If you have a growing service business, you probably used to shop for office space by comparing rental rates. The lowest cost space, of comparable class alternatives, was often the best choice. That’s no longer the case.
The cost of labor, including attracting, hiring, compensating and retaining staff is typically between 8 and 12 times the cost of the real estate that houses that staff. So while you certainly don’t want to overpay, in the grand scheme the cost of the real estate is just a fraction of the cost of labor, so perfect placement to attract and retain that talent is far more critical than rate.
Labor analytics are key. More specifically, it is a combination of labor availability, cost, demand, sustainability, and competition. Because labor drives growth.
Your VP of Human Resources understands this and, more frequently, HR will be the driver of real estate decisions. There are a number of dynamics in play here:
- Near 4% unemployment
- Increased urbanization (Live, Work, Play) demand
- Competition for Millennial workers
- Shrinking space footprints in favor of amenities
Here is some simple math that you can adjust to your market and staff salaries. Typical SQFT per employee varies by industry from perhaps 100 SQFT in a customer support center to 240 SQFT for a law firm (per staff member, not per attorney which is closer to 750 SQFT). The U.S. Average is currently about 160 SQFT per staff member.
Suppose that your firm averages 160 SQFT/staff and you’re considering Class A office space at $35/SQFT. Your annual cost/seat would be $35 x 160 or $5,600. You could move to a trendy urban site that is $40/SQFT. The $5/SQFT delta equates to $5 x 160 = $800 per seat. I’m sure that you can understand that if you can improve your firm’s ability to attract and retain even just one additional staff member, you will very quickly recover that $800 difference. If cost is an issue with your CFO, you could probably just find a way to get 20 SQFT per staff member more efficient and save the $40 x 20 = $800 if necessary.
We use advanced analytics software to aggregate data to evaluate the large number of elements that come into play. While this is certainly not necessary for all businesses, having a good plan like the one outlined here certainly is advisable. The greatest challenge is often the rigid and long term nature of an office lease. Business growth, and results can vary significantly based on the economy, technology, competition and occasionally government regulations. So how do firms make smart decisions? First you determine your own ideal profile of workforce characteristics and then compare them to your target or sample locations. Here are 10 key data points that should be considered:
- Labor Supply — What is the Standard Occupational Classification (SOC) count for the specific positions that you need to fill in the target city?
- Total Jobs Needed to Hire — How many positions do you need to fill over next 3–5 years?
- Underemployment Rate — What is the overall unemployment rate in this area?
- Labor Supply & Demand Gap — What is the supply and demand gap by industry?
- Target Occupations Median Wage — What are median wages for your required entry, median, and experienced workers?
- Population Growth Rate — How will population growth affect your future labor supply?
- Aging Labor Rate — In 2015, those aged 55 years and older represented 23 percent of the U.S. labor force, the highest since 1945.
- Potential Candidates to Job Posting Ratio — How many competitor jobs are posted relative to the candidate base?
- Median HH Income Growth Rate — How will growth rates put pressure on future wages?
- Cost of Living Index — How do cities under consideration compare?
In addition, there are other forces that are perhaps not quite as statistically obvious: The impact of organized labor, political trends of various states, and gaps in educational output and specialized skill sets.
Many times it is possible to discover a labor shed (an area within a metro that has the ideal profile and minimal competitive employers). That’s the location, location, location that you want. There is a war for talent. Use your real estate strategy to win the war.