Archive for March, 2011
|The Incredible Shrinking Office
Wednesday, March 30th, 2011
Technology Hinders Real Estate Recovery But Gives Office Tenants Added Leverage
By Joe Sciolla, Managing Principal
It’s a case of the incredibly shrinking office, and technology is a prime culprit.
Here’s how it works: As technology increases productivity at the workplace, it also leads to a decreasing need for space. Thanks to automation, we need fewer employees, we use less space per employee, and we outsource more jobs overseas. As a result, with new job growth still limited, class A and B office vacancy rates in most markets continue to be high, and rents continue to be flat.
Indeed, technology, while it generally boosts efficiency and cuts costs, also compromises the commercial real estate recovery. This is bad news for landlords. At the same time, however, it’s good news for tenants since they have added leverage as they look to renew their leases or relocate in a “flight to quality.”
Fewer Bodies
With laptops, smart phones, and iPads becoming more sophisticated and more ubiquitous, fewer employees are needed at the office. Today, seven employees can do the work that required ten before the dot-com boom. Moreover, wireless technology has created an environment in which anyone can work practically anywhere at any time.
Today’s virtual office can be a home studio, a car, a plane, or a hotel. While this is clearly not the best set-up for everyone, it has proved to be effective for mobile salespersons, consultants, etc. If a dedicated area in the employee’s home allows for telecommuting, corporations may invest in off-site furniture, phones, faxes, and computers.
Another intriguing arrangement is hotelling, in which companies reserve office space on a “check-in, check-out” basis for employees who are typically on the road. These fully equipped, shared workstations are effective in certain situations, but they may not work when workers are involved with team projects or need face-to-face supervision.
Fewer SF
In the last 10 years, we have seen a significant reduction in the average office space per employee. In 1995, it was approximately 300 SF; in 2000, it was 250 SF to 275 SF; and today, it is about 225 SF or less. A continuing trend is to place more employees in workstations rather than private offices. Today, as much as 70% to 90% of staff members are assigned to workstations, some as small as 36 SF. Almost half of employees today occupy less than 250 SF.
Another trend is the use of collaborative space outside and inside the office. Conference rooms are getting more use, and there’s also greater use of collaborative technology such as videoconferencing, which brings people together at the workplace. Videoconferencing as well as virtual meetings further reduces the need for everyone to work on site. In the office, wireless technology means less hardware, and flat screen computers and TVs consume less space. And while the paperless office is not quite a reality, less paperwork means less space needed to store these supplies.
There’s also the related environmental benefit: fewer trips to the office helps to conserve energy, and less paper helps to conserve trees.
Fewer Jobs
Slow job growth continues to hinder net absorption. Meanwhile, corporate mergers and acquisitions contribute to job losses and excess space. Further exacerbating job growth is the continued flow of jobs to India and other locations overseas.
Reports show that engineers from India perform similar tasks to their counterparts in the States for about one-fourth the salary. In this light, it gives tech companies an efficiency edge when they offshore jobs and operate 24 hours a day.
More Opportunities for Tenants
How can tenants capitalize on these soft market conditions? Clearly, they can use their leverage in many ways as they negotiate with landlords anxious to limit their liability.
First, companies should consider partnering with a corporate real estate advisor that puts their interests first and can save them thousands of dollars. In selecting a real estate service provider, companies should factor in the value of start-to-finish services, including strategic planning and project management.
For companies with fewer than two years remaining on their lease, we recommend they look into early lease renewals. Chances are they will be able to negotiate better terms as well as concessions like free rent and tenant improvement allowances. For companies thinking about relocating, they should, if appropriate, look into trading up into higher quality space.
During contract negotiations, tenants should strive for lease flexibility. This is particularly important for high-tech firms that operate in a volatile market. They should negotiate for expansion as well as contraction and termination options.
Also important during upfront negotiations is space planning and construction management. For example, if a company has downsized, it might consider reconfiguring its space to maximize efficiencies. Here, a project manager can be a huge help.
