Intelligent office buildings would shore up vacancies

11 Oct Intelligent office buildings would shore up vacancies

There is more economic fallout from the sub-prime mortgage market crash and other mortgage credit issues as real estate markets see an increase in vacancies at various office buildings. Crain’s Chicago ran an article pointing out some of these trends being seen in the suburban Chicago market.
Downtown Chicago also is feeling some vacancy problems as several high-profile buildings are being put onto the sales block in the East Loop area. Two towers within Illinois Center are for sale as several large building owners in that area contemplate whether it’s a good time to sell.
Some tenants are migrating to newer buildings and you wonder what some of their reasons are? Are the amenities different? Are the older buildings technologically obsolete?
Discount rates or sell?
Basically, vacancies are rising in older buildings and rents have to be discounted, according to conventional wisdom in the industry. Too many real estate executives panic in a market like this, and they go to the lowest common denominator – price per square foot.
This “strategy,” and I use the term loosely, has been used all over as everything else goes out the door. Under this approach, the way to entice a potential tenant is to drop from the market rate of $20 a square foot to $17.50 a square foot, until Harry across the street drops his to $14.95 a square foot and then you have to throw in six months free rent on top of his new “market price.”
Well, that was the way to do it 30 years ago, but times and strategies have changed. If they haven’t changed in a real estate organization, they better because just dropping the price is not going to work anymore. The tenant market is much more sophisticated, especially for Class A office space.
If someone is selling a building, the buyer better do a much better job of due diligence. Most Real Estate Investment Trusts (REITs) do not look at the technology supporting the building. The traditional approach for reviewing a building’s attributes has to be augmented, otherwise they will overpay and this market will soon become a multi-million dollar game of “hot potato.”
Building systems have to be reviewed and questions must be asked. For example, how “smart” is the building? This has to be asked and answered before any realistic price can be offered. A list of due diligence questions on technology is not what most REIT executives have in their back pockets.
Strategies and buildings have to be updated
If they are looking for blue-chip tenants, I can assure you the idea of selling space as a commodity is not going to work anymore to attract and maintain a solid tenant mix. This is part of my white paper that will be published later this year in the Intelligent Engineering Consortium’s Annual Review of Communications:
“Intelligent Business Campuses: Keys to Future Economic Development,” is a thought leadership paper that was finished after working on several planning issues with the DuPage National Technology Park, and interviewing key industry people from across the country and several from the Asian market, where the term Intelligent Industrial Park has also been coined as well as implemented.
The need to understand how to position real estate is a much more sophisticated approach than many traditional real estate and property managers have had to deal with. Corporate site selection committees are looking for different amenities than when a building may have been leased up five or 10 years ago.
This fact should be taken into consideration when making an offer to buy one of these buildings.
Define Class A buildings
The definition of a Class A building has always been a building offering top-notch amenities and being in the right location. Many real estate executives have yet to figure out that the old real estate adage “Location, Location, Location” has changed to “Location, Location, Connectivity.”
Broadband connectivity was not on anyone’s criteria list 10 years ago, but it is in the top three criteria today. If you think you are in a Class A Building today, it better have broadband connectivity and that means fiber optic connectivity and gigabit speeds, not DSL or T1 connectivity.
In doing research awhile back looking for Class A Buildings in DuPage County, there were over 60 buildings that had vacancies. As soon as you put “broadband connectivity” in as a necessary amenity, that number dropped to six.
If a site-selection committee was looking for corporate space, 90 percent of those properties that property management companies think are Class A would be overlooked and therefore do not really “rate” a Class A rating.
WHAT? What did I just say? You read it. Class A Buildings are quietly being re-rated just from a standpoint of connectivity. To some, that sounds too radical.
If property managers don’t have it as an amenity, they will be looking a long time for a replacement tenant. Oh, they can discount and discount. Maybe they will snag someone, but it won’t be a blue-chip tenant. That’s the reality of the market.
This is the quiet revolution that has been going on and many in the real estate market have not seen it because they still had a lot of tenants on lease. As leases end and the tenants turn over, you will see more Class A Buildings become less desirable as they will not be able to attract and maintain the blue-chip tenants who are looking at connectivity as a required amenity.
It’s already happening. Unless developers and property-management firms understand what needs to be offered to attract and maintain quality business tenants, they are losing tenants to new developments that may have been farsighted enough to add broadband connectivity. This also affects the regional viability to sustain economic development.
At next week’s Rural Telecom Conference in Springfield, Ill., I will be speaking on this issue on Tuesday and will also be the keynote Speaker on Oct. 23 at the second annual “Media, Wireless, and You” Symposium at the Milwaukee School of Engineering in Milwaukee.
Hot potato
Traditional approaches are good in traditional markets, but this issue is changing tradition. If you don’t think so, look at where corporate facilities are being located and re-located. The buildings and surrounding community offer broadband connectivity. This is true not only in the United States but in Asia as well.
Places like Far Glory Park in Taiwan and Cyberport in Hong Kong are examples of campuses offering high-speed connectivity as a common amenity for business tenants.
As for organizations buying existing buildings, they better understand what they are buying. They don’t want to be playing hot potato in this market.
CARLINI-ISM: Intelligent Buildings have been clustered together to create intelligent business campuses.
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