What are the critical factors should tenants be considering when searching for the ideal office situation?
To answer that pithy question, I interviewed three expert office tenant reps from three unique U.S. markets on an episode of the Commercial Real Estate Show, Colliers in Chicago, JLL, in New York and Bull Realty in Atlanta.
Workstyle Shapes the Space
Ideally the way people actually work should inform a company’s workplace strategy, says Bob Chodos. He should know. He’s a principal at Colliers International in Chicago with 30 years experience.
“Corporations are dedicating serious resources to the art of space configuration. They’ve discovered that if you enhance collaboration, you enhance your people, process and productivity.”
The shift in workstyles is changing the way top companies lease. There’s always been a push to reduce square footage, but Chodos explained the new concept of ‘Me,’ ‘We’ and ‘Free’ space has taken hold. ‘Me’ space is shrinking, but ‘We’ and ‘Free’ spaces are expanding, reconfiguring office design.
Location is a Gamechanger
Recruiting and retention are the top drivers in this hot job market, and location is the primary factor for attracting and keeping talented workers. What’s fascinating is how competition for talent is shaping the real estate market, and where you locate can determine the caliber of talent you’ll hire, and therefore your company’s success.
“While cost is an important consideration, location is critical to long term success,” Chodos noted. “Leases are typically 4-7% of costs overall. If the location isn’t supporting your goals, that’s not an irrecoverable cost.”
He’s got a good point. Poorly located, poorly conceived real estate is very expensive to get rid of. Business is full of changes, and you never know when you have to scale down, expand or relocate. You want to know your exit strategy when you lease. And you want space that will have value to the next guy.
Sizzling Hot Prices
A few years ago attractive space was cheap. But now vacancies are down, and global demand for materials means that build out is much more expensive. Technology is also driving up costs: environments, where everyone is connected, require robust networks.
“Ten years ago we budgeted $8-10 per sf for line & low voltage wiring,“ explained Chodos. “Today we’re looking at $25-40.”
Offshore capital seeking safety is still flooding to into US office real estate, and this can’t help but push prices higher. Hitting a new record for office sales in Chicago, 300 N. LaSalle recently sold for $650 psf. The prior high watermark was less than $500, and trophy sales like this put upward pressure on all rents.
Goodbye, Tenant’s Market
The downtown market has robust demand, with vacancies dropping every quarter. The large firms are buying up portfolios and tenant improvement allowances are rising. But that’s downtown. In the suburbs you’ll still find negative absorption and aggressive incentive packages. Companies are flocking in town because today’s talent wants to work there.
And, it’s been half a cycle since many leases were made, so companies who upgraded when rents were down got great into class A and A+ buildings. They’ll feel sticker shock if they’re going to stay put, since rents are at least $7 - $8 sf higher.
“Here in the Midwest we haven’t seen the rate shock like the coastal markets. We fluctuate in a narrower range. But it’s significant.”
Big Apple Tenant Strategies
For a look at New York’s intense office market I talked to Scott Panzer, Vice Chairman at Jones Lang LaSalle in New York. He had a lot to say about the dynamic doings in Manhattan and the boroughs.
“We work to get companies to align their missions with their real estate selection. They tend to get caught up in cost and location and forget to factor in real business goals.
“We can’t get away from location-location, but what that means is changing. Design for productivity and collaboration is becoming much more common, with a growing comprehension of investment in employee attraction and retention."
Manhattan: a tale of four cities:
· Downtown, suffered for 30-40 years, now major media companies are moving in
· Midtown South – tightest in the US, less than 3% vacancy, approaching 3-digit rents, pushing skyward
· Midtown – starting to flatten, glut coming in 2017-18, may come down from $75 average ask
· Plaza District with park views commanding north of $100 on average
Lease vs. Purchase in Manhattan
Mature companies have been on a buying spree for headquarters in NYC. Comcast/ NBC/Universal recently acquired 30 Rock, where it had 1.3 million sf of leased space with half a billion in infrastructure involved. It would have been very difficult to fall into conflict over that space. It’s iconic, and it makes sense for them to own it.
You don’t find a lot a lot of commercial condos in New York. Hudson Yards is looking to sell properties that have been challenging to lease. That’s a great option for companies looking for a headquarters. Owning is advantageous for larger nonprofits as well.
Find Me a Deal
So where are the great deals in New York City?
· Mid-block on the west side around 8th, 9th, 10th Avenues
· 85 Broadway, Goldman Sacks former HQ, for $40 sf
· Jersey City, high $20
· Brooklyn, $30s
Panzer noted with interest the current ‘euphoria’ over CBDs around the country. Interesting choice of words. Perhaps that’s because he’s suggesting the possibility of a tech bubble that will lead to, in his words, “a huge correction, with rents contracting 15-20% in 2016-17. “
“From a landlord’s perspective, were looking at the credit and what’s backing the credit. This business is cyclical,” he warned. “and it will always cycle through again. You just have to be cautious about it.
Atlanta Office Trends
After our visits to Chicago and New York, it’s a pleasure to come home to Atlanta, where $40 a square foot can get you extremely nice class A space. While rates are increasing faster than last year, Atlanta is still a very affordable place to do business.
“Call center space can be had as low as $12-13 per sf,” Eric Harris told me. Eric is VP of Office Services at Bull Realty, and he’s got his finger on the pulse of the local market. He talked about how he works with clients:
“One thing you want to do when you engage a tenant rep is let us interview your staff. When we get a good sense of what you do, and fully understand your company’s functions, we are a better advocate for your space needs.”
Services of a Tenant Rep
Of course your tenant rep is an expert in available locations, lease terms, clauses, negotiations, tenant improvement options and construction, and available concessions. This is all valuable information when you’re searching for that ideal space.
But if you’re still tempted to cut corners and go it alone, realize that even the largest law firms with experienced real estate lawyers use tenant reps. One of the benefits comes from the tenant reps transaction experience, seeing how other companies have been impacted by seemingly unimportant lease terms.
“Do what you to do well, run your business.” Harris urged. “Spend your valuable time on your business, have an experienced tenant rep manage your office requirements.”
One of the biggest mistakes tenants make is starting the process too late. There is much more work and time involved than most business leaders realize.
“It’s important to get started early, 12-18 months ahead for a smaller space need, not of lease expiration date, but of the exercise options date. Start much earlier on larger requirements.”
If your firm has a lease renewal option in its future and you want to stay in the current location, it’s prudent to explore options.
“Even if you want to stay in your current location, the best practice is to look around. You enhance your negotiation power by knowing the negotiated pricing of other options. Besides,” Harris smiled. “You just might find something even better.”