1. Managing Office Property
Lecture 4
Department of Real Estate Management
Faculty of Technology Management and Business
(Semester /2013)
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2. 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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3. Supply and Demand
Developers build office space based on two types of demand
Space-created demand
Money created demand
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4. 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
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5. 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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6. 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
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7. 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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8. Market analysis Site selection.
Site selection
4 key factors influencing the selection of office facilities (Kyle, 2000)
Cost
Accessibility
Environment
Labour market
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9. 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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10. 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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11. 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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12. 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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13. 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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14. 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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15. 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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16. 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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17. 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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18. Tenant selection Major tenants Small tenants Attracting tenants
Newspaper adverisments
Direct mail
Publicity
Signage
Brochures
Miscellaneous media
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19. Leasing consideration
On-site vs off-site
Property management vs leasing agents
Small vs large leasing firms
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20. Leasing techniques Cold-calling Space planner Existing tenants
High status tenants
Comparison of buildings
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21. 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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22. References Decarlo (1997), Property Management, Thomson.
Kyle, R, (2000), Property Management, 6th Edition, Dearborn.
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