6 Key Questions To Ask When Searching For Office Space
Presented By Mark D. Rauch
When tenants go out looking
for new office space, often they're impressed by a building's appearance,
location and rent. But they aren't aware of a landlord's financial
situation, the performance of building systems, the likely trend of operating
expenses during the next five or 10 years, neighborhood problems and other
factors which could turn what seems to be a good deal into a bad deal that
would hurt your company and your career.
To protect your company,
you need candid, complete answers to 6 key questions when you look for office
space:
1.
How good is the quality of building management?
You've got to go beyond the well-maintained corridors to determine whether the
landlord can be counted on to honor the terms of a lease and be a good partner
during the lease term. A seasoned Tenant Rep will for instance assesses
the satisfaction of existing tenants and report how the landlord responds to
routine and not-so-routine requests for maintenance, alterations and special
services. Does the landlord respond promptly and deliver fair
value? Do they see every request merely as an opportunity for
revenue? Is the service adequate or does it take many repeated requests
to correct a simple problem or achieve agreement on how to proceed with a
desired alteration? One tenant moved into a Class A building that had
just been completely refurbished. The building has other world-class tenants,
and the landlord is a highly regarded institution. Yet every request this
tenant has made for information and services has involved frustrating delays --
sometimes for months. Had they known how difficult and costly it would be
to manage day-to-day operations at this building, they might have gone
elsewhere.
2.
From a financial perspective, how does a building you're interested in compare
with others?
This requires a thorough
assessment. Your Tenant Rep should find out how much debt a
building is carrying, how the operating expenses and management fees at a
building you're interested in compares with the operating expenses at competing
buildings, whether critical maintenance has been performed or deferred (which
would mean much higher operating expenses in future years). If a building
has serious financial problems, working conditions could be compromised by poor
air quality, unacceptable temperature swings and inadequate security. One
office tower has a world-class reputation, but because maintenance was
neglected for many years, it actually rated as less than a Class B
building. A major effort was made to rehabilitate the structure -- HVAC
systems were upgraded, the facade was refurbished, and building facilities were
redone or upgraded at a cost of many millions of dollars to existing and
incoming tenants. The building certainly is a better place now, but what
tenant would want the soaring operating expenses?
3. What's the physical condition of the building?
There are plenty of
factors, difficult for a tenant to see, which affect the desirability of a
building. For example, some floors might be offered with HVAC capacity
suitable only for an open floor plan. Virtually any use of closed
offices, as are typical, would require so-called "supplemental HVAC"
at your company's cost. Buildings which seem quite modern could have
elevators with unacceptable wait times. Should an office building
be plagued by elevator delays and lapses in elevator service every day,
tenants suffer tangible dollar losses as staff are gone longer than necessary
from their offices, delayed by the elevators. A well known building was
refurbished in the late 1980s, touted for its allegedly state-of-the-art
building systems. In its new guise, the building attracted major law
firms and financial services companies at top rents. After moving in,
many of these tenants were immediately dissatisfied -- although most landlord
brokers wouldn't tell you that. Nothing had been done to change the
antiquated structure. In particular, the slab-to-slab height is too low,
and employees often feel uncomfortable drafts from the HVAC
system. It's easy for a tenant, touring a building, to miss signs of
problems with structural integrity. For years, high winds caused excessive
sway on the top floors of one well-known building. Many employees felt
the effects of motion sickness, and some feared for their safety.
Eventually, the landlord provided an adequate engineering solution, at
substantial expense to existing and incoming tenants.
4.
How do the nature of non-rent charges compare with other buildings?
Many deals
appear similar when a lease is signed, but over time total costs tend to vary
dramatically. Determining what costs your company is likely to face at a
particular location must be studied. Items include but are not
limited to: operating expenses, management fees, real estate taxes, overtime
HVAC charges, supplemental HVAC charges, condenser water charges, tap-in
charges, sub-metered electricity among other costs of buildings you're
interested in.
5. Are there any "hidden" drawbacks to a
building's location?
Crucial drawbacks are often
overlooked as tenants focus on obvious criteria like proximity to
Downtown, Beverly Hills or
a highway interchange. For instance, an institutional tenant sought
reasonably-priced space for an important operation which involved people
working beyond normal business hours. The tenant liked an older building
that had recently undergone substantial refurbishment. It offered good
light, a functional floor plate, adequate electrical capacity and a relatively
low loss factor. Their visits during normal office hours left them with a
good impression of the building and the neighborhood. They started
preparing preliminary plans. Only their Tenant Rep explored
their need for after-hours operation and told them about a nearby drug
rehabilitation center did they have second thoughts. Additional research
revealed that several adjacent buildings used extra-heavy night-time security
including dog patrols to sniff out drugs. Since the tenant was not in a
position to provide such security for their staff, they decided this wasn't a
suitable location.
6. How would other tenants in a building affect
its desirability?
It's reassuring
to see that a building has Fortune 500 tenants, but you need the right
building dynamics, too. For instance, if you're moving into a
building with one or more tenants which occupy multiple floors, elevator
usage and wait times will be very much affected by inter-floor
traffic. Your Tenant Rep should advise you of this
situation to avoid being in such an elevator bank, to seek a dedicated
elevator or other solutions. If you're considering a building
with a government entity, media entity or other high profile tenant, you
need to be well-advised about whether the landlord maintains adequate
security. You need to be further advised about the size of other
tenants in a building and their possible need for expansion space.
We recently received a call from a big tenant whose landlord is interested
in giving their space to a bigger tenant and might not renew the
lease. Although this highly-regarded tenant wants to stay put and
avoid the cost of building from scratch their own highly-specialized
facilities elsewhere, the tenant might not have any choice -- a
consequence of not adequately assessing the long-term effects of other
tenants before they signed their lease.
As you might gather from these probing questions, candid and complete
answers aren't likely to be forthcoming from a landlord broker because
that would undermine tight relationships with landlords. Nor can
adequate advice be expected from a good lawyer simply because the
questions don't involve legal expertise. What's needed is expertise
in real estate markets, expertise in building operations, expertise in
landlord accounting practices -- and a policy of serving Tenants
exclusively.
