Managing Office Property PDF

11 Managing Office Property Learning Objectives After completing this lesson, students should be able to… Discuss where office property is commonly located Compare the different classifications of office property ac...

11 Managing Office Property Learning Objectives After completing this lesson, students should be able to… Discuss where office property is commonly located Compare the different classifications of office property according to BOMA’s standards Explain the property manager’s considerations when performing a property analysis during the management planning phase Identify the different types of advertising that are particularly suited to marketing office property Explain how a prospective tenant’s space and service requirements affect the tenant selec- tion process Define build-out, shell space, turnkey condition, tenant improvement allowance, and work letter Discuss the security and maintenance needs for office property Contrast an office rent roll report with a residential property rent roll report Suggested Lesson Plan 1. Give students Exercise 11.1 to review the previous chapter, “Managing Residential Prop- erty.” 2. Provide a brief overview of Chapter 11, “Managing Office Property,” and review the learning objectives for the chapter. © 2021 Rockwell Publishing  Property Management Instructor Materials 3. Present lesson content: Types of Office Properties – Location of office space – Methods of ownership – Classification of office buildings EXERCISE 11.2 Grading office space Management Planning for Office Property – Regional analysis – Neighborhood analysis – Property analysis – Market analysis – Analysis of alternatives EXERCISE 11.3 Selecting comparable office buildings Marketing Office Space – Internet – Print and media – Public relations – Rental center – Cold calling Leasing Office Space – Tenant selection process – Lease provisions – Retaining tenants EXERCISE 11.4 Rent in office buildings Operations and Reporting – Security – Maintenance – Working with office tenants – Reports to the owner 4. End lesson with Chapter 11 Quiz. 2  Chapter 11: Managing Office Property Chapter 11 Outline: Managing Office Property I. Types of Office Properties A. For most of the 20th century, most office space was located in a city’s central business district (CBD); because of cars and freeways, metropolitan areas now have multiple business centers located around regional transportation and shopping nodes (edge cities) 1. Much of the nation’s recently constructed office space is found in these areas, or in office parks: several one- or two-story buildings clustered together on landscaped grounds, which often combine office and ware- house or light industrial space 2. In cities, mixed-use buildings (retail space below, office space above) are increasingly common B. Individual or small business entities own many small- or medium-sized office buildings in suburban areas; large investment syndicates own most big multi- story office buildings; office condominiums allow ownership of individual units with shared ownership of common areas C. The Building Owners and Managers Association (BOMA), a trade associa- tion for property managers, created classifications for different grades of office space 1. Class A space: the most desirable and prestigious office buildings in a particular market, with rents above average for the area 2. Class B space: office buildings that compete for a wide range of users in the average rental range for the area 3. Class C space: office buildings that offer functional space for tenants at below-average rents, but that may have obsolete systems or amenities 4. Space that would be Class A in one city may be Class B space in another EXERCISE 11.2 Grading office space II. Management Planning for Office Property A. Regional analysis: considers the bigger picture, including the current status and supply of office space in the area, employment levels, and technological advances that may create demand for certain types of property B. Neighborhood analysis: considers the area immediately surrounding the sub- ject property, including relative prestige of a building’s location, access to utilities, transportation, off-site parking, nearby services, and whether there are nearby buildings of similar quality C. Property analysis: the manager inspects the site and building, and determines how well the property is managed 3  Property Management Instructor Materials 1. During the site inspection, the manager notes the property’s on-site parking, walkways, exterior lighting and landscaping, and access to transportation routes 2. During the building inspection, the manager notes the property’s square footage, age, general condition, elevator and HVAC system, telecommunications infra- structure, and electrical capacity 3. When evaluating the property’s current management, the manager notes whether tenants are happy with the current staff and services, whether rent collection is efficient, whether the owner is happy with the format and frequency of operat- ing reports, and whether the vacancy rate and operating expenses are in line with neighboring properties D. Market analysis: a method of analysis that compares the subject property to compet- ing properties in the same market 1. The manager gathers information from at least three comparables that are chosen from the relevant submarket (similar office properties within the geographical area) 2. The manager then compares conditions and features to those