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Guest Column ...

July 31,2001

Florida Real Estate Journal, July16-31, 2001

Guest Column by Ken Morris

"Landlords should play it smart in soft leasing market"

After several years of landlord's market, the pendulum has started to swing back toward the tenant's side of the negotiation table. This doesn't mean that we will return to the early 1990's office market that suffered from vacancy factors approaching 30% in some submarkets. What it does mean, however, is that there are more alternatives for tenants to evaluate and opportunities to maintain or even slightly lower their occupancy costs. Tenants can usually negotiate for more tenant improvements during a softer market.

The current status of today's office market offers more opportunities. Tenants can take advantage of brand new space in buildings recently completed as well as existing office and industrial spaces that are appearing on the market for sublease more regularly. The soft real state market allows some tenants to take advantage of existing space for sublease, because much of the expense for construction and technology (communications/computer cabling) has already been spent by other parties.

So where does that leave you-the landlord or leasing agent? Now is the time to play it smarter. No matter what type of space a company is seeking, a potential tenant must consider the strategic impact the real estate will have on the organization as a whole. From there, they have to begin to working down to evaluate each level of company's operations when considering what space in the marketplace is most appropriate. A smart, qualified corporate real estate service provider who thinks strategically can become an adjunct member of the tenant's team, connect the tenant with the right space and also be a partner for ultimate success of the organization.

Important factors
There are a number of factors that a smart commercial real state consultant, who does his or her research, can help a potential tenant to consider when assessing the marketplace for new space.

The first factor is the financial one - how much will the space cost per square foot? How will the lease be adjusted annually for cost-of-living and operating expense passthroughs?
Next, look at the "big picture"- What strategic impact does the space have on the organization? Will the new location be geographically suitable for employees and customers to reach? Does the new building offer an image that is in keeping with the image that the company wishes to present to its customers and competitors?
Another important point is how the organization functions in terms of operations and space. Are the employees in their own offices or are the majority of them situated in an open-plan environment that utilizes workstations? How much space a company will ultimately require greatly depends on this ratio of open plan areas to actual offices. More office-intensive space requirements usually translate into less efficient space that demands more square feet per employee, raising the total amount under lease.

The comfort factors
One factor that cannot be studied enough by the corporate real estate service provider and the management team making the decisions is how employees are housed. The quality of the environment as a whole will ultimately affect the bottom line of the company. Comfortable employees are more efficient and more apt to stay with an employer that provides an environment that is safe and pleasant to work in. Efficiency does not have to be sacrificed in order to provide such a work environment.

The "Dilbert" cube landscape of the 90's is giving way to open-plan environments that provide employees with a workplace that offers a more inspired approach to housing employees, including more natural light, and when that isn't possible, indirect lighting that provides plenty of light without a harsh glare. Multiple conference rooms for team meetings, and special purpose areas such as quiet rooms and exercise facilities, are becoming standard in many of the Fortune 1000 companies. Next-generation computer monitors and communications equipment are providing a technology interface that offers less noise and heat.

The physical plant aspects of a building or facility need to be evaluated in terms of how it will affect the operations of the organization. For instance, employee quality of life can be positive, or negative, influence by the amount of natural light available to employees located in the open plan environment. How the building is heated (not usually high on the list of South Florida tenants) and cooled is another very important issue when evaluating a building. Tenants that require 24-hour cooling, and more control over how their space is cooled, may not be appropriate for a building or facility that has a central chiller that provides all HVAC service.

Specifically, if the building's central chiller shuts down at predetermined time every day, as most buildings with system do, how will that affect the operations of a company that operates during non-standard business hours? Technology companies in specific need to have control over cooling in their "mission critical" areas such as server rooms and software engineering labs. Accountants also make an excellent example, because the majority of accountants work well past 5 p.m. during tax season. After hours HVAC service is usually available but at a cost that could become significant over time.

Parking and safety
Parking has become one of the new battlegrounds between commercial landlords that are vying for interest from tenants in the marketplace. Most companies are squeezing more employees into the same or less space now that the required parking ratios have been stretched form three parking spaces per 1,000sf to ratios most commonly needed by today's tenants of five or six per 1,000sf.

The impact of how parking is achieved (structured vs. surface) should be considered for the financial implications (i.e. cost per space) and ease of access for employees and customers visiting the company.

Of course, safety considerations should always be taken into consideration. What kind of security is provided? Is there 24-hour security or is security limited?

Tenant retention
Interestingly, it isn't unusual for current commercial office tenants to be surprised to find that their lease expiration date has crept up on them unexpectedly. It is customary to notify tenants 90 days or more in advance that their lease is expiring and the terms under which you are seeking to renew the lease.

However, some landlords make it a standard practice to notify their tenants closer to the expiration date in the hope that panic and inertia will help make the tenant decide it's easier to stay on instead of searching for new quarters on a rushed basis. This type of decision-making occurs frequently even though the tenant could suffer financially or strategically by not evaluating their alternatives in the marketplace.

A smart real estate service provider will start working early with a company to help them avoid making a rushed or panicked decision that could significantly affect the health and future of the organization. This prescient service will often result in a long-term relationship that benefits both parties.

Ken Morris is president of Morris Southeast Group, a commercial real estate firm in Plantation, Fl.

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