The Office...To Be Or Not To Be

Here we are…ten months into the induced coma known as the pandemic’s restrictions on human interaction.  The long-term view on business survival and the effects on the way we work have changed a lot since April, 2020.  In particular, the impact of the sudden changes in the way we work and interact has skewed everyone’s view of the relevance and role of the office…and office buildings. 

Here are the dramatic numbers: since the pandemic, Kastle Systems has been studying keycard and fob access data from 3,600 buildings and 41,000 businesses in 47 states to identify trends in how Americans are returning to the office.  Los Angeles now leads the Barometer with an occupancy rate of 27.5%, followed by Dallas at 24.2%, Houston at 22.8% and Austin at 22%.

There are those who are ready to jettison all office space and pivot to a virtual workplace.  Note that this is different from virtual work.  We have all done that to a degree for the past several years evidenced by people taking their laptops everywhere and being glued to their cell phones.  (See that woman outside of Starbucks who is making her way back to her Mercedes roadster?  I assure you, she’s not looking at funny cat videos.) 

On the other hand, there are those who think that the place in workplace cannot exist virtually – that the human need to contact and in-person interaction is not being nurtured on Zoom. 

Change in fundamental aspects of our lives can be daunting. Stay courageous.

It Is Time To Completely Rethink Your Office

Corporate C Suites around the world are wrestling with a fundamental and conceptual rethinking of their office strategy, ranging from “do we eliminate them altogether?” to “do we need more space to allow for social distancing?”  No wonder they are confused about which way to turn.

Now more than ever, businesses leasing office space need an advocate who is well versed in workplace planning and local real estate market conditions who can help direct the conversation.  There are good, executable strategies for every company but no two are exactly alike.  Here are some of the topics that need to be carefully examined:

·        Which of our staff positions can work from home full time or part time?

·        How does a work from home policy affect the corporate culture and productivity?

·        Does a downtown or suburban location best fit our business objectives?

·        What business functions should our office space serve?

That last question is the big one.  The traditional concept of the office is “the place where everyone does their job.”  But with every firm making a concerted effort to allow at lease some of their staff work from home, other functions come to the fore: training, company-wide meetings, client presentations, and corporate functions, to name a few.  Unlike any time before, decision makers are planning their office strategy on a clean slate.  It is an exciting time and the decisions you make over the next couple of years will impact your business for many years after.

Remember when we all wanted the teacher to pick us to be the blackboard monitor and hand us the eraser?  As a real estate tenant rep broker with 40 years in the business, it’s finally my turn!

Nothing Gets Done Without A Good Plan

Often the CEO’s or business owner’s decision to move their offices is driven by the desire to save money, “right size” the company’s footprint, improve their image, or be in a location that better suits their staff and their customers.  These are all salient reasons to consider a move.  But often I find that the process shifts back into neutral when it gets to actually looking at other buildings and identifying a space that will really advance their goals.  What causes the drop off in determination to improve their workspace?  In almost every case, it is a lack of planning.  Space planning.

One of my long-term clients is a health care enterprise.  They provide clinical services but are developing new, high tech service delivery models.  Groundbreaking stuff.  They were recently staring at clear opportunities to expand in geographical submarkets that have proven to be very lucrative for them.  The CEO, the President and I had toured some buildings in two of these markets.  They were clearly motivated but the decision to move forward with offers and negotiations never seemed to come.  The issue became quite clear to me: they had several key operations staff members flinging in valuable input from the sidelines on what the facility needed to include but they had never all been in the same room with the C-suite executives to discuss it.  I needed to pull things together.

I arranged for a telephone meeting with the President and CEO and strongly suggested that we needed to find a designer with extensive medical office design experience to be a part of the growth team.  For my part, I promised to interview at least three and recommend one to meet with us and develop a template space plan.  They agreed.

We recently conducted that meeting and I was thrilled to have everyone in attendance that had key operational responsibility at their clinics and therefore an important contribution to make.  Not surprisingly, the conversation was animated but not just between the architect and the client.  There was lots off banter (and a little friendly arguing) between the members of the client’s staff.  You could almost hear the clang of sledge hammer against hot steel and things got worked out..  It was an incredibly constructive meeting.

The space plan that came out of that meeting was not the final product; indeed, everyone continued to contribute until all departments felt their needs were meet and better understood how to share resources and make their operations more efficient.  The final result, a well thought out space plan that had the buy in of everyone and a unified motivation to choose the building and get the clinic open.

Doctor, plan thyself!