In the final analysis, technology naturally helps us become more productive. But as technology giveth, it also taketh away. If you’re a landlord, you must deal with our shrinking offices and high vacancies. If you’re a tenant, you should study the market and then crunch some numbers on your laptop. Do your homework—whether at the corporate office or in your home office—and make the numbers work for you.
Tags: corporate real estate, landlord, office space, technology, tenant
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Tenants Start with Project Management, Finish with Big Savings
Thursday, March 24th, 2011
By Dwight Patten, Director of Project Management
While the recovery slowly continues, it continues to be a tenant’s market, and cost-conscious companies are finding opportunities to save that go beyond reduced rental rates. Whether companies are upgrading or renovating existing space or building out new space, many are discovering that they can realize significant additional savings—in some cases more than $1 million. How? By adapting upfront, value-added Project Management.
Project Management—often overlooked and misunderstood—is a process that oversees all components of commercial real estate projects following strategic and portfolio planning. It involves managing all the elements that help you optimize your space needs, align your real estate with your business plan, and improve your bottom line.
To maximize savings, you should engage a Project Manager before the lease signing. Typically, the Project Management sequence includes the following steps:
-Lease negotiation (right-sizing space, maximizing tenant improvements, ensuring on-time project completion)
-Needs analysis and project objectives
-Vendor selection (architects, engineers, general contractor, IT, furniture)
-Design planning and space programming
-Construction control
-Move-in coordination
The right Project Manager orchestrates the whole process (including measures to “green up” your office, as needed), ensuring that your project comes in on time and on budget.
What Are the Benefits?
As far as cost savings, we have found that tenants will save at least the cost of the Project Manager by the project’s completion. One way Project Managers can guarantee savings is by leveraging relationships with vendors who want to work with them. For instance, they can drive 70% price reductions from furniture manufacturers alone.
Beyond cost savings, they will help you mitigate risks and minimize your time and stress. And additional benefits continue long term as space upgrades often lead to improved employee productivity and morale. For instance, through space reconfiguration, you can avoid empty pockets of vacant space, bring employees closer together, and establish a more collaborative environment. Sustainable practices will also produce a healthier workplace—and they are proving to help companies be more competitive, enhance recruitment efforts, and not necessarily cost additional “green.”
Overall, alternative work optimization strategies such as space restacking are now particularly timely as a new generation of younger employees are benefiting from new technologies, working in virtual areas, and sharing space at the office.
How to Proceed?
Meet with a project manager and real estate advisor who can integrate all your real estate needs, objectively arrive at a consensus, and represent your best interests. And remember to put project management to work before the deal is done.
Think of project management as an insurance policy that gives you peace-of-mind. The right team will provide a single source of accountability with professionals who will navigate around potential pitfalls and squeeze savings every step of the way.
Whatever the economic climate you should consider engaging an experienced, knowledgeable Project Manager who will plan intelligently and deliver as promised.
Tags: corporate real estate, cost savings, lease, PM, tenant
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Changes in Lease Accounting Simplified
Wednesday, March 16th, 2011
By Brant Bryan, Principal
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) tentatively agreed to revise some of the proposed lease accounting standards. Nearly 800 letters and comments had been sent to the Boards in response to the proposed changes, and as a result, the Boards are simplifying portions of the new lease standards. However, the Boards remain firmly committed to requiring that all leases be recognized on the balance sheet.
What Has Changed?
The tentative changes from the initial Exposure Draft that will have the biggest impact to corporate tenants are:
-Defining Lease Term as the base term plus only option periods for which there is significant economic incentive to extend.
-Leases with variable lease payments (such as percentage or contingent rent) will have a threshold for inclusion in lessee’s lease liability and asset.
-Creating two classifications of leases: (1) Finance Leases and (2) Other-Than-Finance Leases.
-Affirming the direction of the Exposure Draft to require all leases to be reflected on the balance sheet as both an asset and a liability.
What Are the Specifics of the Changes?
