Creating Opportunities in a Down Market
Commercial real estate across the country is starting to feel the effects of the dot.com meltdown. There may be no better example than the Dulles Corridor of Northern Virginia. Once the hottest commercial markets in the nation, Northern Virginia now sports several million square feet of vacant space with much more expected to be on the way. Northern Virginia, Boston, New York, San Francisco and other markets driven by the technology boom are the first to feel the downside of an economic slowdown; the rest of the country is not far behind.
So how can managers become heroes in a market heading south? Effective property management. Changing markets create opportunities for management to shine by controlling costs and creating value through use of technology and innovative applications of traditional services. A downward market will demand that management again do more with less, focus on tenant retention and keep a watchful eye on the bottom line.
Focusing on Retention: The Manager as Superman
To effectively retain tenants, owners and manager must truly understand what tenants want, need and expect. A BOMA study found that the key factors tenants use in making leasing decisions are price, location, thermal comfort and workplace flexibility. Key factors in retaining tenants are the quality of service and the ability of the space to meet tenants' needs.
Property management service reaches far beyond how fast management responds to a minor repair or maintenance request. If property management is truly going to become a service-based industry, the space owners and managers provide will have to become service-oriented as well. To accomplish that goal, owners and managers will have to think differently. One concept is to offer more flexible space that allow tenants to easily reconfigure their offices to meet changing needs and provide tools that can help tenants adapt to fluctuating employment levels, new technologies and ever-changing workplace environments. And if you don't think tenants want more flexible office space and want to know how to better use the space that they have, consider just how many tenants have moved all or part of their operations to an open floor plan. A key to future tenant retention is service. And a key to service is responsiveness and flexibility.
Controlling Costs
Flexible, modular components are not suited for every type of tenant. However, if you have tenants that opt for open-air floor plans and use modular components, property managers can take advantage of savings opportunities especially now that tenant improvement expenses mean more than paint and carpeting.
Intelligent or flexible space involves moving HVAC, electrical and telecommunications infrastructure from the ceiling to the floor or creating connectivity from the ceiling to components through power poles. Using a grid approach based on anticipated densities with universal distribution throughout the office suite or floor plate allows tenants to plug in electrical, phone, and HVAC connections and plenums wherever they want. If a tenant wants to move a desk or a conference room to a different part of suite, no problem with the caveat that the circuitry in the component matches up with the circuitry of the connection in which the desk or conference room has been relocated to.
The advantages to owners are numerous. First, build out becomes incredible efficient. According to Douglas J. Stevens (SMED International), speaking at the June 2001 BOMA Convention in Baltimore, "The whole process of interior construction is inefficient. It is a convoluted way to build space. At least 15% of all construction materials in new build out is wasted. The cost of change is staggering."
One of the biggest benefits to the approach is tax savings. Using a modular, flexible approach takes tenant improvement dollars from capital expenses and classifies them as furniture. As such, expenditures for flexible office space because they are not permanent fixtures can be depreciated in five versus 30 years. Several management firms that have built out modular component space have rolled the cost into leases.
Another significant advantage is reduced operating costs. Moving ductwork from the ceiling to a pressured plenum in the floor can cool space at 30% of the cost of conventional methods. Cooled air through conventional methods must be delivered at 55 degrees to work effectively. Moving the HVAC system to the floor allows for air to be delivered at 65 degrees with the same cooling ability because hot air rises. According to David Mueller, Vice President of Marketing for Interface AR, an additional advantage of under floor HVAC systems is that plenums are easily moved allowing for each employee to manually adjust the heat or air conditioning they receive at the desk. Mueller also claims that under floor systems improve indoor air quality up to 40%. From a management perspective, moving HVAC from the ceiling to the floor gives every employee of every tenant control over his or her thermal comfort. And when that happens, the number one tenant complaint disappears. However, the system is not a complete bed of roses. When components are moved, someone in the office must know how to reconnect system to assure that the proper power source is connected to help assure that the system operates as designed. If the tenant does not have in-house expertise, management may be called upon to assist.
What's the Cost?
The cost of flexible materials can be up to five times as high as conventional systems. However, material cost does not a building make. When determining if a flexible system is the right approach for property and/or tenants, consider the total cost of build out and the ability of the systems to create value especially if you know that a tenant is building out an open office environment. Companies like SMED, Herman Miller, Steelcase and others offer flexible systems that can meet almost every type of office configuration, finish or architectural detail. When you look at total cost, flexible systems are competitive up front. When you look at the value flexible systems create in terms of tax savings, faster move-in, tenant comfort, they make both dollars and sense and give you the opportunity to become a hero.
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