Labor Supply Thwarts Office Build-Outs

SAN FRANCISCO—This hot market has hit a boiling point: the construction labor shortage is creating a challenge for tenants trying to schedule office build-outs. In this exclusive, Dan Polito, director of Skender’s Northern California operations, discussed the trends and options for companies facing build-outs.

GlobeSt.com: How is the construction labor shortage affecting new office build-outs/?

Polito: The construction labor shortage has significantly backed up contractors’ availability to build out corporate interiors. Some contractors can’t start on a new project for at least 12 months out, posing a challenge to companies that need to expand offices more immediately.

The lack of available space is another factor especially acute in greater San Francisco. This market is like a giant Tetris game in which you have to move quickly to secure space. We often learn that a vacancy has been leased and subleased before it is even publicly marketed. The more active brokers often keep pending vacancies under wraps and market them to their own contacts before the availability can hit the streets.

To close the gap between what is needed and what is realistic, we’re seeing companies get creative. Companies generally have three options. You can lease swing space. You can join a co-working space. Or you can plan a phased build-out and occupancy schedule to work around potential delays. We’ve seen companies renting co-working spaces to house growing workforces until contractors’ schedules open up. Some companies are negotiating short-term leases on other floors in the building they’re already in until new facilities are built out. Then, their contractors can quickly touch up the short-term space to be aligned with the tenant’s brand without investing in any significant upgrades.

A phased strategy is how we helped Prezi renovate its three-floor 20,000-square-foot office suite in the South of Market district. It was a complicated situation because not only was the lease expiring, but also we faced a complex permitting process to bring the mechanical systems and building structures up to code. And, Prezi didn’t want to disturb its employees. In collaboration with Gensler, the interior designer, we created a multi-phase plan that allowed for employees to continue working while we executed the build-out as rapidly as possible.

But implementing these strategies can be complicated and incur unexpected premiums. Our general advice is that a company planning a relocation should include a general contractor in the earliest stages of planning. A sophisticated general contractor will be able to create a build-out and relocation timeline aligned with the start of the new lease and anticipate potential permitting woes that can delay occupancy even if construction labor is all lined up. The general contractor also can track long-lead items and provide real-time cost information along the way.

GlobeSt.com: What trends are you seeing in how companies are designing San Francisco offices? 

Polito: In the past few years, the most popular features incorporated into the hottest offices have included the latest workplace and smart building technologies, complimentary snacks and social amenities. The question is if these are really the features that incoming Millennial and Gen Z talent want? We’re seeing companies invest in upfront research and counsel to learn about what the newest generations of workers want and need to succeed and find satisfaction in the workplace. It’s a smart way to go, because proactive research helps companies avoid investing in spaces, technologies and amenities that are not fully used and don’t really support employee recruitment, retention and engagement.

GlobeSt.com: How can companies future-proof spaces for anticipated growth, recognizing that the construction labor shortage will likely continue into the future?

Polito: Smart workplace strategy, coupled with flexible design, can help a company create an office positioned for future workforce growth. For example, you can design a layout to accommodate the addition of more desks in the future as teams grow. You can use prefabricated wall systems that can transform a large communal space into some smaller private spaces if workers need individual offices. Also, prefab furniture systems can be repurposed in different kinds of spaces, whether conference rooms, collaboration lounges or private offices.

Some companies have reduced square footage-per-person by adopting unassigned desks and collaboration spaces or cafes. Employees who are often out of the office or constantly moving around don’t need personal desks but they do need robust office technology that accommodates mobile working, along with spaces and furniture that can be easily reconfigured as needs change.

GlobeSt.com: What kinds of creative approaches are you seeing in tenant build-outs?

Polito: When new office product is unavailable, tenants are exploring adaptive reuse. In San Francisco’s red-hot South of Market submarket, for example, owners, investors and occupiers are redeveloping legacy warehouses into white-collar workplaces. The more creative ones are celebrating the historic aspect of the properties and the neighborhood by retaining interesting design features that would be costly to recreate in a class-A office building. For instance, most warehouses have high open ceilings that employees like, but would be very expensive to incorporate into a build-out in a new office building. Industrial buildings also tend to have concrete floors, wood elements, brick walls and other interesting textured surfaces that reference the history of the building and create a unique environment.

The highlight of the completed space is the “show and tell” assembly space throughout levels one and two with stadium seating that connects the first-floor presentation area to the mezzanine on the second. The first floor features a specialty kitchen that can provide full catering services for office meals and after-hours functions. Prezi’s Hungarian roots and storytelling values are prominent throughout the space, which includes a signature wall in the entryway that features memorabilia representing the company’s history.

Skender has completed significant new construction and office interior renovation projects in the Bay Area across multiple downtown neighborhoods. In addition to the projects in the East Cut area, the final project is in Silicon Valley. These three projects and the work for Prezi are valued at around $45 million in total.