A Rational Look At The Future Of Office Space

The shift in recent office space thinking has been profound.  But will the actual changes in how office space is planned and utilized be just as profound?  H Hendy, a highly respected Orange County, CA based planning and architecture firm recently put out a white paper on the look and effectiveness of a truly “blended” workforce with remote and location-based teams.  This is the most common sense view I have encountered, and I wanted to share some excerpts from their white paper.

“There is no prescriptive solution or one-size-fits-all answer in determining the amount of office space you will need or its configuration. Each organization will have a different solution depending on culture, leadership style and business objectives.”

The conversation can start with your real estate team including HR, operations and your outside, trusted real estate broker.  This time around though, have the team draft a skilled and knowledgeable planning firm like Hendy who can translate concepts to concrete plans

“While it may feel like we’ve been working from home for ages, we are still in the “honeymoon” phase. Remote working in the wake of a crisis has challenged many employees to rise to the occasion, and most of us are still on our best behavior. What remains to be seen is how our collective conduct will shift over the coming months, and how well leadership will react if out-of-sight turns into out-of-mind.”

What seems natural now about staff working from home may present problems and complications when human nature starts to reassert itself.

“We all have a basic human need for social interaction and connection. From an employee standpoint, this connectivity is often tied to their company’s vision, purpose and culture. In recent years, businesses have been prioritizing building a strong corporate culture through traditions that drive employee engagement, satisfaction and retention. From all-hands meetings to cornhole tournaments and potluck lunches, these efforts have largely been location dependent. With today’s new blend of onsite and remote workers, leaders will need to find new culture-driving solutions to maintain this momentum.”

Company culture, shared values, and a sense of teamwork does not naturally happen when we are physically separated by miles.  Company leaders may face profound challenges in inventing new ways of being and feeling together.   

Take heart – with enthusiasm and a forward thinking attitude, the future of your office is very exciting, indeed.

Popular Office Trend Predictions Might Be Off The Mark

I have expressed some skepticism about dire predictions about the end of office buildings as a result of the forced work-from-home conditions brought on by the COVID-19 pandemic.  I wanted to share an excerpt from a recent Globe Street.com article by Erika Morphy that articulates my own predictions.  In this article, Ms. Morphy debunks several myths about how the pandemic has changed commercial real estate.  The excerpt below focuses on office buildings:

The Myth

Office users will need less space as their employees continue to work from home. Office demand will lessen as fewer employees work full time in the office.

The Reality

This question of future office demand, of course, is being debated fiercely in the CRE community right now and there are good points to be made for both sides.  RCLCO principal Rick Pollack weighs in with an overlooked observation that Millennials and younger generations are having a harder time working at home as many are living in or sharing small apartments. There are also social aspects of an in-office experience that are difficult to replicate virtually.

Likewise from the employer perspective, Pollack said. “Onboarding new employees is more difficult to do virtually. There is also the cultural benefit of having people in the office and bottom line benefits of collaboration to consider,” he said.

For many companies this does not have to be an all-or-nothing proposition but even just shrinking square footage can come with problems, Pollack added. “Employees need somewhere to sit. The feedback on the hoteling or hot desking trend has not been positive. People are less productive when they don’t have an assigned desk.”

His conclusion: Office users will continue to use the same amount of space as they did before the pandemic. 

Another popular prediction is that office buildings need to become a no-touch, germ-free experience.Sensors for everything.No need to push buttons in an elevator or grab a handle to open a door.No need to dial a telephone in a conference room.And daily janitorial cleaning services performed to hospital standards.In the short term, this is indeed what office and building managers need to do to help keep the tenants and visitors safe.But after the pandemic passes, will these be permanent features of the modern office building?I wonder.

Rethinking Office Buildings

In most large office markets, a tenant has a distinct choice: to house their business in a modern, Class A office building featuring dramatic common areas and amenities or to opt for an older building for the sake of lower rent. 

Historically, this was essentially a function of the tenant’s brand (translate: image), the needs of its hired talent, and whether the business was public facing; that is, visited often by their clients who might judge the business by the environment they choose.  About ten years ago, tenants started to focus on sustainability and their building’s carbon footprint.  A LEED (Leadership in Energy and Environmental Design) designation, whether it was silver, gold or platinum was a sought-after distinction.

As a result, since 2010, demand for four- and five-star offices has grown at four times the rate of that for three-star properties and 19 times the rate of that for one- and two-star offices, according to the commercial real estate data gatherer CoStar.  Newer buildings, which tend to have more natural light, modern air conditioning and heating systems that are more capable of removing pathogens from the air, more amenities, and more outdoor space, generally better facilitate a focus on health and wellness; indeed, because of newly heightened fears over the spread of communicable diseases, health and wellness is likely to be as important this decade as sustainability was last decade.