of the subject prop- erty, making an adjustment to the comparable’s rental rate for each difference 3. This information is used to set the rental rates for the managed property a. Rent is usually expressed as cost per square foot per month or per year b. Certain areas of a building (facing the street, or with a view) may command a higher rent than other areas E. Analysis of alternatives: an analysis that evaluates the manager’s proposed changes to the property or operations in order to increase income, decrease expenses, and/or provide the owner with her desired return on investment EXERCISE 11.3 Selecting comparable office buildings III. Marketing Office Space A. Advertising may be general, or may be designed to appeal to particular tenants or types of tenants B. Advertising media that are particularly suited to marketing office property include the internet, print media, public relations, rental centers, and cold calling 1. Buildings often have their own websites that are updated frequently and include information about the building and its amenities, clickable maps, suggested floor plans, and virtual tours of amenities and common areas 2. A manager may use commercial real estate listing websites, such as CoStar/ LoopNet, CREXi, or Brevitas 3. Carefully chosen print media can target niche markets 4. The manager of an office building can hire a public relations firm to raise a proj- ect’s profile, or may undertake a simple PR campaign herself 5. Many large buildings have model office space to help potential tenants envision how their own space might be built out 4  Chapter 11: Managing Office Property 6. Cold calling (canvassing) can be a very good marketing method, so long as con- tacts are selected carefully IV. Leasing Office Space A. During the tenant selection process, managers of office space should consider the ten- ant’s space and service requirements, and the building’s tenant mix 1. To determine whether the property will meet the prospective tenant’s needs, the manager needs to know how many employees will work in the new space, what kinds of tasks they will perform, and how much growth is expected a. The manager also needs to consider the building’s configuration and whether columns, elevator shafts, and other elements will prohibit the tenant’s desired use of the space 2. The manager should determine if the building’s services (hours of business, level of security) are in line with the prospective tenant’s business 3. The manager also must consider tenant mix: the blend of tenants in a property; office property managers should strive for an appropriate mix, avoiding new tenants who are incompatible with current tenants or who may have a negative impact on the building’s reputation B. The next step in leasing office space is to negotiate the lease provisions 1. Rent for office space is negotiable depending on the current market for office space and the vacancy rate in the building a. Office rent is usually a flat rate based on the square footage of leased space, plus an additional amount for the common areas; the amount of rent paid for the common areas is determined in part by the R/U ratio (the ratio of rentable area to usable area); R/U ratios can be used to determine the loss factor, ex- pressing how efficiently tenant can use the space b. The lease should clearly state which expenses are passed through to the tenant c. The lease may contain an escalation clause which allows for periodic rent increases to offset inflation 2. Build-out: Finishing office space to a tenant’s specifications a. Shell space: space that has not been built out, but is awaiting a tenant’s im- provements. b. Turnkey condition: space that is fully improved and ready for occupancy c. Tenant improvement allowance: the amount per square foot the owner will pay toward a tenant’s build-out; the tenant is responsible for amounts over that allowance d. Property owners can specify a uniform finish quality for the entire building e. Work letter: the tenant’s specifications for improvements to the leased space 3. The lease should state which utility services the landlord will provide 5  Property Management Instructor Materials 4. The lease should state the terms of use for shared common areas and facilities, as well as janitorial services that will be provided 5. Office lease terms often run five to ten years, so choosing the right tenant is im- portant C. Retaining tenants involves maintaining good relationships with the tenants; in lease renewal negotiations, the manager should try to renew the lease at current market rates, offering concessions as necessary EXERCISE 11.4 Rent in office buildings V. Operations and Reporting A. Security personnel help keep tenants and their possessions safe from crime, as well as offering assistance during emergencies 1. Large office buildings usually have one or more security guards on duty at all times 2. Office parks may employ a security detail (or contract with a firm) to patrol park- ing lots 3. Security may also involve the use of alarm systems, surveillance cameras, and electronic access systems B. Building management often provides maintenance or janitorial staff; the types and frequency of services provided depends on the building’s size and which services the tenant needs 1. Tenants in office parks may be required to provide their own janitorial services C. Every commercial lease should include a clause that names an employee or other rep- resentative who is officially responsible for receiving and paying rent bills, especially if the company’s headquarters are not local D. Reports to the owner include the rent roll and delinquency reports 1. Office rent rolls should include CAM charges and other pass-throughs, and a separate entry for amounts paid under a rent escalation clause 2. The manager’s reports should differentiate between rent delinquencies and delin- quencies in pass-throughs and other charges Exercises EXERCISE 11.1 Review exercise To review Chapter 10, “Managing Residential Property,” read the following True/False questions aloud to students and have them jot their answers down on a piece of paper; discuss the answers together. 