In a significant change from the Exposure Draft, the Boards decided that all lease terms will be the contractual minimum period plus any optional renewal periods for which an exercise of the renewal option is reasonably certain. Reasonable certainty will be based solely on economic factors within the lease, such as bargain pricing on renewals. The Board plans to provide specific criteria to be used in this assessment. These tests likely will be very similar to the current GAAP standard concerning renewals. The ED had proposed including renewal terms if they were more-likely-than-not to occur based on a wide variety of factors, including lessee past practice, market conditions, and lessee intent.
One change that will greatly simplify life for corporate lessees is that there will be fewer reassessments of renewal options during the lease term than the Exposure Draft had proposed. Reassessments will only need to occur when economic factors affecting the decision to extend or terminate a lease change significantly. Lessees will not need to search for reassessment events.
The Boards also decided that variable lease payments tied to an index or rate would be included in lease calculations using the current rate, or spot market, for that index or rate, rather than a forward projection. There will also be thresholds for including contingent rents in leases (such as percentage of sales). Such contingent payments will only be included when they are virtually certain. If variable payments are, in substance, minimum lease payments, they shall be included based on such minimum.
There were also discussions regarding several other issues, including: which agreements shall be defined as a Lease, Residual Value Guarantees, and Lessor Accounting.
Two Types of Leases:
In another significant change from the Exposure Draft, the Boards tentatively decided there will be two classifications for leases, and each type will have a different pattern of recognition in an income statement. All leases will either be a (1) Finance lease or (2) Other-Than-Finance Lease. The Boards will develop criteria for distinguishing between these two types of leases.
A finance lease will be viewed as a financing transaction. The pattern of income for a finance lease will be consistent with the methodology presented in the Exposure Draft as it will be treated as a financing, with more expense early in the lease term. If the lease is similar to a rental transaction and financing is not considered to be a significant part of the transaction, the lease will be treated as an Other-Than-Finance Lease. The pattern of income for an Other-Than-Finance Lease will be consistent with current US GAAP (straight lined or leveled).
What Is Next?
Deliberations will continue, and other changes may be forthcoming before a final lease accounting standard is issued. June 30, 2011 is still the target date for finalizing the new standards. The exact schedule for formal adoption of the new standards has not been set; however, most observers expect larger corporations to begin reporting under the new standards with their 2012 fiscal year-end.
Tags: corporate real estate, Exposure Draft, FASB, IASB, lease, lease accounting
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A Glimmer of Hope?: Q&A with Houston Tenant Advisors
Wednesday, March 9th, 2011
Participants:
Sue Rogers, Principal
Steven Heal, Vice President
John Mason, Project Manager
Perry Reese, Senior Associate
Brett Ganz, Senior Associate
Erik Prejean, Senior Associate
What differences are you seeing from the landlords in the deals you are currently working compared to those of the past year?
E.P. - A year ago, I was seeing more free rent offered; now not as much. Fortunately, I am seeing quicker turnaround on commission payments lately.
S.H. – I am actually seeing more free rent being offered and better Tenant Improvement Allowances now as well. However, there isn’t much change in the rental rates.
P.R. – In the industrial industry, I am still seeing free rent being offered. The only difference is that now I am encountering landlords who are “sprinkling” free rent throughout the term rather than all at once at the beginning of the term.
B.G. – Well, it seems to really depend on who you ask and what landlords they are dealing with. Right now, I am not seeing a lot of free rent offered, but I am getting some through negotiations. A year ago, landlords used concessions to entice prospective tenants, but now there is more movement, and landlords are significantly cutting back on what they offer.
S.R. – Landlords, buoyed by the recent activity, will be more aggressive in their efforts to protect face rates, and they will, most likely, decrease free rent and other incentives toward the fourth quarter.
What are your clients expecting right now from you and/or their leases?
E.P. – In particular, I am representing a residential real estate company and an energy company that are pursuing options to provide more flexibility.
S.H. – Tenants that did five-year terms back in 2005 and 2006 are under the misconception that they should be able to find outstanding deals due to the down market and recession, but due to the large rate increases that happened in 2007 and 2008, their renewal rates are typically much higher than their expiring deal.
