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Wednesday, July 23, 2014

Tenants, Talent and Transit

By Rodney McDonald (Toronto)

On June 17, 2014 I moderated a panel session at the Bisnow Creative Office Summit in Toronto.

The panel included five other leaders from Toronto's commercial real estate industry.

During our one-hour morning session, in front of an industry audience of 200 people at the Shangri-La Hotel, we discussed a range of topics within the creative office theme: what are creative office tenants looking for, how are developers enticing them into their portfolios; and will we see more creative office tenants in downtown office towers.

Yes, we will see more creative office (and other office) tenants in downtown towers, as well as other types of downtown buildings. Why? Tenants are chasing talent.

In the past, office location was determined by the CEO's needs, executive team needs, or some business need. Office labour was relatively abundant and not particularly specialized. Employees were expected, and willing, to travel to wherever the job was located, and often stayed for life.

For many office tenants, especially large office tenants, those days are gone. In a recent meeting, one large company representative said to me, "our office labour force is shifting from clerical workers to knowledge workers."

Knowledge workers are now a key driver of our economies. In some cases, we are relying less on natural and manufactured capital and more on human capital to create value. Creating a smartphone app and selling it to millions of users for $1 does not require very many natural resources or a factory or warehouse of manufactured capital; it does require some smart people who can think creatively and innovate, combined with financial capital. With human capital now a greater factor in value creation, and boomers retiring, tenants are chasing young talent.

In Toronto, the young talent lives downtown in condominiums. In the past ten years, since 2004, over 23,000 high-rise condo units have been built in 69 buildings in downtown Toronto. Today, another 22,000 high-rise condo units are in pre-sales or under construction in 53 buildings - almost as many units as in the past ten years combined. Rapid urbanization is not just a Toronto trend, it's a global trend, a subject for a blog of its own. The point is, young people in Toronto live downtown, they want to walk or take public transit to work, and office tenants are having to adapt.

A sample of office tenants that have moved or consolidated operations in downtown Toronto over the past five years include (in alphabetical order): Apple Canada, Coca-Cola, Deloitte, eBay, eOne, Google, LinkedIn, Oracle, Postmedia, Randstad, SNC-Lavalin, Tata Consulting, Target Canada, and TELUS. This movement and consolidation is also happening in other cities that have been historically more suburban. Just two examples: 1) in Vancouver, Amazon has taken 90,000 sf in the new TELUS Garden tower downtown; 2) in San Francisco, will lease more than 700,000 sf in the new 1.5 M sf 61-storey Salesforce Tower (formerly known as the Transbay Tower) - a new landmark for that city - next to the Transbay Transit Centre.

Transit is another key part of this story. In many cities traffic congestion has become an acute issue, with long commute times impacting the productivity of people and the economy. The Toronto Region Board of Trade says that congestion is the biggest threat to the long-term competitiveness of the Toronto region's economy and gridlock is costing the Toronto region $6 Billion annually in lost productivity. (Imagine if every office tenant in Toronto had a flexible work strategy that allowed employees to work from home one day each week, and companies coordinated this effort to spread it out over five days. It would be a 20% drop in traffic each day, plus a ready-made business continuity program when unexpected weather or other disruptions occur.)

In addition to chasing talent, tenants are also chasing transit. In Toronto, KPMG is the anchor tenant in the first office tower at Vaughn Metropolitan Centre - the new subway terminus of the University branch of Toronto's Yonge-University subway line. In Burnaby, British Columbia, the office buildings closer to the SkyTrain now rent faster. In Winnipeg, Manitoba, although there is no subway or light-rail, transit was still a factor in Manitoba Hydro deciding to locate its new LEED Platinum office tower on a downtown site that provides bus access to over 90% of the city - prior to Manitoba Hydro's move downtown approximately 95% of office staff commuted via personal vehicle; today, over 65% take transit to the office.

At Avison Young, we know know and live these aspects of young talent and transit. Our global headquarters in Toronto is located downtown in a LEED Gold office building with secure indoor bicycle storage, shower facilities, and direct access to Union Station - Canada's busiest passenger transportation hub - allowing our people to easily travel to work by subway or GO Train. Many of the young people - the Gen Y's - in our downtown Toronto office live in downtown condo towers and walk or take the subway or streetcar to work (and do not own a car). Some of the Gen X's in our office take the subway or Go train - the office location was one of the factors in my decision to join Avison Young last year (I have a 15 minute subway ride to the office). Some of the Boomers walk, take the subway, or the Go Train to the office each day. On top of this, there is the element of flexible work - with the technology most of us have at our fingertips, an Internet connection, and files in the cloud, it is possible to work from anywhere - I was not in the office when I wrote this blog.

When you consider all of these factors together - human capital as a driver of value more than ever before, the growth and shift to knowledge work, where young talent lives, congestion and transit, and flexible work enabled by Internet-based IT - it demands that office tenants think holistically and strategically and apply integrated decision-making.

There is a lot of talk about Workplace Strategy today. This is important and we often help clients with this aspect of strategic thinking - to create a physical workspace that is a fit for your company's culture and work process. Since the factors needing consideration stretch beyond the physical workspace, in addition to a Workplace Strategy, we often recommend our clients create a broader Real Estate Strategy. We also recommend that the Real Estate Strategy be aligned with your business strategy and your sustainability/CSR strategy.

As you chase talent, Avison Young can help you think about the big picture from a real estate perspective and help you implement a winning strategy.

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