But, what makes for a successful office building development and what are the key things to look for to know if you’re on to a winner or not?
One of the fundamental differences between owning and operating apartments versus owning an office building – think ‘Empire State Building’ in prime downtown locations across America – is that the tenants don’t live in the buildings. Consequently, while there are similarities between the two asset classes in terms of management and maintenance, there is a significant difference in the skillsets necessary to successfully operate prestigious office buildings. Here are five rules for successful office investment that every investor and developer should keep in mind.
Whether you’re building from the ground up or renovating an existing office building, who do you have in mind with the design and functionality of the building? To really add value in a market, especially if you’re working in a crowded market, you need to focus on the people who will be using the space.
During the 1970’s through the early 2000’s, employers across America moved out of the downtowns and into suburban campuses. Employers forced employees to flock to work in parking lot environments.
Over the last ten years, this cycle has completely reversed and there has been a massive migration of millennials into the urban cores throughout the country. Employers are now chasing these tech savvy employees into the downtowns. Although employers will not admit to it, they are effectively age-discriminating in favor of these millennials. Given this dynamic, it is critical that a developer cater to this population.
In order to make buildings hospitable to a younger millennial generation, Feldman Equities is incorporating a host of new amenities including modern gym facilities with state-of-the-art equipment (e.g. Peloton bikes), yoga rooms, 24/7 chill zones with WiFi, high-end coffee bars and play zones.
Another factor is the rise of the female work force – many of whom are working late. Based on this research, we’ve renovated all of garages with much brighter LED lighting and painted surfaces. Also, our property managers have implemented programs where night security guards are tasked with walking people back to their cars. By providing this service to everyone who wants it, workers are given a strong feeling of comfort and safety that contributes to overall tenant satisfaction. This in turn leads to higher renewal rates when lease terms come up, reducing overall operating expenses – it is far less costly to retain an existing tenant than it is to find a new one.
Ultimately, while they don’t live in offices buildings, it’s still people who are leasing the space. If you design, renovate, or remodel with them in mind, not only does it increase retention rates, but it also enhances desirability for prospective tenants. Sometimes a little extra effort to solve a common complaint can help a building stand out from area competition.
Everything in office building success is driven by rents (duh), which means everything is driven by the tenants who pay those rents. Access to tenants for the downtown office building owner is very different than you might imagine.
Unlike in apartment buildings where an owner will generally advertise directly to the end user, the resident, the pathway to success for an office operator is through leasing brokers. Commercial real estate brokers that specialize in office building leasing are a very different kind of professional from the residential agent that most people are familiar with.
A commercial real estate broker must have a sophisticated understanding of the complicated financial structures of office leases, an intimate understanding of office operations and management, and an encyclopedic knowledge of all the buildings in an area to be successful.
These professionals are the gateway to tenants; the key to filling an office building. For as many brokers as there are in any city, there will always be a few who make the market move more than others. Learning who they are and becoming the kind of landlord they want to work with can make every difference.
Feldman Equities has a policy of paying brokers faster than other landlords. Most Landlords pay brokers 50% upon signing a lease and 50% upon occupancy. In contrast, Feldman pays 100% upon signing. Also, Feldman pays its brokers a 25% premium over what most Landlords pay.
Feldman has a policy of treating brokers like extremely important customers. Returning calls and emails quickly and working on creating a stable, consistent relationship pays off not only when leasing a building, but also when off-market acquisition opportunities arise.
There are typical marketing practices that seem like the obvious steps to gaining the attention of prospective tenants and potential sellers. Many office owners will preserve old habits and conventional marketing techniques that aren’t necessarily the best choices for a specific project. To stand out in a crowded and competitive market, success comes from honing in on a building’s market audience. As applies to all business, highly targeted marketing can yield far better results at significantly lower cost.
For example, advertising on NPR or Facebook, taking out a full-page ad in a local newspaper, while it might reach a vast audience, won’t necessarily reach your target audience; it’s not about getting the most eyes on you, but the right eyes.
