ensure the right match for the enterprise. For example, Houston has a low overall index score, yet is the leading market for energy related businesses and has built an infrastructure around that industry that would be challenging to replicate.

REAL ESTATE MARKETS ARE CHANGING The occupier war for talent has impacted real estate property types and market dynamics. A preference for urban-style living and working is dictating location decisions, as occupiers seek to capture the new urbanism trend that has developed in many U.S. cities and markets. Demographic shifts have produced higher than average population growth within major U.S. cities.

Millennials and Boomers, both of which have smaller households on average, are seeking urban-type locations to live, work, and play and corporations are following.

This new sense of urbanism has altered the real estate dynamics within many core Central Business Districts (CBDs) and given rise to submarkets that have long been ignored by occupiers and investors alike. Previously overlooked submarkets in cities such as Boston, New York, Chicago, and San Francisco, among others, have provided lower-cost alternatives to traditional CBD locations. Seemingly overnight, many of these markets have experienced significant office, retail, and residential development in response to occupier demand and as a result are now becoming increasingly more expensive.

RISING INNOVATION SUBMARKETS

RIVER NORTH (Chicago) $38 Class A Rent 13.5% Market Vacancy 0 SF Under Construction

S. FINANCIAL (San Francisco) $60.00 Class A Rent $60.00 8.9% Market Vacancy 8.9% 3.5 million SF Under Construction E. SOMA (San Francisco) $60.00 Class A Rent 5.2% Market Vacancy 535,185 SF Under Construction

RIVER WEST $20 Class A Rent 13.0% Market Vacancy 550,000 SF Under Construction

SEAPORT DISTRICT (Boston) $55.00 Class A Rent 4.8% Market Vacancy

MIDTOWN SOUTH (New York) $76.15 Class A Rent 11.1% Market Vacancy 2.4 Million SF Under Construction

AUSTIN,TX $43.00 Class A Rent 9.3% Market Vacancy 959,887 SF Under Construction CUSHMAN & WAKEFIELD

7

SUCCESSFUL PROPERTIES FOCUS ON THE EMPLOYEE EXPERIENCE The most successful product types today are the ones that bring together the necessary components to make recruitment work. Buildings and markets that are served by public transportation provide millennials and other workers better access to the office without having to provide their own transportation. Nearby residential and retail provide an overall employee experience, while the right workplace strategy shows employees that the company has an investment in how they work.

SUBURBAN REAL ESTATE:

Leading owners of suburban property have realized that the best way to compete with urbanization and assist their tenants in attracting talent is to bring urban elements to the suburban marketplace. Properties that help effectively move employees from one aspect of life to another and support the employee experience are being sought by occupiers­─and these properties do not have to be in an urban core market. In the war for talent, corporations understand that they are hiring a whole person and the environment they provide should support that.

LIFE 24/7 Convenience

EMPLOYEE EXPERIENCE WORK 21st century work style

8

PLAY Health, Retail, Amenities

HUMAN CAPITAL

CALL TO ACTION OCCUPIERS 1 Determine the best markets today and in the future for talent recruitment and retention at a global,

regional, and local level.

2

Consider a workplace strategy as a way to contain occupancy costs before compromising on the quality of labor.

3

Know the importance of the employee experience to your current and future workforce.

4

Consider even slight differences between submarkets that can make or break a project.

INVESTORS

1

Integrate work, life, and play into existing and new developments.

2 Consider a reverse site-selection analysis that assesses the competitive advantages of the property, the industries it is best-suited to attract, and the ideal strategy for maximizing its marketability and occupancy.

3 Ensure that the capital improvement budgets focus on making the right investments to attract and retain talent in the industries being targeted for tenancy.

4

Consider ways to improve access to the property.

“Real estate plays a significant role in recruiting, retaining, and engaging talent.�

CUSHMAN & WAKEFIELD

9

www.cushmanwakefield.com

INNOVATION INDEX DESCRIPTION

CORPORATE OCCUPIER & INVESTOR SERVICES

The U.S. Commerce Department’s Economic Development Administration, in conjunction with the Purdue Center for Regional Development, the Indiana Business Research Center, and other research partners, in 2009 developed the Innovation Index. The index measures specific inputs and outputs, that when present in an economy, allow for increased innovation to occur.

The index compares 22 different economic inputs and outputs for a defined region to for the U.S., some of which include:

Corporate Occupier & Investor Services (CIS) creates comprehensive solutions for real estate portfolios, aligning real estate strategies to our clients’ overall business priorities. Our clients range from multinational corporations to owners/occupiers of single assets, in local markets and across the globe. CIS adds value as a trusted advisor, leveraging all services to span the entire life cycle of our clients’ real estate.

High-tech employment

Global CIS teams collaborate through the sharing of best practices, use of consistent tools and processes, alignment of goals and priorities through industry-leading performance management and governance programs and flexible, effective technology. C&W partners with clients, enabling them to focus on their core business, confident that real estate experts are attending to every strategic and operational detail required to create, optimize and protect business value.

Knowledge-based occupations

CIS Services:

Education of population

Account Management

Venture capital investment GDP / Worker

Agency / Landlord leasing Business Consulting Transaction Management

Average patents issued

Facilities Management

More information can be found at www.statsamerica.org

Lease Administration Project Management Property / Asset Management Risk Management Services

For more information about this briefing contact: Rick Cleveland

Managing Director CIS Research & Strategy rick.cleveland@cushwake.com

Debra Moritz

Executive Managing Director Head of U.S. Business Consulting debra.moritz@cushwake.com

10

For more information about Cushman & Wakefield’s CIS platform and services, contact: John C. Santora

President and CEO Corporate Occupier & Investor Services john.santora@cushwake.com