To this end, the International WELL Building Institute has launched a new standard to rate how well a building protects its occupants from the transmission of the novel coronavirus.  I can imagine many tenants insisting on this certification before signing a lease.

Going upscale or value used to be a matter of style and economics.  For some companies it may soon become a matter of life or death. 

Let's Get Real About Tenant Improvements

There is a giant wild card in the economics of a commercial property lease that can easily derail a deal: tenant improvements.  In most instances, the tenant asks the landlord to make changes to the leased space prior to the lease commencement that can amount to a significant capital improvement on the landlord’s part.   Even for a small lease, these costs can easily climb into six figures.  What a lot of tenants fail to see is that this investment on the part of the landlord changes the character of the arrangement from a mere lease of space to more of a partnership.  It is enough for a landlord to agree to tenant significant tenant improvements but when the tenant’s financial statements don’t indicate impressive financial strength, the decision by the landlord will often be to pass on the deal.

A good commercial tenant rep broker can adjust the landlord’s perspective in a way that helps get over this hurdle.  In many deals, I emphasize the fact that many of the requested improvements add value to the building and make the property more valuable and the subject space more marketable for many years to come (and future tenants).  I call this “playing the long game”.   

I recently negotiated a deal for a tenant that wanted to move several walls in a small suite. The space was very inefficient with valuable space wasted on hallways and a couple of the windowless, interior offices that were too small to really be functional.  But it is crazy how the costs balloon when changes like this are planned.  There is a domino effect – walls impact the ceiling, the flooring, the HVAC (air conditioning system), and the lighting.  But by moving some walls, useless hallway space was converted into more area in those interior offices.  Windows were installed at the top of the walls in the interior offices to let in light.  Cabinets were relocated in the kitchen/break room area yielding enough space to put a small table and chairs for employees to take their breaks in the suite.  Now the landlord had a much more appealing suite for the market at large.  We just offered to lease it for the next five years.

I was able to get the landlord to see the tenant improvements as an investment in his building, not just in the tenant.  Everybody was happy with the outcome…and the landlord was quite happy for the income!

Keep A Scorecard When Searching For Properties

One of the messages I always convey to new clients when embarking on a search for a new location for their business is that it is a process; that is, the search itself serves to bring into focus what is important to them and that it is OK to shift their priorities along the way.  Nothing brings must-haves and deal killers to the surface better than actually touring several properties and their respective neighborhoods. 

Sometimes several of the tenant’s stated priorities are in flux and I find it helpful to keep track of the properties we have viewed with a scorecard that rates key criteria on a scale (I like 1-5; 1-100 or even 1-10 risks everyone getting lost in the weeds.)  Here is a list of criteria I rated for a client recently:

• Budget – budget often evolves from the tenant’s original rent target.  When it comes to the economics of a given space, employee satisfaction and productivity trump rent.
• Parking – abundance and security were key parking considerations for this client
• Proximity to neighborhood amenities – the client wanted to be in a walkable neighborhood where their employees felt safe and where there was an array of food and personal services available.
• Proximity to client’s manufacturing facility – as our touring progressed, neighborhood amenities moved ahead of being close to the industrial submarket where they manufacture their products and this slid down the priority list.
• Proximity to other business in the same industry and industry-supporting services – this matters when you are in the fashion or media industry but not so much if you are an accounting firm.
• Building and premises image and functionality – they valued a creative office environment and lots of natural light.

When I introduced the client to the scorecard I made it clear that it was not intended as a tool to choose a property based on the overall highest score; rather, it was a way to consciously take stock of their shifting priorities and steer clear of confusion that can derail what is always a complex decision. 

In the end, the tenant got the location they wanted and just as importantly, knows how they got there.

Getting Creative With Creative Office

One of the hallmarks of “creative office” space is the deconstruction of the walls that divide everybody and the collaboration and fresh ideas that spring from large, open spaces. Many of the images we see are of the most dramatic spaces created for large tech juggernauts. While these pictures are eye-popping, they also tend to scare off small and mid-sized business in more traditional industries. But fear not – creative concepts can be applied in smaller offices with great functional and aesthetic effect.

I am working with a regional accounting firm eager to change the feel of their space. This desire is motivated by the most profound reason: they know that they are competing with other firms to attract the best and brightest millennial accounting talent and want to present an environment that is cool and alluring. Want to know the secret to achieving this goal in a traditional office building setting? One word: furnishings.

