Tuesday, October 6, 2009

Knowledge Center: Learn Which Factors Are Crucial in Office Space Decisions

What Office Tenants Want

Despite the fluctuating economy and current design trends, two factors remain constant when tenants select office space: cost and location. But in today's market, other factors also influence the decision-making process. From turnkey buildouts to shorter lease terms to adaptive work space, office tenants want flexibility, functionality, and responsiveness.

Tenants also want value, and a down market is a good place to find it. Due to the abundance of office space in most markets and many companies' consolidation of their employees into fewer square feet, most tenants today are spending less for their space, says Barry Spizer, CCIM, principal of SRSA Commercial Real Estate in Metairie, La. An exception is small tenants that have less negotiating leverage, so their costs can be somewhat higher, he says.

In today's environment, offering the best financial deal is no longer enough to secure tenants, since many “are more than willing to spend the money in order gain operating efficiencies,” says Gregory C. Hobbs, CCIM, owner of Olympic Properties in Raleigh, N.C. Instead, landlords need to educate tenants (and potential tenants) about the space's footprint, the potential costs over and above the lease price, and other factors that help them “make the best decision they can make,” says Kimberly Surratt, a senior project designer at Dallas-based WorkPlaceUSA.

On the other hand, knowing what tenants are looking for helps landlords anticipate their needs and keep space filled. “Landlords working hardest to stay informed are the ones who will keep cash flow high,” says Norman G. Marquardson, CCIM, an agent with Prime Commercial in Midvale, Utah.

Ready for Change “Flexibility seems to be the key word for the offices of the future because businesses are changing so fast,” says Michael Orr, architectural team leader and vice president of WorkPlaceUSA. Tenants view their companies as growing organisms, and they don't want spaces that inhibit growth. They prefer facilities that can be adjusted to fit their current and future business needs, from movable walls to buildouts.

“Landlords should remember to market their space as flexible,” Spizer says. Even if furniture already is in place, landlords should provide space-planning services to show how offices can be configured to meet tenants' needs, he says. Computer-aided drawings make it easy to generate space plans that illustrate how the new space will look and feel.

In today's market, “Tenants dictate exactly what they want,” and they are willing to pay for it if they have to, Marquardson says. Overall, improvement costs are going up. “Many owners are pushing those costs through to the tenant as part of their buildout cost,” Spizer says. “While allowances are increasing due to the competitive economics of office deals, tenants are still having to come out-of-pocket and pay for a portion of the buildout or at least amortize it on top of their rent.”

But tenant expectations vary from market to market. In Knoxville, Tenn., more tenants expect landlords to provide turnkey offices for new leases so they don't incur any out-of-pocket improvement costs, says Louise R. Fogarty, CCIM, CPM, leasing manager for Blue Ridge Development. “This is a more common concession than offering free rent or a reduction in the rental rate,” she notes. “Tenant improvement allowances are usually in the $12 per square foot to $20 psf range, but a turnkey buildout can average $22 psf to $32 psf depending on the level of finishes, so this can be a significant concession.”

No matter how the space is configured and who pays for improvements, leases should be as flexible as possible. Tenants are cautious about making long-term leasing decisions, especially until the economy stabilizes. They want “the flexibility to cancel or downsize, even if they have to pay a penalty to do so,” Fogarty says.