By J.C. Pelusi
It’s no secret that the millennial generation is becoming an integral piece of our nation’s workforce. Millennials will dominate the workforce by 2015 and will comprise 75 percent of the workforce by 2030, according to the U.S. Bureau of Labor Statistics. Consequently, millennial lifestyle preferences and work habits will continue to transform economic activity and, more specifically, shape commercial real estate demand.
This up-and-coming generation is the primary driver behind workforce urbanization. Following a recent influx to U.S. urban cores, it’s clear that young professionals (born between 1980 and 1997) prefer downtown living, working and shopping.
We’re already seeing the economic impact in major metros and in our secondary markets. In fact, space availability is low across the region as a whole, and The Atlantic magazine recently featured Cleveland and Pittsburgh among the top nine U.S. cities “Where Millennials Can Make It Now.” The Atlantic noted that Detroit was already established among those “deemed magnets for young, creative people.”
The commercial real estate implications are unique to the young generation of professionals, including the evolution of the collaborative office space, new retail structures that cater to online shopping and, subsequently, more demand for downtown residential space.
But, now that we are in the midst of a generational shift, how are businesses adjusting to the changing landscape? How are millennials shaping the nature of new demand in our region? Following are three major trends driven by the millennial generation across our region in the office, retail and multifamily sectors.
Shift 1: Young Pros Fuel Collaborative Office Concept
We are in the midst of an office space shift, with rising demand for space in the Midwest and the interior East. In Detroit, we’ve seen a number of new tech incubators opening downtown offices, including Tech Town and Refresh Detroit. Meanwhile, a large technology company called Computer Sciences Corp. (CSC) has decided to open an office in Pittsburgh, largely because of the new talent entering the local market, according to a recent article in the Pittsburgh Tribune Review, another indicator of the impact of millennials.
More and more businesses are looking to tech-focused, collaborative workspace styles to stay competitive in their industry, and to boost recruitment efforts. This trend has created increased demand for downtown office space — but not the traditional kind.
New technologies, coupled with an emerging workforce demographic, are driving innovative workplace productivity strategies across the board. In the words of my colleagues from Jones Lang LaSalle’s research team, Rich Kleinman and John Sikaitis, “The impact of these shifts on the amount of office demand will be minor compared to the impact on the nature of the office demand.”
Cleveland is experiencing steady demand from millenials for urban living.
A prime example is how KeyBank reduced its Cleveland office space by 30 percent in April 2013. While KeyBank did cut back on staff, a shift in workplace design was largely responsible for the reduction in space from approximately 700,000 square feet to 487,000 square feet, according to Cleveland.com.
Dunnhumby USA’s new headquarters, which is currently under construction in Cincinnati’s central business district (CBD), is another example of a business building a more collaborative office environment, as opposed to the traditional desk/cubicle model.
Shift 2: Downtown Pros Seek Downtown Living
The renewed passion for downtown employment is accompanied by an interest in downtown living. Fourteen percent of millennials live downtown or close to a downtown area, and 34 percent live in a city or neighborhood just outside of a downtown space, according to Jones Lang LaSalle and the Urban Land Institute.
It’s a cycle that we expect to continue this year. As a result of increased demand for urban residential space, we are also seeing a new trend emerge in multifamily living. More and more vacant, traditional office space is being renovated into new apartment space in our local markets. Since most millennials are opting to rent, we expect this trend to continue.
In Cleveland, construction is currently underway at the former East Ohio Gas Co. office building, where K&D Group is converting the 350,000-square-foot office building into apartments. The target date for completion of this development is 2015. This is just one of many recent residential projects in downtown Cleveland.
Millennials are driving urban residential development in Cincinnati and Columbus. Anderson Birkla Investment Partners LLCpurchased the 580 Building in downtown Cincinnati in early 2013 with intentions to convert the office property into mixed-use space featuring residential, retail and entertainment components. And in Columbus’ CBD, developers have completed more than 2,000 residential units during the past decade. More than 750 units are under construction, and an additional 830 units are under consideration.
Shift 3: Retailers Align Real Estate Strategies With Evolving Technologies
New demand for downtown living and office space is driving growth in local entertainment sectors. Thanks to the Pittsburgh Penguins, and increasing demand downtown, Pittsburgh’s entertainment sector is undergoing a transformational period. With the professional hockey team’s move from the Civic Arena to the CONSOL Energy Center, the Penguins engaged Jones Lang LaSalle to implement a $600 million master plan for the 28 acres left behind.
Located in the heart of downtown Pittsburgh and connecting to the Lower Hill District, the Penguins are leading redevelopment efforts of the Civic Arena. The makeover of Pittsburgh’s downtown will include residential, office and retail supporting the millennials’ live/work/play approach.
The retail sector is also experiencing a major shift, and we are seeing the impact both locally and nationally. Tech-savvy millennials are shopping online, and ultimately changing the way retailers utilize brick-and-mortar store space. The digital shopping shift has increased the need for fulfillment centers, larger in-store stock areas, as well as the need for larger distribution centers.
Pittsburgh’s American Eagle Outfitters, Inc., will relocate its distribution center to a new 1 million square foot distribution center in 2015. The Pittsburgh Business Timesreports that its current facility is 500,000 square feet. During the coming year, we foresee increased redevelopment of existing space in the retail sector driven largely by changes in technology. In the words of Jones Lang LaSalle researchers, “Urban retail properties are in ultra-high demand by investors.”
JLL’s 2014 Forecast
Millennials will continue to seek the connected, urban lifestyle. With limited space available across the region, we expect to see elevated interest in new development this year. Cities like Cleveland and Pittsburgh are tracking steady growth, while up-and-coming cities like Cincinnati and Columbus have potential to make a bigger impact.
Jones Lang LaSalle researchers also expect to see an upturn in investment activity in secondary and tertiary markets in 2014. The outlook for these markets is strong. In fact, we are already seeing exciting activity in our local markets, including ongoing redevelopment of the Flats in Cleveland as well as the Pittsburgh Penguins’ plan for the downtown entertainment scene.
Thanks to Dan Gilbert, founder of Quicken Loans, we are also expecting substantial commercial real estate activity in Detroit in the coming year. Gilbert has invested upwards of $1 billion with plans to transform the downtown area into a more exciting, lucrative place live and work.
While the nation’s economic recovery may be slow, we are nonetheless expecting the recovery to continue at a steady uptick throughout 2014. Coupled with a healthy lending environment and increased investor interest in our markets, we are looking forward to a busy, positive year driven by demand characteristics of the millennial generation.
— J.C. Pelusi oversees Jones Lang LaSalle’s transaction advisory service line within the company’s corporate solutions group. He manages the firm’s corporate clients and local offices in the Great Lakes region consisting of Detroit, Cleveland, Columbus, Cincinnati and Pittsburgh. He is based in Pittsburgh.