Innovation Centers: Next Big Thing in Commercial Real Estate
Innovation is at the heart of any global market. Creating improved products, processes and technology is essential for any international player, and we have seen this innovation time and again in the primary American real estate markets. But as these markets become saturated and overheated, new markets are emerging—some on the outer rings of primary markets and others not as close in.
One factor that has caused many of these markets to emerge is job growth, but not just any job growth. Amy Liu, VP and director of the Metropolitan Policy Program, recently wrote in her blog for the Brookings Institute that relentlessly chasing jobs can be costly; instead, it’s better for taxpayer dollars to be spent on strategic investments in public goods like research, training and infrastructure that support innovative firms creating good-paying jobs. “Only by boosting household incomes can regions stoke demand for local-serving industries like restaurants and retail, and create new jobs associated with them,” Liu wrote.
In addition, each region has to play to its own strengths and not try to imitate hot tech markets like San Francisco and Silicon Valley if it doesn’t share their strengths, Scott Andes, associate fellow with Centennials Scholar Initiative, wrote in another Brookings Institute report. “Cities have unique technology competencies and pathways to venture capital.” Economic strategies to attract outside capital and bolster local funding should reflect those attributes and not simply default to what seems to have worked in the Bay Area.”
With these unique strengths in mind, Real Estate Forum set out to explore what makes these emerging markets great, why people are attracted to them and how they’re impacting commercial real estate.
Seattle is a very urban, downtown and livable community similar to San Francisco, only with a better cost of living, Berkeley Davis, director at RETS Associates—a national commercial real estate recruiting firm, in Seattle—tells Forum. “Because of the spur of development over the past several years, a lot of trendy submarkets have evolved that are walkable and transit oriented. For the growing number of working Millennials, this is a very attractive lifestyle.”
Davis says a major component that makes Seattle attractive to employees in CRE is the culture. “Museums, shows, music and arts venues are all very affordable and accessible. This is a desirable element that stretches across all generations.”
Seattle is also a tech-focused city—second only to Silicon Valley—which greatly influences the CRE community and results in a relatively high number of companies that promote flexible hours and working from remote locations. “One of our clients in Seattle has approximately 50% of its workforce in the office on a daily basis—the rest work from home,” says Davis. This is extremely attractive to Millennials and Gen-Xers with small children or those who do prefer to live further out in the suburbs.”
Seattle has become so popular that available homes are growing scarce. According to RealtyTrac, due to Seattle’s growing economy, high in-migration and limited housing supply, “it’s no surprise that our market has a low number of vacant homes relative to the national average,” writes Matthew Gardner, chief economist at Windermere Real Estate in Seattle.
One of the fastest-growing areas of Seattle has been South Lake Union. It began with the Fred Hutchinson Cancer Research Center’s relocation to the market in the late 1980s and continued through Amazon.com’s relocation of its urban campus in 2007, which spurred many like-minded businesses to move to the area, Lori Mason Curran, real estate investment strategy director for Vulcan Inc., tells Forum. Between 2010 and 2015, Vulcan delivered 2.7 million square feet of office space to the online retailer in South Lake Union, and soon the neighborhood became a hub for innovation and collaboration across companies and sectors.
“Soon, start-ups, life-science and tech companies were relocating to South Lake Union because of its unique atmosphere,” says Mason Curran. “In 2014, South Lake Union was recognized as one of seven innovation districts in the US by the Brookings Institute,” which defines the term as geographic areas where leading-edge anchor institutions and companies cluster and connect with start-ups, business incubators and accelerators. “They are also physically compact, transit-accessible and technically wired, and offer housing, office and retail.”
Mason Curran expects to see more major employers moving into the neighborhood. “While there has been a strong focus on commercial office and life-science research facilities in the past decade, the amount of residential development is increasing. In the 1990s, there were fewer than 500 units of (mostly subsidized low-income) housing. Today, there are about 6,500 units (complete or under construction), including about 25% workforce/affordable housing, with several thousand more units in the pipeline.”
South Lake Union is now where many of the city’s young, well-educated newcomers are concentrating, elevating the neighborhood to number one in Seattle for population growth, she adds. “Several hotel developers are also proposing hospitality uses.”
Vacancy in many property sectors is low in Seattle, which is causing a lot of development, specifically for multifamily and office, says Davis. “Most of these projects will be delivered this year or next. Then the head of development will most likely settle, with few new construction starts. It’s a cautious but optimistic market, and we anticipate there will be continued job opportunities.”
Portland is less than a three-hour drive from Seattle, but has a different vibe and therefore attracts a different crowd, Davis tells Forum. “The city has a little slower pace; it’s a less urban and has a bit of a free-spirited vibe inside and outside of the office. This is the location that is attractive to Millennials who seek a relaxed environment that is still rich in culture. From a quality-of-life standpoint, Portland is very attractive.”