Success in office management comes from being creative. We learned this lesson here at Feldman in the late 1980s, when we sent live trees (seedlings) to brokers to draw attention to the trees we had planted in the atrium of a new office building we were developing in downtown Manhattan. We sent out two hundred of these little trees on Earth Day to office building lease brokers around the city with information about the building and our contact information. We knew that it was this tiny community of highly influential brokers who could fill our building and the effort earned us a story in the New York Times – something that would have cost us hundreds of thousands of dollars in ad-spend otherwise – and we filled the building with tenants as a result.
The reason this out of the box marketing worked is because we zeroed in on the right audience with something different and memorable. It was our first realization, nearly forty years ago, that it wasn’t the people leasing office space that we needed to market to, not the tenants, it was the office building lease brokers, and we have been employing this strategy to great success ever since.
Sign up to learn more about how to invest in office buildings and to get early access to our next investment opportunity.
Taking a risk on an office investment means making sure it’s a property that’s leasable.
It’s easy to look at an office building deal and focus first on cap rate, yield, existing leases and the like, in deciding whether to move forward with an offer based on those factors. The first criteria, however, for every office building acquisition should be how attractive is it, or potentially how attractive might it be to prospective tenants.
This is the fifty-thousand-foot view of an opportunity. Does the building have good bones? Is it built well? Are the floorplans laid out well and does it offer something unique and desirable? If an office building has the potential for being an attractive and desirable place to work, it will be leasable with the right renovation program and subsequent marketing efforts.
We’re all plugged in and wired in with a million devices and social media is pervasive in our lives. In spite of all of this technology, the loneliness problem is an epidemic in the United States. Our job as a developer is to do things in our buildings that are going to help that.
For example, our new Riverwalk Place project will have four restaurants, all with outdoor seating along downtown Tampa’s Riverwalk, a pedestrian trail along the Hillsborough River.
We’re going to have as many as 240 outdoor seats and tables. We’re requiring that our restaurants that operate there be open not just for dinner. We’re requiring them to be open for lunch and in many cases breakfast. We want them all to have bar activity. We want that bar activity to be open to as late as 2 o’clock in the morning.
We are also creating park areas with benches and areas for live entertainment. Investing in a downtown office building requires a mindset that is not just about renovating a building and creating something new, it’s about working to contribute to a city to make it a better place. A successful office development can transform an area. To promote the long-term success of an office project it needs to contribute to transforming the local area into a place with “placemaking”.
With office spaces, company leasing decisions are driven by the type of downtown they are in. No matter what the industry, top talent wants to work at exciting companies in great locations in an environment that enhance their daily working lives. If a city doesn’t have these kinds of buildings then it won’t attract or retain successful, growing companies.
Being part of the effort to change that through visionary development and improvement of large scale office buildings can provide a center of gravity for a city that will attract new tenants and transform a downtown area.
***
Investing in prime downtown office buildings offers extraordinary opportunities for the savvy investor to build wealth, diversify a real estate portfolio, and earn ongoing, sustainable passive income. The basic principles of office acquisition, improvement, management and divestment remain the same as for other real estate asset classes; it is in the nuanced approach that the differences are pronounced. Investing in large scale office buildings is, for the first time in generations an option for accredited investors. Partnering with a seasoned professional who has knowledge and experience in office development can bridge the gap to this lucrative opportunity.
Sign up to learn more about how to invest in office buildings and to get early access to our next investment opportunity.
As more investors look to add commercial real estate to their portfolios, demand for commercial property has risen to new heights. Many prospective investors will look at dozens, even hundreds, of properties before making an offer to purchase. Before they do so, however, most will submit what’s known as a “letter of intent” – or LOI – as a precursor to a more formal, binding agreement with the seller or landlord.
A good investment portfolio includes a range of different assets including stocks, bonds, and alternatives like real estate, and an even better one includes a diverse selection of real estate that includes an allocation to office buildings.
A boom market makes real estate investing look easy. Investors chasing fast yields flood the market, bidding properties up to the point where the yield isn’t there.
