Managing Office Property Lecture 4 Department of Real Estate Management Faculty of Technology Management and Business (Semester 1 2012/2013) 28/11/2018

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) 28/11/2018

Supply and Demand Developers build office space based on two types of demand Space-created demand Money created demand 28/11/2018

Location Desirability Decarlo (1997) categorised office desirability into four grades: 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 Location Desirability 28/11/2018

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’ 28/11/2018

Desirability The grades are achieved by ranking 12 criteria: Elevators Location Neighbourhood Transportation Prestige of building Appearance Lobby Elevators Corridors Office interiors Management Tenant mix Tenant service 28/11/2018

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. 28/11/2018

Market analysis Site selection . Site selection 4 key factors influencing the selection of office facilities (Kyle, 2000) Cost Accessibility Environment Labour market 28/11/2018

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 28/11/2018

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. 28/11/2018

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) 28/11/2018

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 28/11/2018

Setting the rent schedule Factors to consider: 12 criteria for ranking the building Additional amenities General economic conditions Owner’s break-even point 28/11/2018

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. 28/11/2018

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. 28/11/2018

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 28/11/2018

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 28/11/2018

Tenant selection Major tenants Small tenants Attracting tenants Newspaper adverisments Direct mail Publicity Signage Brochures Miscellaneous media 28/11/2018

Leasing consideration On-site vs off-site Property management vs leasing agents Small vs large leasing firms 28/11/2018

Leasing techniques Cold-calling Space planner Existing tenants High status tenants Comparison of buildings 28/11/2018

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. 28/11/2018

References Decarlo (1997), Property Management, Thomson. Kyle, R, (2000), Property Management, 6th Edition, Dearborn. 28/11/2018