6  Chapter 11: Managing Office Property 1. Government-assisted housing refers to housing developments where the local government has waived maximum occupancy requirements and certain other burdensome regulations. 2. A credit report gives a credit score but no details about repayment history. 3. A tenant who is renting month-to-month has a periodic tenancy. 4. A property manager who manages residential properties is called a resident man- ager. 5. A manager can deduct unpaid rent from a security deposit at the end of a tenancy. 6. Common interest developments include condominiums and cooperatives and mobile home parks. 7. Property managers who are leasing residential units must include the equal hous- ing logo in their print and display advertisements. Answers: 1. FALSE. 2. FALSE. 3. TRUE. 4. FALSE. 5. TRUE. 6. TRUE. 7. TRUE. EXERCISE 11.2 Grading office space Classify the following office buildings as either class A, B, or C office space. 1. A relatively new high-rise in the middle of the downtown core, with a large bank on the first floor. The wood-paneled lobby is in good condition, the floor surfaced with high-quality wool carpeting and marble at the entrance doors. Rents are fairly typical for the central business district—though not as high as they were in recent years due to a glut of construction in the core of downtown. 2. An aging office park with a rambling collection of one-story buildings in a vaguely Mediterranean style. The wiring is outdated, causing occasional outages. It would be hard to find lower rents, partly because the area has little identity or amenities except for a few fast food outlets. 7  Property Management Instructor Materials 3. A four-story office building built ten years ago. It is at the edge of the downtown corridor. Until recently, rents were average, though they’ve risen slightly due to the pressure of an expanding downtown. There are no major maintenance issues. The lobby has a purely functional look. There are no prestige tenants. Answers: 1. CLASS A. While rents have fallen slightly, this is clearly premier space in this par- ticular city. 2. CLASS C. Aging buildings and outdated utilities indicate the lowest quality office space. 3. CLASS B. The location, rents, and the size of the building all indicate middle-grade office space. EXERCISE 11.3 Selecting comparable office buildings Discussion prompt: The property manager of a mid-rise Class B office building is look- ing at comparables. For which of the following factors would he make adjustments when evaluating the rents of the comparables? 1. Lighter, higher ceilinged lobby 2. Neighborhood crime rate higher 3. Farther from property management office 4. Poor curb appeal 5. Building owner pays relatively small management fee 6. Public transportation access better, with a rapid transit stop nearby 7. Many offices have view of lake 8. Cafe in building; subject building only has restaurants nearby 9. Building owner lives in another state Answers: 1. ADJUSTMENT. A better lobby would probably have at least a modest effect on rents. 2. ADJUSTMENT. Properties where the employees feel at risk will rent for lower amounts. 3. NO ADJUSTMENT. Managerial convenience does not affect what rent gets charged. 8  Chapter 11: Managing Office Property 4. ADJUSTMENT. Office tenants care about curb appeal, if only because it makes a good impression on their clients. 5. NO ADJUSTMENT. The fact that a building would be less profitable for a manager doesn’t affect how much rent could be charged. 6. ADJUSTMENT. Access to quality mass transit matters to the employees of office ten- ants and would affect rents. 7. ADJUSTMENT. Views add value to office buildings. 8. ADJUSTMENT. The presence of amenities in a building adds value. 9. NO ADJUSTMENT. This would not affect how much the spaces in an office building would rent for. EXERCISE 11.4 Rent in office buildings Have your students answer the following true/false questions concerning office build- ing rent. 1. Office building tenants typically pay percentage rent. 2. Office building leases usually contain a rent escalation clause. 3. Unlike with other kinds of commercial buildings, office building rent isn’t usually expressed as a certain dollar amount per square foot. 4. The loss factor in an office building generally runs about 5%. 5. A new roof is the kind of cost that is invariably passed through to office tenants as part of rent. Answers: 1. FALSE. Percentage rent is generally limited to retail tenants. 2. TRUE. An office lease rent provision usually contains an escalation clause. The clause provides that rent will rise each year by a certain set amount, or will rise according to some measure of inflation, such as a consumer price index. 3. FALSE. Office space rent is usually expressed as a certain dollar amount per square foot. 4. FALSE. Typical loss factors for office buildings run between 10% and 18%. 