Most people think of bow truss overhead structures, exposed air conditioning ducting, and concrete floors when creative office is mentioned but furniture systems are at the root of the functionality of creative space. Work surfaces are replacing work stations. Task seating is critical to wellness and productivity over the long term. Soft seating with style contributes mood enhancing color and, well…style.

For the accounting firm remodeling their existing offices, we started with a fresh space plan that carved out the open space. Then I set up a meeting with one of the largest dealers of modern office furnishings who could not only present a vast array of new concepts and materials, but could help them with the design and “spirit” of the space.

“Creative” not only describes the finished space but the inspiring process of getting there. Get a good broker on your team who can lead the way…and have fun!

A New Location Involves So Much More Than Real Estate

It is time to find a new location for your business.  You know this is going to be a time consuming pain in the neck, so you call your trusted tenant rep broker – your advocate for all things real estate – and give the command to get started. 

No doubt, a move is arduous and complicated, but it’s not just about real estate.  Every professional advisor that your business depends on gets involved in a change this big; indeed, your corporate attorney, your CFO, your outside accountant, your insurance agent, and your HR department all have a role to play.  And the outside business growth consultants that you recently engaged to help steer your business to a successful future?  Yeah, them too.

Your real estate broker is the scout that runs out in front of the expedition, reporting back on market trends and available space for lease or purchase.   But it is also the broker’s role to know how each professional on the tenant’s team will be processing that information.  In particular, the broker would be wise to open a line of communication with the growth consultant to insure their efforts are coordinated to achieve a common goal.    I often encounter tenants who do not fully appreciate the teamwork involved.  As the consultant that initiates the relocation process, I am in a position to call to their attention the need to draw their other business experts into the fold.

The real estate broker may run ahead of the pack at first, but a lone wolf could jeopardize your goals. 

The Varied Reasons For Picking A Business Location

The rise of new business sectors is pulling us back to the old cliché concerning the three fundamental rules of real estate: location, location, location. 

When you look at the most expensive office submarkets in Los Angeles you might wonder why firms would choose to locate there when there are so many lower cost alternatives.  Very rarely is more than a few cents per square foot of the rent premium related to the physical attributes of the building and its amenities.  Similarly, only a few cents differentiate the prominent location on a major street with a building located on a secondary artery (on L.A.’s Westside, think Wilshire Blvd. vs. Olympic Blvd.)  It is business synergy and the people behind it that creates a “have-to-be-there” location .  For once, the developers can’t even take credit!

The classic example in Southern California is Silicon Beach, the submarket originally comprised of Santa Monica and Venice.  Due to demand pressures, its borders have since expanded.  Within those boundaries is a culture of adventurous, entrepreneurial creativity that has become a vital jolt of energy to every one of the businesses there.  Thus, you have firms willing to pay nearly double what they would have to pay in, say Westwood, barely 4 miles away. 

I toured a social media app client through Santa Monica recently to look at buildings to lease.  Parking is impossibly scarce, mid-afternoon traffic is mind-numbing (and blood pressure-raising).  But in one building, we crossed paths with another young tech worker.  When she introduced herself to my client and they realized they were big fans of each other’s tech offerings, the connection was palpable.    And the value?  Arguably, priceless.

Sometimes there is a submarket where your business just has to be.  When that is the case, you still need a good real estate broker advocating for you and negotiating aggressively on many fronts.  But the rental rate may not be one of them.  

"Creative Office" Moving From the Fringe to the Middle

Once and for all, let’s put the worn out term “Creative Office” behind us.  Used to describe the workplace of technology startups and flip flop-wearing millenials, the term was abused and perverted by the real estate profession, I’m sorry to say.  First and worst of all, they tried to define creative office by a type of building (old, obsolete industrial buildings) and where it was likely to be found.  The archetypal locations in the Los Angeles region have been Santa Monica, Venice, El Segundo, Culver City, Hollywood, and the Arts District in downtown L.A.  But the misguided definitions of building construction and zip code missed the point.  The emerging new concepts about the communal office are about the people and the work – and it can take place anywhere that a community can thrive.  

The “Creative Office” cliché is being crushed in downtown Los Angeles.  In the midst of a breathtaking renaissance, young entrepreneurs and professionals are flocking to the city’s long forgotten core to live, work and play…and eat…and drink (craft beer, anyone?)  And in everyone’s view is Bunker Hill, home to the city’s largest concentration of skyscrapers.  Where better to challenge the notion that the new office space paradigm is exclusive to low-slung, worn down buildings?

