Millennial Allowance: Tenant Improvement Key to Attracting Tomorrow’s Workforce [REPORT]

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New JLL construction research reveals what – and who – is shaping the future of the urban landscape

The Millennial generation is having a profound impact on the built environment under construction in 2015, according to a new report from JLL tracking national construction trends. Throughout 2015, tenant improvement (TI) – or the renovation of existing space – has been a bright spot in the construction industry, even as labor and construction costs continue to rise.

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There has been a 14.2 percent rise in TI projects since the second quarter of 2013, as landlords compete to attract tenants and companies compete for Millennial talent. This is especially prevalent in office markets that are saturated with new construction and renovation.

According to JLL’s latest report on U.S. non-residential construction activity, TI costs are declining in most key markets, as landlords eager to compete for tenants are more willing to pay for them. For office building owners, the average TI package nationwide is approximately $30-$50 per-square-foot in Central Business Districts (CBDs). These packages have become especially important as tenants look to customize office space to attract and retain employees—especially Millennials.

“If you’re in the C-suite and making real estate decisions now, keep in mind what the Millennial tomorrow’s generation of leadership needs are today,” says Julie Kilpatrick, LEED® AP, PMP, Senior Manager in the San Diego Project and Development Services (PDS) Group. “Even though you are possibly preparing for a move or receiving a TI Allowance for a re-up of your lease, you want to ensure you are spending your money wisely and applying it to the productivity needs of the Millennials. You don’t want to lock yourself into a traditional office space with large corner offices along with large blocks of “cube farms” with little natural light or views. You might as well just tell the Millennials you are recruiting to turn around and walk out the door on interview day. One of the biggest factors in attracting young competitive talent and retaining happy and productive employees is having an appealing space that works. This goes for our seasoned generations, too. Who doesn’t want a comfortable, aesthetically pleasing productive place to work? Finally, sustainability is not a trend, it’s here for good for the betterment and enjoyment of all of us.”

Companies are focused on accommodating their Millennial employees and their preference for offices in existing urban locations that are close to amenities and often with unique, open interior spaces. As a result, as companies begin to renovate and occupy older buildings, office space vacancies are slowly declining and are down 10.2 percent since Q2 2011.

“Construction costs remain high and the amount of available stock is increasing rapidly, so many tenants are focused on renovating rather than building new,” said Dana Westgren, JLL Industry Research Analyst. “Economics, however, are not the whole story. Millennials want everything nearby. Same-day delivery trends favor renovating urban warehouses, while the same cultural preferences favor trendy offices in renovated urban lofts. It’s all interrelated.”

The JLL research also points to other key construction industry trends playing out in 2015 including:

Rethinking the retail environment: New “omnichannel” strategies emphasize convenience for customers by leveraging their brick-and-mortar stores as e-commerce pick-up/return depots, which in turn requires a revamped store configuration. On the construction front, the majority of new retail space is located in the Northeast and Florida, with some Midwestern growth. In particular, Florida’s growth is driven by increased consumer confidence, growth in tourism and a recovering housing market.

Manufacturing industry driving construction volume: While construction in the education has been strong as universities focus on building new space to keep students engaged on campus, it’s been upstaged by a surprising category: manufacturing. Annual project spend on construction within the manufacturing sector has increased from $57.8 billion in 2014 to $90.3 billion YTD in 2015. For example, Sparrows Point in Baltimore, the largest privately owned industrial re-development in the U.S, has redevelopment plans to become a world class transportation, manufacturing and logistics hub.

Technology leads the charge: Technology companies are driving demand for cool, renovated office space. At the same time, industrial occupiers want and need, more custom e-commerce space, with higher shelving, specialized lighting, new technology and office space. Similarly, in retail, quick service restaurant chains are investing in new, creative interior build-outs to better compete with fast casual concepts. This increase in TI packages gives occupiers the opportunity for more customization and controls costs by focusing on renovation over new construction.

Future opportunity and capital planning: With construction starts at their highest point since the recession, the industry is still in the early stages of its recovery and will continue to grow in response to overall economic growth. Activity is still far below pre-recession highs, indicating growth will continue over the next several years, and dollar value of TI allowances will too.

“We expect to see continued growth of tenant improvements,” said Burns. “Companies will continue to grab vacant property both in primary and secondary markets and build out offices to fit shifting trends. That activity will place a premium on strategic capital planning.”

JLL research revealed that on average Forbes 1000 companies miss their capital plan targets for office real estate along by an estimated $12.2 billion annually. Of that total, 28 percent was overspent.

“As Capital continues to be scrutinized, it becomes even more important for companies to align the available capital with the firms overall strategy and objectives,” said Jim Dobleske, JLL Project and Development Services Global Board Chair. “Some of the worst performers overspend by as much as 20 percent, and that eats into these companies opportunities for growth. As space changes to meet the needs, wants and demands of the Millennial workforce, smart capital planning and construction management can make the difference between success and failure.”

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