5. FALSE. Office leases may provide that the costs of capital projects (major improve- ments or repairs to the building), as opposed to regular maintenance costs, are not passed down to the tenants. 9  Property Management Instructor Materials Chapter 11 Quiz 1. In the first half of the twentieth century, office 5. A manager performing a market analysis finds buildings were heavily concentrated in _____, that a comparable property has a subterranean but that changed with the rise of automobiles parking garage, while the property that he man- and the freeway system. ages has only on-street parking. What kind of a) central business districts adjustment would he make? b) edge cities a) Adjust comparable’s rental rate downward c) mixed-use medium-rise buildings b) Adjust comparable’s rental rate upward d) office parks c) Adjust subject property’s rental rate down- ward d) Adjust subject property’s rental rate upward 2. An example of a Class A office building would be: a) a high-rise building with luxurious appoint- 6. A manager finds that the rental rate indicated ments near the focus of the central business by his market analysis still doesn’t cover the district property’s expenses. To cover the gap, the b) a mid-rise building in a central business manager may do all of the following, except: district that is several decades old but well- a) convince the owner to accept lower expec- maintained tations c) a suburban office park with an attractive b) generate additional revenue landscaped setting and quality interiors, c) recalculate using different comparables with average rents for the area d) reduce operating expenses d) an office building on the periphery of the downtown area, that is comparatively 7. A building in a suburban office park hopes to smaller and older and charges lower rents attract service professionals like lawyers and accountants. Advertising should stress: 3. A manager putting together a new manage- a) low utility costs ment plan for his office building, which has b) prestigious address traditionally housed mainly law firms, studies c) proximity to rapidly growing residential economic data to see whether the legal sector areas in the city is expanding or shrinking, to decide d) up-to-date network infrastructure whether to try to recruit other types of tenants. He is engaged in: 8. Which method of marketing may be the most a) building analysis cost-effective and persuasive, but only if it is b) market analysis targeted at a specific audience? c) neighborhood analysis d) regional analysis a) Cold calling b) Internet advertising c) Print media 4. Property analysis would include all of the fol- d) Rental centers lowing except: a) access to nearby freeway b) amount of on-site parking c) square footage of building d) tenants’ satisfaction with current manage- ment policies 10  Chapter 11: Managing Office Property 9. Even if all indications are that a prospective 14. A small office building with little foot traffic tenant will be a good financial bet, there are still from tenants’ customers is likely to: other considerations in selecting an office ten- a) have a chief engineer on-site ant. These include all of the following, except: b) have several janitorial shifts and a janitorial a) service requirements supervisor b) space requirements c) have the janitorial staff clean common areas c) tenant mix several times daily d) tenant race or ethnicity d) require individual tenants to provide their own janitorial services 10. The amount an office tenant pays as rent may vary from month to month depending on all of 15. When a manager prepares a rent roll for an the following factors, except: office building owner, it will typically include a) changes to R/U ratio all of the following as separate items, except: b) month-to-month changes in gross sales a) amounts paid under rent escalation provi- c) use of an escalation clause sions d) utilities costs varying b) CAM charges c) comparable property’s rents d) pass-through charges 11. A new tenant in an office building takes pos- session with the space in finished condition, according to her specifications, after contrac- 16. A company that needs to combine office space tors hired by the manager have completed their and a warehouse facility in one place would be work. What describes the space? most likely to locate in: a) Mint condition a) a central business district b) Shell space b) a loft space c) Showroom condition c) a mixed-use building d) Turnkey condition d) an office park 12. Which of the following statements about typical 17. Janet notes that her building does not have suf- lease terms is false? ficient electrical outlets or internet connectivity a) Janitorial services are usually provided for tech firm tenants, which are a growing part by management, but the lease will specify of the local economy and which she would like what gets cleaned and when to recruit. This would fall under the heading of: b) Office leases usually run five to ten years a) property analysis c) The landlord will most likely pay for heat- b) market analysis ing or air conditioning both during and after c) neighborhood analysis business hours d) regional analysis d) The lease may require the landlord to pay for electricity costs up to a certain level, but the tenant pays for any overage 13. What level of security is a low-rise office build- ing in a suburban office park likely to have? a) Around-the-clock guards in lobby b) Key card access to elevators c) Occasional patrols of parking