If the primary creative office precept is collaboration, then it can flourish in a dense, vertical downtown community brimming with cultural institutions and richly programmed public spaces.   It is starting to happen.  Brookfield Office Properties’ experimental  DesignHive of six bleeding-edge spec suites in two of their Bunker Hill Towers is a must-see.  I would be happy to give you a tour.

Another perception that is being trashed is that “Creative Office” is just for technology companies.   I have accounting and insurance clients that are shifting to more open plan, team work layouts.  No longer relegated to the “creative” pigeon hole, a new paradigm of productive office space is here.  All aboard

When "Triple Net" Isn't Really Triple Net - Kellogs Swale Tale in Detroit

Can the landlord force their tenant to cure all latent defects at a property under a NNN lease?  The answer is yes…if you let them!  Tenants take this on the chin day in and day out without a good, experienced broker in their corner who can come out swinging!

Properties can have latent defects even if they are brand new.  The benefit of brand new is that there are construction warranties in place.  Did the broker make sure those warranties were addressed in the lease to protect their tenant against construction defects?  If not, the tenant just got the shaft!  If the warranties have long since expired, did the broker get wording into the lease that latent defects would be the landlord’s responsibility?  Admittedly, those assurances are hard to get, but you gotta ask!   Putting protections into the lease regarding premature and extensive repairs to a property that is being tendered in “good operating condition” is the stuff of another blog post, but I wanted to share an interesting story that involved my client, The Kellogg Company. 

Kellogg was 3 years into a five year lease at a free-standing, single tenant facility in the greater Detroit, Michigan market.  This was a classic triple-net situation: the tenant was the only one using the property.   I got an email from Battle Creek: the Detroit distribution center manager was complaining that a broken concrete drainage swale running down the middle of their truck court was breaking up and causing damage to their trucks.  After reviewing their lease and finding what I expected – pure triple-net without any carve outs – I took a few minutes to reset the client’s expectations; after all, it was their truck traffic that caused the damage.   But before I came to any final conclusion, I asked them to take several photos and send them to me.

What the photos revealed was that the concrete swale was poured with the rebar very close to the surface which arguably caused the concrete to “spall” or fracture.  The rain and freezing temperatures took care of the rest.  I presented the problem to the landlord thusly: the faulty construction of the swale was the root of the problem.  And the tenant was considering their options with respect to renewing this lease.  Can you guess what the outcome was?  Problem solved…and at no cost to the tenant!

The moral of the story here is that the tenant or their broker must give these situations a closer look before incurring the cost of repair.  And if you think you need the leverage afforded by a Fortune 100 tenant, that’s not necessarily the case.  So long as the tenant has held up their end of the lease and paid their rent on time, they are golden. 

Nothing is absolute when it comes to the landlord-tenant relationship.

Corporate Image: Inside vs. Outside - Does Your Broker Get It, or Even Care?

Did you sign a lease for a beautiful new building only to watch employee morale disintegrate after you moved?

Your corporate image and culture is projected in many ways, including your branding and marketing materials, but perhaps in no way more dramatically than in your place of business.  Tenants, be they retail, office, or industrial in nature, choose buildings based on their outside appearance  or “curb appeal”.  While there is no discounting the way a building looks from the street, experienced and knowledgeable real estate brokers know that what you see isn’t always what you get.  Poor brokers and naïve tenants overlook the fact that there are two distinct audiences for corporate culture:  the outside world (their clients and the public at large) and, no less important, their employees. 

On the outside is the architecture, the building skin of granite or glass, the expansive lobby and the corporate identity (not necessarily theirs) on the top of the building.  But what is important to your valuable employees?  Think ease of parking, the speed of the elevators, the smell of the bathrooms, the design of the suite, and the amenities in the neighborhood.  What do you think it does to productivity to have your employees chronically complaining that they are too hot or too cold in their work area, or worse, going home feeling sick because they are hypersensitive to these temperature extremes?  Or when they take longer lunch breaks because the food amenities located in or nearby the building are lousy?  Or when there are no places nearby to network and socialize after work?

How else does a building impact your business operations?  Is that impressive grand lobby in your three story suburban building inflating your rentable square footage and costing you more relative to other alternative buildings?  Are you setting yourself up for surprise billings from the landlord because they are doing a poor job managing building operating expenses?  It might surprise you to learn that these are all things a good real estate broker can identify before you sign your lease.

Think about it: those companies rated as “the best places to work” in your local business journal never cite the exterior appearance of the building.  It’s all about happy employees.  And happy employees make for happy clients.