P.R. – I am actually finding some great deals in the market – however, for the most part, they are all in functionally obsolete buildings. The rate will be great, but the space isn’t user-friendly at all.
J.M. – I am seeing tenants waiting until crunch time to make major decisions about construction. They seem to have the misconception that in the down market, construction companies will jump through hoops for them. In actuality, I am seeing tenants being charged construction premiums, and construction deadlines slipping for lack of manpower.
B.G. – Tenants want to believe they can get a steal, and in certain submarkets, they can. Overall, they are much more difficult to find, though. Last year, it was easier to get class A space at class B rates; this year not as much.
S.R. – As compared to last year, tenants should be even more wary of owners and their ability to fund any capital expenses such as Tenant Improvement Allowances and other economic incentives.
Are there any trends in particular that you are seeing with tenants?
P.R. – I am seeing a lot of tenants attempting to consolidate and sublease space. Budgets are tight, and the outlook is very short term. Tenants are unsure of what is to come with the market and are trying to realistically predict the future.
B.G. – The oil & gas industry and its ancillaries are very strong. I recently picked up two start-up oil & gas companies. Insurance seems to be struggling, and as a result, medical companies are struggling as well due to insecurities about what healthcare reform will bring. Big companies seem to be excelling and focused on future growth, while small companies seem to be drowning in the down market.
So it seems like the market is still in a trough. Is there any glimmer of hope in the near future?
E.P. – Well, the government job growth is still going strong. Here in Houston, consulates are steadily expanding.
S.H. – I am seeing tenants in the oil & gas and energy fields continuing to expand.
P.R. – I think there is a light at the end of the tunnel for tenants due to some active bidding and new contracts, but I believe we still have some time left before we are out in the clear.
J.M. – If tenants are thinking about expanding, now is still a good time. Contractors are eager to work, so it is a very competitive market – a big benefit for the client.
S.R. – The safest move for tenant rep brokers is to work with reliable landlords to avoid an unhappy outcome for your client. Pent-up demand and continued expansion in the oil industry is good news for landlords but could create a shortage of “deals” in preferred submarkets.
How does the Houston market compare to your market? Would you respond differently to any of these questions based on your market’s conditions?
Tags: corporate real estate, free rent, landlord, tenant, tenant improvement allowance
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Server Rooms: Going Green and Saving Green – Part II
Friday, March 4th, 2011
By Matt Newstrom, Senior Advisor
In Part I, I discussed a CresaPartners client, PECI, and how it applied progressive energy conservation strategies to its server room. In this entry, we will look at the third and fourth strategies.
Strategy Three – Air-side Economizer
By definition, an air-side economizer is “a mechanical device used to reduce energy consumption. Economizers recycle energy produced within a system or leverage environmental temperature differences to achieve efficiency improvements.” Since PECI both raised the approved temperature set-point to 85 degrees and confined, redirected, and used the heat load created by the servers, it was able to use the ambient office air to “cool” its server equipment. This means that as long as the building’s central plant is conditioning the office space (Monday through Friday, 7 a.m. – 6 p.m.), PECI will be in effect getting “free cooling” for its server room. So, by doing simple math, there are 8,760 hours in a year, and for about 2,600 of those hours, the building is being controlled for occupant use and will be well under PECI’s 85 degree allowable operating temperature.
Outside the normal “occupied” hours in most buildings, the building systems typically will go into cooling mode on nights and weekends when the indoor temperature reaches the mid-80s (some buildings may let their temperatures float up from there, some below). While PECI’s installation is new, and over the next year, hard data will be collected through its energy monitoring system, it is expected the company will only need to rely on supplemental cooling on nights and weekends in the summer months, if at all.
Strategy Four – TIMING!!
I put TIMING in all caps since all of the strategies listed above will be much more difficult to achieve if you wait until your new building is selected, the lease is signed, and the construction documents are at 90%. If you wait until the lease is signed, then you are already behind the eight-ball and can miss out on opportunities that exist during the negotiation phase. In the case of PECI, we spent many hours upfront and even before touring prospective buildings, documenting the requirements and goals of the project beyond the basic questions about “how much space do we lease, and what is the cost per foot?”