lots by secu- rity contractor d) Video surveillance observers 11  Property Management Instructor Materials 18. Having determined that her building’s tele- communications infrastructure isn’t sufficient to attract high-tech tenants, Janet begins a cost-benefit analysis to determine whether upgrading the building would attract better ten- ants and increase revenues enough to make the improvements worthwhile. She is performing: a) analysis of alternatives b) market analysis c) neighborhood analysis d) regional analysis 19. An online resource called “Income/Expense IQ,” which details features and rents for thou- sands of buildings nationwide, is available from: a) BOMA b) IREM c) the Census Bureau d) the U.S. Chamber of Commerce 20. A building’s owner agrees to contribute $25 per square foot to a new tenant’s build-out costs. If the build-out costs exceed that amount, the tenant is responsible for additional expenses. This is known as a: a) build-out maximum b) rent roll c) tenant improvement allowance d) work letter 12  Chapter 11: Managing Office Property Answer Key 1. a) A city’s central business district is 8. a) Cold calling potential clients, either its downtown core; until the freeway in person or by phone, can be a useful system led to suburban sprawl, most method of reaching potential tenants. office buildings were concentrated However, it must be targeted to find here. appropriate prospects, which means research in business journals and 2. a) A Class A building is a prestigious newspaper financial sections. and usually centrally-located building “competing for premium office users 9. d) A manager should never consider a with rents above average for the area.” prospective tenant’s race or ethnicity; this would violate antidiscrimination 3. d) Regional analysis looks at the entire laws. If the tenant would have greater metropolitan area where the property space or service requirements than can is located, and considers the supply of be accommodated, though, or if the and demand for office space within it. tenant’s business wouldn’t mesh with other businesses, those would be im- 4. a) Freeway access and other transpor- portant considerations. tation issues fall under the scope of neighborhood analysis. Parking, 10. b) Office properties do not use percentage square footage, and management prac- leases; those are more typical in retail tices are all property analysis issues. spaces. Pass-through charges and esca- lation clauses may apply, though. 5. a) If a comparable has a feature that the subject property lacks, the compara- 11. d) If an office space has been fully built ble’s rental rate is adjusted downward out according to plans, and man- by an appropriate amount. Never ad- agement has taken care of all the just the rates for the subject property. preparation work, it is known as turn- key condition. 6. c) Options include reducing operating expenses, generating more revenue, or 12. c) Most often, management will pay for adjusting owner expectations. Using heating and air conditioning services different comparables, assuming they during business hours but not after- are properly selected and adjusted, will wards. not likely give different results. 13. c) A building in a suburban office park is 7. c) A location near rapidly growing sub- not likely to have around-the-clock se- urbs would be a strong selling point curity staff, but rather use the services for a building targeting individual of a security firm. The firm may per- service professionals like lawyers or form periodic patrols of parking lots. accountants, because it puts them near a pool of potential clients. 13  Property Management Instructor Materials 14. d) Small buildings often have little in the way of common areas to clean; the management may require tenants to provide their own janitorial services for their leased spaces. 15. c) A comparable property’s rent might be part of a market analysis in a manage- ment plan, but it’s not included in a regular rent roll. 16. d) An office park consists of low-rise buildings in a suburban setting, and may be zoned to allow light industrial as well as office uses. 17. a) Problems with functional obsoles- cence within the building, such as an electrical and telecommunications in- frastructure that isn’t adequate, would be considered property analysis. 18. a) Analysis of alternatives may consider whether upfront expenditures to im- prove the building will pay off in the long-term through increased revenues. 19. b) “Income/Expense IQ” is a digital in- formation platform maintained by the Institute for Real Estate Management (IREM). 20. c) A tenant improvement allowance sets a limit on how much a landlord will contribute toward a tenant’s build-out expenses. The work letter, by contrast, details the tenant’s specifications for the build-out project. 