Original Article

Developer Christopher Brown hardly ever uses his home office anymore. The dedicated office space in his Manhattan home is the first place his two kids want to be, especially when he’s there. So now, he rents shared office space four blocks from home and retreats there when he wants to knock out e-mails or review the pro rata numbers on his latest development deals.

“It’s great, it’s close by, and I can get my work done,” says Brown, who commutes between New York City and Coral Gables, Fla., where he’s co-developing, along with Heidi Eckes-Chantré and Kim Tabet, Giralda Place, a 33-unit condominium and mixed-use retail project that will also house 100,000 square feet of Class A office space.

As such, Brown is both a practitioner and a purveyor of today’s live–work trend, which doesn’t necessarily just encompass people working from home, but also people living and working within a relatively small geographic area.

“The reality of working these days is that, because of the technology, you can do it from anywhere, and people are actually doing just that,” Browns says. “That holds for all demographics, age 18 to 85, whoever is still working.”

Indeed, according to Gallup, 43% of Americans spent at least some time working remotely last year, a four percentage point increase from 2012. And where those workers live today isn’t defined as much by the location of a traditional office as it is a home that’s in proximity to a shared or co-work space, whether rented or not, where professionals can sit heads down and be “alone together” to get work done.

It’s the type of lifestyle at least some of the buyers at Giralda Place are looking for. There, Brown recently spoke with a buyer who wanted to downsize from his large, single-family home in Coral Gables to the more carefree, condominium lifestyle. “Right after he asked about our condominiums, he said he had about 60 employees and wanted to know if we had space for them in our commercial tower as well,” Brown says. “He’s the epitome of what we’re seeing today—someone who wants to downsize from his royal lifestyle, forget the car, and walk down the block to his office. We are actively pursuing tenants right now to do shared office space, because that’s the trend that’s really transforming everything.”

The idea of a live–work lifestyle is nothing new. In fact, it was the norm in America before the advent of the automobile. But developers of both for-sale and rental homes say that trend is now reversing itself at breakneck speed, as technology has altered the concept of work as a place and demographics have changed residents’ lifestyle demands. These shifts, they say, are rapidly transforming the development landscape—and the strategy developers apply to their business—in ways that would have been anathema just 10 or 15 years ago.

“It’s affecting everyone, not just in the office real estate market, but in the residential investment and development industry, as well,” says Russell Tepper, senior managing director for Dallas-based Mill Creek Residential, which has developed 25,000 apartments in more than 90 communities since 2011. “The reality is, people no longer work from 9 to 5, in an office, with a mandated, hourlong lunch break where they punch a time card. That hasn’t existed in our economy for a long time, and as a result, people are living and working differently.”

The Driving Change

For developer Art Falcone, whose career has spanned nearly 40 years and has encompassed everything from master-planned communities to urban towers and mixed-use office, retail, and residential projects, what’s happening in development today is a watershed moment that unwinds six decades of U.S. development history.

“After World War II, we got into this highway craze in America, of getting in the car to drive out to the suburbs,” says Falcone, CEO and managing principal at Boca Raton, Fla.–based Encore Capital Management, who is currently spearheading the downtown Miami Worldcenter project. “That was the trend for 60 years, probably up until about 12 years ago. But now, the millennials and Generation X want to be back in those urbanlike settings again, where they can walk and never even have to get in their cars. The world has changed pretty dramatically, and it’s not going to flip back anytime soon.”

As Eugene Diaz, principal at Bloomfield, N.J.–based Prism Capital Partners, puts it, “The changing face of technology is making workspaces that are separate and distinct from living spaces a thing of the past.”

These changes are impacting everything from the core areas of expertise that developers apply in their daily workflow to wondering aloud about how physical space will continue to change in the years to come, and what challenges that will bring to their business.

For example, several developers interviewed for this article expressed concerns over what will happen with the structured parking components of their developments—a must-have requirement that’s often zoned into their projects today—when driverless cars become the norm. Already, they say, fewer residents want or need parking spaces.

More Core Competencies

From a more fundamental perspective, these changes also mean that developers need to foster core competencies across a spectrum of disciplines. With development now encompassing live, work, and play—­often in close proximity to one another—they now need to be better in more-diverse areas while still being able to develop those various elements simultaneously.

“Developers are being forced to have more expertise and be able to do more than one thing well,” Falcone says. “But, by the nature of the business, most builders and developers are experts in a single asset category, because it’s very difficult to focus on different things, and be good at what you’re doing, in multiple areas.”

