Making the case for creative space

"The whole idea here is that, by having an open floor plan where people work close to each other, it facilitates people sharing and communicating about what they're doing, which enables better collaboration, which we think is key to building the best services for our community."
– Mark Zuckerberg, founder and CEO of Facebook

Commercial real estate is a constantly-evolving industry with ever-changing preferences for space use, design and common areas. Within the office sector, industry experts have witnessed a decade-long shift from traditional office formats with perimeter offices and interior support stations to more open, collaborative and efficient designs. This evolution continues today as creative space has gained popularity with tenants and landlords. So what is creative space and why is it worth the investment?

Defining Creative Office

Traditional office space is easy to describe; it's a workplace with standard carpeting, nine-foot ceilings with acoustic tiles, overhead fluorescent lights and dry wall. Creative space is a little more amorphous and is described by its finishes, which often include exposed columns, often “brick and beam”; high ceilings with exposed wood or concrete; and a combination of quiet work areas, collaborative lounge areas and relaxing break areas. However, creative space is truly identified by those who occupy it, namely TAMI tenants (those engaged in the fields of Technology, Advertising, Media and Information). What was once seen as a design layout reserved exclusively for small start-ups, creative spaces have become widely accepted and is the preferred fitout for both users and owners.

History of Creative Space

Creative space is commonly referred to as “Office 2.0”, which correctly suggests its evolution from prior generations. The modern open office environment actually originated in Germany in the 1950s, but it was not popularized in the United States until the dot-com era, when West Coast entrepreneurs embraced the concept out of sheer necessity. Creative space was often less expensive to rent, as it primarily existed in peripheral locations such as San Francisco’s South of Market, New York’s Hell’s Kitchen and Boston’s Seaport. Creative offices could also be built out quickly and cheaply, as tenants eschewed hard walls, suspended ceilings and complicated lighting in favor of no-frills benched seating. The new way of working was also more economical; an emerging company could fit significantly more bodies into the same space and spend that venture backing on human capital as opposed to overhead.

Creative space has also gained popularity due in large part to the changing way in which people work. The very concept of an individual office is seen now as isolated and out of touch with fellow employees. Quite often C-level executives are giving up their offices to be closer to the front lines.

With the advent of mobile devices and remote computing, employees no longer need to be tethered to their desks. As it is with many TAMI employees, their work is more interactive and is often conducted in non-traditional areas. Employees of the messaging app Tango can de-stress in their California headquarters with a quick game of ping pong in the firm’s game room while employees at Arnold Worldwide’s Boston office can head over to "Barnold", the office bar, to continue their work over a few cocktails.

Tenant Appeal

Companies are embracing the creative space trend, realizing the benefits beyond the obvious innovation advantages:

• War for Talent: Now more than ever, cutting-edge companies are only limited by their human capital. As the demand for attracting and retaining young talent becomes increasingly more fierce, companies find themselves catering to millennial preferences in order to keep their best employees. The problem is a sky-high turnover rate among millennials: Professionals between the ages of 20 and 24 stay at a company for less than an average of 16 months. Millennials are seeking organizations with office space that blends work and life, absent from the traditionally bland cubicle work style.
• Cool Factor: Face it: creative office space is just cool. From the insane rock climbing wall at Google’s New York office to the rain forest oasis decorating Zappos’ Las Vegas headquarters, companies are thinking outside of the proverbial design box. While all creative space may not be as eccentric as Zappos or Google’s, firms across all industries are constantly trying to stay ahead of the trends, determined not to be left in the abyss of yesterday’s news. From tech startups to auditing firms to even government offices, the creative space has taken off as the preeminent work layout.
• Efficiency: The real beauty of creative space is that companies are able to fit more people into the same footprint. This is achieved through a combination of flexible (and often unassigned) work areas and increased density. By viewing rent as a “cost per employee” metric, versus price per foot, companies can justify the higher rent that is now associated with being in the coolest location – essentially Real Estate 101.

Dollars and Sense

Not only is creative office space preferred by the end user, it is also an extremely attractive investment opportunity for the following reasons:

• Tenant Improvements: Creative office spaces are largely open and can easily be transitioned into space for the subsequent tenant moving in. Absent of fixed walls and doorways, creative spaces are filled with portable furniture, mobile structures and other easily removed items. During turnover, investors face very few tenant improvement costs, directly improving their own return on costs.
• Income/Expense Dynamics: As mentioned above, by viewing occupancy costs on a “per employee” versus a “per foot” metric, tenants are able to justify paying a higher rent and thus deliver superior income to the landlord. In addition to the rent premium, there is often an operational savings when compared to traditional Class A space. Both of these factors often have a direct correlation to superior NOI performance when compared with other assets in the same submarket.
• Institutional Acceptance: Given the proliferation of creative space, it has also become highly desired by institutional investors. While buildings with such spaces and companies might have been seen as a risky investment in years past, investment committees are desirous to cycle out of buildings with functionally obsolete floorplates and into those that are poised to capture tenant demand going forward.

What’s Next?

The work environment has evolved over the past 15 years, shifting from suits and individual offices to more casual attire and a preference for creative space. As the next generation of employees enters the workforce, how else will the work environment change? The only thing that is for certain is that for right now, creative office is all the rage.