14  Chapter 11: Managing Office Property PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Property Management Lesson 11: Managing Office Property © 2021 Rockwell Publishing 1 Introduction This lesson covers office property: ⚫ types of properties ⚫ management planning ⚫ marketing ⚫ leasing ⚫ operations and reporting © 2021 Rockwell Publishing 2 Types of Office Properties Location Central business district (CBD): Downtown core of a city where high-rise office buildings are heavily concentrated. ⚫ Very common for much of 20th century. ⚫ Changed by advent of cars, freeway system. © 2021 Rockwell Publishing 3 15  Property Management Instructor Materials Types of Office Properties Location Today most office space is constructed in: ⚫ clusters of medium- or high-rise buildings located around regional transportation and shopping nodes ⚫ sometimes called edge cities ⚫ office parks along suburban arterials Office park: Property that consists of one- to two-story buildings clustered together on landscaped grounds. © 2021 Rockwell Publishing 4 Types of Office Properties Location Office park tenants often include: ⚫ call centers ⚫ companies that need to combine office and warehouse or light industrial use In cities, mixed-use buildings have become common (retail on ground floor, office space on upper floors). © 2021 Rockwell Publishing 5 Types of Office Properties Methods of ownership Traditionally, most commercial investment property owned by small private investors. ⚫ Still true for many small- or medium- sized office buildings, especially in suburban areas. Now large investment syndicates own most big multi-story office buildings, especially in CBDs. © 2021 Rockwell Publishing 6 16  Chapter 11: Managing Office Property Types of Office Properties Methods of ownership Increasingly popular ownership trend is office condominiums. ⚫ Instead of renting, small businesses buy space within office building or complex. ⚫ Upside: owners build equity. ⚫ Downside: maintenance fees; difficult to expand or decrease space based on needs. © 2021 Rockwell Publishing 7 Types of Office Properties Classification Building Owners and Managers Association (BOMA): Trade association for property managers. Created building classifications based on factors such as: ⚫ finishes ⚫ amenities ⚫ location ⚫ market perception © 2021 Rockwell Publishing 8 Types of Office Properties Classification Class A space: Most desirable and prestigious office buildings in a particular market, with rents above average for area. Class B space: Buildings that compete for users in average rental range for area. Class C space: Office buildings that offer functional space for tenants at below-average rents, but have obsolete systems/amenities. © 2021 Rockwell Publishing 9 17  Property Management Instructor Materials Types of Office Properties Classification Classification of A, B, C space is subjective. ⚫ Affected by other office space in the area. ⚫ Building can be Class A in one city, but Class B in another. ⚫ BOMA discourages publishing classification rating for individual property. © 2021 Rockwell Publishing 10 Summary Types of Office Properties – Central business district – Office parks – BOMA – Class A space – Class B space – Class C space © 2021 Rockwell Publishing 11 Management Planning Management planning for office property involves analysis of: ⚫ region ⚫ neighborhood ⚫ property ⚫ market ⚫ alternatives © 2021 Rockwell Publishing 12 18  Chapter 11: Managing Office Property Management Planning Regional analysis Regional analysis: Considers larger metropolitan area where property is located. Includes analysis of: ⚫ oversupply/undersupply, including impact of construction on future supply ⚫ employment levels ⚫ demand driven by technological advances (telecommuting, online sales) © 2021 Rockwell Publishing 13 Management Planning Neighborhood analysis Neighborhood analysis: Analysis of property’s location, including its prestige and accessibility to transportation, parking, and utilities. Should also note: ⚫ nearby services (daycare, restaurants) ⚫ other businesses nearby (quality, type) ⚫ transportation (quality, type) © 2021 Rockwell Publishing 14 Management Planning Property analysis Property analysis: Analysis that focuses on site, building, and management. Site: ⚫ parking ⚫ walkways ⚫ exterior lighting ⚫ landscaping © 2021 Rockwell Publishing 15 19  Property Management Instructor Materials Management Planning Property analysis Building: ⚫ square footage ⚫ age ⚫ general condition ⚫ elevator and HVAC systems ⚫ telecommunications and tech infrastructure ⚫ electrical system © 2021 Rockwell Publishing 16 Management Planning Property analysis Management: ⚫ current staff and services ⚫ rent collection ⚫ vacancy rate ⚫ income and expenses ⚫ IREM platform: Income/Expense IQ © 2021 Rockwell Publishing 17 Management Planning Market analysis Market analysis: Compares subject property to competing properties in the same geographical area. ⚫ At least three comparables should be used. ⚫ Information about comparable rental rates is especially important. © 2021 Rockwell Publishing 18 20  Chapter 11: Managing Office Property Management Planning Market analysis Manager gathers information about rental rates from published sources, or from trade associations. Looks at comparables’ base rent, concessions, pass-through expenses, R/U ratio. © 2021 Rockwell Publishing 19 Management Planning Market analysis Next, manager puts information into a grid and compares condition and features of each comparable to those of subject property. ⚫ For each difference, manager makes adjustment to comparable’s rental rate. © 2021 Rockwell Publishing 20 Management Planning Market analysis Final adjustments show what each comparable would rent for if essentially identical to subject property. Rental rates may vary in large buildings based on where unit/space is located (upper story with view rents for more than ground floor). © 2021 Rockwell Publishing 21 21  Property Management Instructor Materials Management Planning Analysis of alternatives If competitive rental rates won’t cover property’s expenses, manager may: ⚫ reduce operating expenses ⚫ generate additional income ⚫ convince owner to lower