For example, while the poster child of multifamily development may have been a suburban, greenfield, garden-style complex 15 years ago, those types of communities have lost appeal for developers and potential residents alike.

“The days of greenfield development and straightforward processes are long gone,” says Mill Creek’s Tepper. “Our focus is now primarily urban or suburban areas that have some type of attraction, whether that’s mass transportation, cultural amenities, access to highways, institutions of higher learning, or medical centers. Those are the things that attract renters by choice.”

Or, as Falcone puts it, “The neighborhood now is the amenity.”

And developing those neighborhoods, or developing a community to complement the surrounding area, is quickly becoming what development is all about. That means programming the various aspects of your live–work–play project so they can coexist peacefully, without causing headaches to your various tenants.

“You’ve got to think about how you serve the back of the house for your retail and commercial components so that it doesn’t interfere with your residents,” Falcone says. “You can’t have it where the Dumpster is in a spot that’s disturbing the residents three floors up. You have to be very cognizant of not placing the entertainment component, where a band is playing downstairs at night, too close to the residents so you don’t get noise complaints.”

Financing Conditions

Financing for these kinds of projects is also different, especially when it comes to vertical construction where retail and office are typically on the lower floors, with residential components above them.

“It’s really the magic question,” Falcone says. “You can only start building from the ground up, and you’ve only got one contractor building the office, retail, and residential components. But before you can start building your residential floors higher up, you have to make sure you have enough of your retail and office pre-leased, so that you can get your financing to build higher. So now, you’ve got the retail done, and you’re committed to your contractor, but you’ve got to make sure your retail is 50% or 60% leased to get your loan to keep going. It gets really tricky, fast.”

Because of that financing structure, Falcone—who has the luxury of having dedicated directors of office, retail, residential, and hospitality in his company—says while many developers try to set up joint ventures to pull off mixed-use projects, the more partners there are in a project, the more complicated each step becomes.

“You’ve got to be able to sit around a table without the posturing of different attorneys, principals, and lenders, all of whom have different objectives and alignments, getting in the way,” Falcone says. “You’ve got to be able to make quick decisions, without [having to make] five phone calls to the various players involved.”

Rick Kolb, senior vice president for the Southeast region for Boston-based Suffolk Construction, says the complexity of these projects makes the financing hurdle that much higher. “From a development perspective, the challenge is exploring adequate, competitive financing sources for these kinds of deals,” Kolb says.

Do More, Charge Less

Tackling a mixed-use project is different not just from the development end of it, but from an operations standpoint, too. ­Developers look at these projects through the lens of a rent mix from the various components and may even have a “loss leader” on certain aspects of the development in order to make the whole work.

“You’re trying to create everything you want in one block,” says Brown. “At Giralda Place, we want to put in brands in the retail space that are good for our condominium owners and reflect back the quality and lifestyle of our residences. So, if there’s a certain retailer who provides that and it means cutting my rent down a little on that component to get them in here, I’m willing to do that, because it improves our brand as a whole.”

At Falcone’s Miami Worldcenter, where he has more than 500,000 square feet of retail, he says that in order to provide the kinds of amenities his clientele will want, he may need to price it accordingly to secure the anchor tenants he needs.

“You don’t lose money on it, but, obviously, whereas a retail client might be paying $90 a square foot, a movie theater can only pay $30,” says Falcone. “So if that’s what you need to do, you do it. You’ll still make your money off the smaller retail shops and restaurants.”

If You Worked Here, You’d Be Home Already

For J.J. Abraham, California division president at Lennar Multifamily Communities (LMC), that reality hit home in 2012, when he was touring a community in Los Gatos, Calif., near the Netflix campus, and noticed residents huddled around wall jacks they could plug their devices into, much as you might

The result is the firm’s STLT (pronounced “satellite”) office ­spaces within its buildings, where residents can use private rooms for conference calls and meetings, print out color documents, and plug into mounted screens and TVs to work on a presentation. Through a proprietary app, similar to a co-work office membership, an LMC resident renting in Seattle can fly on business to Orange County, ­Calif., and reserve office space to be available when she gets there. The company has programmed approximately 14 of the spaces so far.

“We decided, instead of all the kitschy amenities that nobody really used, like wine cellars, demonstration kitchens, and lobby theaters, why don’t we give them a real offering? Somewhere they can actually get work done and save between $1,000 and $1,500 a month that they would otherwise have to spend on office space,” Abraham says. “Holding a meeting at Starbucks just doesn’t cut it for everyone, because it’s too darned loud. This is a real workspace.”