The project used an integrated team approach in which we engaged engineers, project management consultants, PECI staff, and the landlord early to gain consensus on what the limitations and opportunities were. Getting an early start on the server room design (as well as other energy-saving initiatives) allowed us to locate the server room in the optimal location of the building and leverage landlord funds to cover the additional costs associated with the build and the other energy-saving tenant improvements.
While not all engineers and IT experts will always agree with some of these ideas and practices, the point is that the problem of excessive energy usage in call centers and server rooms needs a solution, and rethinking “the norm” is what each of us needs to be doing to raise the bar.
Tags: corporate real estate, data center, energy conservation, green, server room, sustainable
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Server Rooms: Going Green and Saving Green – Part I
Wednesday, March 2nd, 2011
By Matt Newstrom, Senior Advisor
I was recently at the BetterBricks Award Breakfast, and the keynote speaker quoted a few statistics regarding energy usage that I had not heard before. According to the Department of Energy , data centers can consume up to 100 times more energy than a standard office building. Between 2000 and 2006, data center energy usage more than doubled, reaching more than 60 billion kilowatt hours per year. Through programs like LEED, the US Green Building Council has done a great job of educating the public and getting more commonly known statistics out to the masses. For example, in the US, buildings consume about 70% of all electricity usage and about 40% of all primary energy usage. Facts and figures like these are acting as a catalyst for changing people’s thinking, awareness, and practices. Whether the motivation for reducing energy usage is to impact the bottom-line fiscally or to save natural resources, either way, we see it as “doing the right thing.”
Now, while those figures are staggering, you may be asking yourself, “I’m a user of office space and don’t own or operate a data center, so what does this have to do with me?” Well, many of the operational practices and principles that data center operators such as Google, Intel, and HP are implementing in the way of energy conservation can be applied to users of office space. Most IT departments require supplemental cooling of their server rooms. The IT personnel calculate the heat load, how many tons of cooling is required to maintain the room at a specific temperature, and then install a CRAC (computer room air-conditioner) unit that will run 24/7/365. CresaPartners recently had the pleasure of partnering with a leader in energy conservation PECI on the leasing, planning, and project management of its new 60,000 SF office space. While PECI implemented many progressive energy conservation strategies into tenant improvements, the one that resonated most with me is the approach to the server room. We’ll be dissecting this approach by taking a closer look at four strategies:
Strategy One – Containing and Exhausting the Hot Air
PECI implemented the use of a “chimney cabinet” versus a more standard four-post rack or cabinet enclosure. The purpose of the chimney cabinet is to exhaust 100% of the heat created by the server equipment out of the back of the servers and into a return duct or directly to the outside. In PECI’s case, it took all of the hot air produced by the servers and ducted it through a coil that then pre-heats its domestic hot water, sends some of the excess heat down to the ground floor retail tenant, and then discharges it into the building’s return plenum. This accomplishes two things: 1) it takes away the heat load that would otherwise be expelled into the room, then costing the tenant to be cooled by supplemental means, and 2) it saves energy that would be required to heat the hot water for the kitchen and coffee bars and heat for the ground-floor tenant.
Strategy Two – Server Room Temperature Set-Point
Most of the corporations that I’ve worked with set their temperature set-point in their server room or telecom closet at 69-72 degrees. Typically, this will require some type of supplemental cooling system to maintain those temperatures, which most of the time must run around the clock. PECI has initially set its set-point for cooling at 85 degrees, with the goal of moving it to 90 degrees. While this may appear to be extreme, a number of studies show that show that running equipment in higher temperature ranges found “no consistent increase” in failure rates due to the greater variation in temperature. With that said, it is advised that you check with the equipment manufacturer to verify any specific warranty requirements associated with operating temperature being met.
Stay tuned for Part II of this series, where I will discuss the third and fourth strategies implemented by PECI.
Tags: corporate real estate, data center, energy conservation, green, server room, sustainable
Posted in Sustainability | 1 Comment »