Adam Lewis, regional manager for Marcus & Millichap, tells Forum that Portland continues to rank among the top 10 fastest-growing metros, competing with other West Coast locales such as San Jose and San Francisco, but at a much lower cost of living. “It also benefits from its proximity to some of the best outdoor activities and scenescapes in the country. Mixed-use development throughout the urban core is barely keeping pace with population growth, as the aptly named ‘Silicon Forest’ continues to draw talented Millennials to its growing community of tech firms.”
Lewis adds that decades of urban planning have created a desirable city with vibrant communities and protected natural areas. “Forward-thinking community leaders established the Urban Growth Boundary and Metro, which set the stage for Portland to become the jewel it is today. The city continues to invest in its residents’ quality of life, green development and transit improvements and attract businesses that will only increase its growth and appeal.”
Employment has been growing exponentially in Portland, too. Asim Hamid of the Praedium Group recently told Forum’s sister publication, GlobeSt.com, “We’ve witnessed a recent explosion of jobs in Portland, particularly within the tech and consumer product sectors.” He cited Intel Corp. and Nike, both of which employ thousands in the area and are expanding.
Elliott says San Diego ranked the most desirable city to live in per the results of RETS’ survey of the top 10 western markets, completed in the fall of 2015. “The primary driver for employment in San Diego is the quality of life, followed by the weather and the abundance of space that balances the dense city. From our experience, people that usually move to San Diego stay in San Diego. It’s a tight-knit city with great companies, opportunities and culture. Many companies search for candidates that are locals and know the market well.”
He adds that there is a not a tremendous amount of activity in San Diego, so the number of available mid-to-high-level positions in commercial real estate is lower than in cities like Los Angeles and San Francisco. “When these positions do surface, they’re typically paired with a great opportunity so the hiring company can secure a high-quality candidate.”
There’s a lot to be optimistic about given the solid 2015 that San Diego just experienced, Michael Combs, research manager for CBRE, formerly with the San Diego Regional EDC, recently told GlobeSt.com. “The region added the most jobs in 16 years, led largely by innovation economy jobs. Investment trends were very positive, and a healthy flow of capital is essential to our innovation economy. A recent study by the Martin Prosperity Institute found that San Diego received the sixth most venture capital investment in the world, ahead of global cities like London and Paris. There are a lot of signs that the region isn’t going to slow down significantly in 2016.” Not bad for a market that was once heavily reliant on the defense sector for its income.
For Stacey Pennington, urban planner for Makers Quarter in the East Village area of Downtown San Diego, the market’s rise began with UCSD decades ago, when the city recognized the importance of creating a university presence in La Jolla and worked out a very beneficial deal with the school. “Pueblo land was given to UCSD at a discounted price, and it flourished into its own innovation cluster, becoming an internationally recognized hub for biotech and related industries,” she says. “It’s spurred a lot of clusters throughout the region.”
Today, Pennington says, San Diego is #3 in the US for life sciences and attracts more than 60% of the region’s venture capital. It’s home to over 600 life-science firms and more than 80 research institutes. “That kind of density and cross-fertilization between education, research, innovation and entrepreneurship is tightly intertwined.”
The region is also home to more than 1,200 sports and active-lifestyle companies, particularly in the North County coastal area, which employs more than 20,000 people and generates $2.24 billion in economic impact to the region, says Pennington. It also boasts a huge cleantech presence, is #1 in solar installation nationwide and was highlighted by the National Geographic Channel as a Smart City. And San Diego is #1 in telecommunications in the US, and its cross-border relationship and proximity to R&D hubs in Mexico has caused Downtown San Diego to be the center of a megaregion, rather just than the southern edge of the city of San Diego. “That’s the transition point between the regional story and the story of Makers Quarter, in many ways,” says Pennington.
Indeed, Makers Quarter, a new and developing urban district in the East Village, is a big part of that submarket’s success story. A new development hub for apartments, education, retail and eventually one million square feet of office—all punctuated by a distinct arts and cultural presence—Makers Quarter aims to capture the innovation vibe that exists in other parts of San Diego and create a unique neighborhood to attract talent and companies.
While much of the development and redevelopment in the Downtown San Diego market has been residential, that looks to be changing. Kris Michell, president and CEO of the Downtown San Diego Partnership, recently told GlobeSt.com, “I’m hearing that development is skewing toward commercial. For the first time, we’re having discussions with developers who want to build spec office Downtown, not just build-to-suits. I think over the next few years you’ll see more commercial construction here.”
IDEA1 is the first step to establishing the District’s vision of becoming San Diego’s design + technology innovation hub. We will achieve this goal by mixing all of the critical uses – office, residential, and retail – in a way that encourages interaction between inhabitants of this block and the larger community. The design principles that support an innovation ecosystem are on display in this project to act as an inspiration for other I.D.E.A. District designers and developers.