While the company hasn’t been able to monetize those spaces, ­Abraham says they help prospects make the purchase decision and justify spending more on rent because they can save on office space.

(And, incidentally, while demonstration kitchens as a stand-alone amenity may indeed be passé, some developers have found ways to incorporate eating areas into workspaces, too. “We’ve kept fully functional kitchens in our common areas, adjacent to these rooms, so residents don’t need to go back to their apartments for lunch,” says Kristen Gucwa, vice president at Tampa, Fla.–based Richman Signature Properties.)

A Truly Transit-Oriented Development

The live–work trend is also pushing developers to take on projects they may have never considered in the past. Take AvalonBay’s co-branded Avalon Willoughby Square and AVA DoBro project in downtown Brooklyn, N.Y. The property’s first 30 floors have a more eclectic, neighborhood feel, while floors 31 to 58 feature—with a view of Manhattan—more classic, sophisticated designs.

Arlington, Va.–based AvalonBay, which owns 83,000 apartment units nationally, developed an entirely new subway entrance within the four corners of the property so residents could access the five New York City subway lines converging there, in order to make the building attractive to today’s urban professionals, whether they want to work where they live or commute to where they work.

“There were a number of challenges and lessons learned along the way. We had to do a lot of it on the fly,” says Martin Piazzola, AvalonBay’s senior vice president of development. “We performed the construction of the new subway entrance internally, the same way we self-performed the rest of the project.”

The property also includes a bike lobby, a pet spa, an “AVA Brew” branded coffee shop and brew pub, and, on the building’s 30th floor, a designated “chill” lounge for socializing and group gatherings. While the space is outfitted with speakers for residents to plug their phones into and play music, residents actually use the area to practice the quintessential millennial art of being alone together.

“We would love to say we had great insights, because we thought of it as a social gathering place,” Piazzola says. “But, invariably, you walk into that space and while the music is never on, it’s still jam-packed with people, young and old, with laptops that they have their ear buds plugged into. We suspect they’re doing work.”

For Nancy J. Ruddy, founding principal of New York City–based design firm CetraRuddy, which designed the space, having that kind of informal, yet work-oriented functionality is key in development today. “The ability to be alone together, in a space where you can read or work in an exciting atmosphere, is critical,” she says. “It expands the experience and enjoyment for residents living in the building.”

Obviously, building a community with a dedicated subway entrance, coffee shop, and brew pub isn’t exactly what one would typically think of as an apartment developer’s core competencies. But it’s ­emblematic of the different ways in which developers are thinking about their business today.

Space Efficiencies

Take Modera Lofts in Jersey City, N.J. There, Tepper and Mill Creek rehabbed a 113-year-old, eight-story brick exterior to house 366 apartment homes, as well as a lounge area with a pool table, and other social areas throughout the building. But, tapping into the live–work trend—and utilizing windowless space where the building abuts a neighboring property—Mill Creek also built private offices. “You can just walk in there, lock the door, and do some work if you want to,” Tepper says. “We also have a conference room that’s available for face-to-face meetings.”

Those offices at Modera Lofts tie into another trend within the live–work genre, one that’s akin to cutting rents on retail in order to bring in the brands developers want. Namely, developers are more willing to program less-efficient space (in terms of NOI) into their buildings in order to take a holistic approach to providing the amenities residents want. Examples include Modera Lofts’ windowless offices and AVA DoBro’s chill lounge, both spaces where residents can sit and work for free.

“In every community that we develop, there’s always space in the building that’s less efficient and may be better utilized as an amenity than as an apartment,” Tepper says. “We work with our architects, who can be very creative as to how to build and use those spaces without compromising the design of the apartments themselves.”

Tepper points out that it’s critical to educate any financing partners on the importance of that kind of space—that is, square footage that can’t be tied directly to a revenue stream—at today’s properties, which may have inspired head scratching in the past. “You need to educate your capital partners to the importance of these amenities, so that when you present your new development opportunity in underwriting, they have an appreciation for why you’re allocating resources in this way.”

Education, of course, is critical to mastering any new shift in business direction. For the live–work trend, and how it’s affecting ­developers of all stripes, though, that education is going to have to span areas they might never have considered in the past, so that they can become better in areas that weren’t even on their radar a generation ago.