Managing Office Property

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Managing Office Property Lecture 4

Department of Real Estate Management Faculty of Technology Management and Business

(Semester 1 2012/2013)

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Introduction

• An office building can be defined as a property that provides facilities (space) to a tenant engaged in services rather than a location where goods are sold (shopping centre) or manufactured (industrial building)

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Supply and Demand

• Developers build office space based on two types of demand– Space-created demand– Money created demand

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GRADE LOCATION RENTAL RATE TENANTS

A Best Highest Most Prestigious

B Second Best

Slightly less than A Good, Solid

C Older area Below A & B Lower income

D Near CBD Lowest Not usually maintained

• Decarlo (1997) categorised office desirability into four grades:

Location Desirability

Desirability

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Desirability

• Why are some office buildings at full occupancy with high rental rates while others are half empty at bargain-basement rents?– The answer is ‘desirability’

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Desirability

• The grades are achieved by ranking 12 criteria:

– Location– Neighbourhood– Transportation– Prestige of

building– Appearance– Lobby

– Elevators– Corridors– Office interiors– Management– Tenant mix– Tenant service

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Market analysis

• Regional analysis– Reflect availability or scarcity

• Neighbourhood analysis– Prestige of the local area, transportation,

parking and proximity to business and services

• Absorption rate– The no of sq feet that have been historically

been leased in the market area.

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Market analysis

.

• Site selection–4 key factors influencing the

selection of office facilities (Kyle, 2000)• Cost• Accessibility• Environment• Labour market

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Property Analysis

• Measuring the building– Gross area of entire building

• The total sum of the areas of each floor including lobbies and corridors within the outside faces of the exterior walls

– Gross rentable area• All areas within the outside walls, less pipe shafts, vertical

ducts, elevator shafts, balconies and stairs

– Net rentable area• Total sum of gross rentable area – (public corridors,

washrooms, janitorial and electrical closets, air-conditioning rooms and other rooms or areas not available to the tenant and the tenant’s employees

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Property analysis

• The property manager should be sure that figures are accurate and truthful to avoid confusion and lawsuit.

• In describing the space, the lease document should contain language such as ‘suite 300’, which approximately 3,000 square feet’.

• As a rule of thumb, the higher the loss or ‘load factor’ (unusable space), the lower the rent, because the tenant receives less usable space.

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Property analysis

– For example: if the net rentable area is 80,000 sq ft, but only 70,000 sq.ft are usable due to corridors, the load factor is:• 10,000/80,000 = 12%

– So, gross area of entire building – (Shafts, ducts, balconies and stairs) = rentable area (tenant pays rent on) – (public corridors, restrooms, mechanical rooms) = USABLE AREA (tenant occupies)

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Property analysis

• Usable area– Any area in a given floor that could be used

by the tenant.– This area includes a point from the perimeter

glass line to demising walls– It also includes column areas within such a

space

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Setting the rent schedule

• Factors to consider:– 12 criteria for ranking the building– Additional amenities– General economic conditions– Owner’s break-even point

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Setting the rent schedule

• Example from the market survey

– If the rent is RM4,000 permonth on 2,500 sq. ft of space, • the quoted rate = RM1.60 psf permonth or

RM19.20 psf perannum.

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Setting the rent schedule

• Example from Break-even Analysis– A break even analysis determines the min

rent needed to pay all of the building’s expenses and costs, as well as the owner’s expected return.

– the formula: • B/E rent = (expenses + mortgage + return)

rentable area of building in sq.ft.

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Setting the rent schedule

• For example:– Rentable space = 50,000 sf– Expenses = RM291,258– Owner’s equity = RM1,000,000– Owner’s rate of return = 10% = RM100,000– Mortgage payment = RM568,742– Mortgage = RM4,500,000

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Setting the rent schedule

• Therefore:– B/E rent = (RM291,258 + RM568,742 + RM100,000

50,000 sqft = RM960,000 50,000 sq.ft

= RM19.20 sq.ft per annum

• so the min rent charged is RM19.20 sq.ft per annum or RM 1.60 sq.ft permonth to cover all of the building’s expenses, costs and the owners’ return

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Tenant selection

• Major tenants• Small tenants• Attracting tenants

– Newspaper adverisments• Direct mail• Publicity• Signage• Brochures• Miscellaneous media

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Leasing consideration

• On-site vs off-site• Property management vs leasing agents• Small vs large leasing firms

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Leasing techniques

• Cold-calling• Space planner• Existing tenants• High status tenants• Comparison of buildings

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Maintenance

• Smart (intelligent building)– 5 classifications of smart buildings

• Level zero – has no intelligent amenities and does not qualify.

• Level one – provides infrastructure core• Level two – provides level one capabilities + conference

space, photocopying and business centre• level three – provides level two capabilities +

telecommunication services utilizing building cabling system• Level four – provides level three capabilities + sophisticated

office automation and ICT.

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References

• Decarlo (1997), Property Management, Thomson.

• Kyle, R, (2000), Property Management, 6th Edition, Dearborn.