expectations Analysis of alternatives: Process of evaluating possible operational or physical changes to property. © 2021 Rockwell Publishing 22 Summary Management Planning – Regional analysis – Neighborhood analysis – Property analysis – Market analysis – Analysis of alternatives © 2021 Rockwell Publishing 23 Marketing Office Space Types of advertising suited for office space include: ⚫ internet ⚫ print and broadcast ⚫ public relations ⚫ rental center ⚫ cold calling Each can be used for general advertising, or to market to particular types of tenants. © 2021 Rockwell Publishing 24 22  Chapter 11: Managing Office Property Marketing Office Space Internet Internet advertising is economical and relatively easy way to reach potential tenants worldwide. Manager may use website that: ⚫ describes building and amenities ⚫ lists space available ⚫ contains interactive features (floorplans, virtual tours) ⚫ has photos of nearby services/amenities © 2021 Rockwell Publishing 25 Marketing Office Space Print and broadcast Classified ads and free real estate magazines don’t work as well for office property as for residential property. ⚫ Exception: very small buildings suited to small businesses. ⚫ However, well-selected print media can target niche markets (such as ad in bar association magazine to target lawyers). Radio and television rarely used. © 2021 Rockwell Publishing 26 Marketing Office Space Public relations Manager may: ⚫ hire public relations firm ⚫ handle public relations herself Public relations may include: ⚫ press release about building’s opening or high-profile new tenant ⚫ using empty space to sponsor events or conferences of interest to potential tenants © 2021 Rockwell Publishing 27 23  Property Management Instructor Materials Marketing Office Space Rental center Many large office buildings have a model office space. ⚫ Provides work space for leasing agents. ⚫ Helps potential tenants envision finished, built-out space. © 2021 Rockwell Publishing 28 Marketing Office Space Cold calling Cold calling involves contacting potential tenants, either by phone or in person. ⚫ Sometimes called canvassing. ⚫ Can be very effective if contacts are selected carefully. © 2021 Rockwell Publishing 29 Summary Marketing Office Space – Types of advertising – Public relations – Rental center – Cold calling © 2021 Rockwell Publishing 30 24  Chapter 11: Managing Office Property Leasing Office Space Leasing involves: ⚫ tenant selection ⚫ negotiating lease provisions ⚫ retaining tenants © 2021 Rockwell Publishing 31 Leasing Office Space Tenant selection When selecting tenants for office space, manager must consider: ⚫ potential tenant’s space and service requirements ⚫ tenant mix © 2021 Rockwell Publishing 32 Tenant Selection Space requirements When discussing potential tenant’s needs, manager should consider: ⚫ number of employees who will work in the space ⚫ types of tasks employees will perform ⚫ expected growth © 2021 Rockwell Publishing 33 25  Property Management Instructor Materials Tenant Selection Space requirements Configuration of office space is particular concern: ⚫ columns, elevator shafts, stairwells may prevent building out space tenant desires ⚫ may not be enough windows in outer walls for private offices ⚫ building layout may prevent special use areas (conference room, library) ⚫ whether space will allow future growth © 2021 Rockwell Publishing 34 Tenant Selection Service requirements Manager must also consider whether property will meet potential tenant’s needs concerning: ⚫ security ⚫ hours that building is open ⚫ lobby and elevator usage © 2021 Rockwell Publishing 35 Tenant Selection Tenant mix Manager must also consider building’s tenant mix. ⚫ Tenants who complement each other can lead to more business for all tenants. © 2021 Rockwell Publishing 36 26  Chapter 11: Managing Office Property Leasing Office Space Lease provisions Lease provisions important in leasing office space include: ⚫ rent ⚫ build-out ⚫ utilities ⚫ tenant services ⚫ lease term © 2021 Rockwell Publishing 37 Lease Provisions Rent Rent negotiations are important part of leasing office space. Rental rates depend on vacancy rates which can vary sharply over time with office space. © 2021 Rockwell Publishing 38 Rent Square footage Office rent is usually flat rate per square foot. Lease states square footage of: ⚫ tenant area ⚫ common areas Common area rent determined by R/U ratio, which is converted to loss factor expressing how efficiently space can be used. © 2021 Rockwell Publishing 39 27  Property Management Instructor Materials Rent Pass-through charges Most office leases are net leases, so some or all expenses are passed through to tenant. ⚫ Building expense: manager passes through prorated portion to tenant. ⚫ Capital improvement: owner usually pays. © 2021 Rockwell Publishing 40 Rent Escalation clause Inflation can make long-term leases fall below market value after a few years. Escalation clause addresses this issue by calling for periodic increases in rent amount based on: ⚫ rate of inflation ⚫ increase of building’s expenses © 2021 Rockwell Publishing 41 Lease Provisions Build-out Build-out: Space that has been finished to tenant’s specifications (turnkey condition). Shell space: Unfinished commercial space. ⚫ Consists of exterior walls, roof, concrete floor, utility connections. ⚫ Once leased, tenant chooses configuration and space is finished. ⚫ Manager usually oversees construction. © 2021 Rockwell Publishing 42 28  Chapter 11: Managing Office Property Lease Provisions Build-out Build-out costs consist of: ⚫ construction itself, along with ⚫ architectural, engineering, and design fees Unless market is tight, property owner usually pays build-out costs. ⚫ Tenant pays for costs over tenant improvement allowance. © 2021 Rockwell Publishing 43 Lease Provisions Build-out Build-out must still meet property standards. ⚫ Uniform finish work, consistent aesthetic appearance. Tenant specifications for improvements: ⚫ added to lease as addendum, or ⚫ separate work letter prepared later. © 2021 Rockwell Publishing 44 Lease Provisions Utilities Lease should specify which utility services landlord will provide and when. ⚫ Example: air conditioning only during business hours; tenant must pay to keep AC on at night to cool computer room. Alternatively, lease may state landlord will pay up to certain amount, and tenant will pay anything over that amount. © 2021 Rockwell Publishing 45 29  Property Management Instructor Materials Lease Provisions Tenant services Lease should spell out rules for use of facilities shared with other tenants (such as conference room). Janitorial services should be explained: what will be cleaned, and how often. © 2021 Rockwell Publishing 46 Lease Provisions Lease term Office leases generally run for multi-year periods, such as five or ten years. Long lease terms: ⚫ reduce tenant turnover ⚫ make selecting good tenants very important © 2021 Rockwell Publishing 47 Leasing Office Space Retaining tenants Finding tenants and the build-out process are expensive and time-consuming. Methods to keep tenants include: ⚫ building good relationships (events, newsletters) ⚫ concessions: may cost less than finding new tenant, build-out Lease renewal discussions: ⚫ contact tenant at least six months out © 2021 Rockwell Publishing 48 30  Chapter 11: Managing Office Property Summary Leasing Office Space – Tenant mix – Loss factor – Pass-through charges – Build-out – Shell space – Turnkey condition – Tenant improvement allowance – Work letter © 2021 Rockwell Publishing 49 Operations and Reporting Operational requirements for office buildings vary based on size of building. ⚫ Smaller buildings: on-site staff may not be necessary or feasible. ⚫ Larger buildings: can usually support on- site staff. © 2021 Rockwell Publishing 50 Operations and Reporting Security Security personnel: ⚫ keep tenants and possessions safe from crime ⚫ provide assistance in emergencies © 2021 Rockwell Publishing 51 31  Property Management Instructor Materials Operations and Reporting Security Large office buildings usually have one or more security guards on duty at all times. ⚫ Business hours: gatekeeping (controlling access to building). ⚫ Off-hours: monitoring security cameras, making rounds. © 2021 Rockwell Publishing 52 Operations and Reporting Security Low-rise buildings in office parks usually don’t have around-the-clock security. ⚫ Some larger parks do provide parking lot security. ⚫ May use services of security firms, rather than hiring own staff. © 2021 Rockwell Publishing 53 Operations and Reporting Security Other office security considerations: ⚫ alarm systems ⚫ video surveillance cameras ⚫ electronic access systems (key cards) © 2021 Rockwell Publishing 54 32  Chapter 11: Managing Office Property Operations and Reporting Maintenance Building management often provides maintenance and janitorial staff using: ⚫ hired staff, or ⚫ janitorial/maintenance service company. © 2021 Rockwell Publishing 55 Operations and Reporting Maintenance Services offered depend on size of building and needs of tenants. Public areas need more cleaning in bigger buildings. Larger buildings also have more complicated mechanical systems. © 2021 Rockwell Publishing 56 Operations and Reporting Maintenance Janitorial staff may report: ⚫ directly to building manager in smaller buildings ⚫ to supervisor (part of hierarchy) in larger building © 2021 Rockwell Publishing 57 33  Property Management Instructor Materials Operations and Reporting Working with tenants Manager needs to build relationships with tenants by: ⚫ welcoming them at beginning of tenancy ⚫ communicating with them on regular basis ⚫ providing timely responses to requests and complaints © 2021 Rockwell Publishing 58 Operations and Reporting Working with tenants Tenant relations also involves proper collection of rent. Lease should contain clause naming employee or representative of tenant responsible for receiving and paying rent bills. ⚫ Especially important if tenant isn’t headquartered locally. © 2021 Rockwell Publishing 59 Operations and Reporting Reports to owner Managers of office properties are particularly concerned with the following reports: ⚫ rent roll ⚫ delinquency reports © 2021 Rockwell Publishing 60 34  Chapter 11: Managing Office Property Reports to Owner Rent roll Managers must provide owners with rent rolls that list monthly rent collections. Although considered part of rent, report should separately list: ⚫ pass-through and CAM charges ⚫ rents collected under rent escalation provisions Helps manager and owner compare amounts year by year to evaluate changes. © 2021 Rockwell Publishing 61 Reports to Owner Delinquency reports Manager’s reports usually distinguish between: ⚫ delinquencies of rent ⚫ delinquencies of pass-throughs and other charges ⚫ even though all amounts are considered past due rent under lease © 2021 Rockwell Publishing 62 Summary Operations and Reporting – Security – Maintenance – Rent roll – Delinquency reports © 2021 Rockwell Publishing 63 35