Office Space NJ

Write in your questions

For the past year I have been writing this blog to help people who need office space better understand the world of commercial real estate. My intention was to have a dialog, through this medium, in which I could respond to the needs of readers. What has happened, is not what I had hoped for. Very few people have ever commented or asked any questions. So, rather then my selecting the next topic, I am leaving it for you, the reader, to select the next issue, question or curiousity about which you would like to hear my thoughts and opinions.

In Good we Trust

No, it's not a typo. It's an important lesson to learn in transacting business in real estate. When you deal with good people you usually end up with good results. It sounds simple enough, but you'd be surprised how often brokers, tenants and buyers don't take the time to get to know the people on the other side of the deal. I learned long ago that you never want to rely on the legal terms spelled out in a document. The best deals are when the parties sign the documents after robust negotiations and never have to take them out of their files because everything goes along smoothly and the intentions of the parties plays out. Once one party feels like they aren't getting what they bargained for, the documents come out, the attorneys get involved and everyone usually loses.

So, what I am suggesting is that you spend time getting to know the party on the other side of the transaction. Talk about life, family, hobbies, politics and anything you feel will give you a sense of the values, mindset and ethics of your future partner. Yes, I said it. Partner. Well, you're going to sign an agreement with this person stating that you have rights and responsibilities and so do they. Sounds like a partnership to me. Don't you want to be able to trust your partner? And if you find out in the process that you're really not comfortable with the other party, why commit yourself? Find the right party to work with. This actually applies to every phase of a transaction and every professional you choose to work with on the transaction. You really need to trust these people because they should know more then you about the subject for which you hired them and you should be able to accept their guidance without questioning their motives.

I know when I have earned the title of trusted adviser with one of my customers both of us end up completely satisfied. When I am just pushed into a role and my customer could care less about me, doesn't really trust me and certainly doesn't confide in me, it is so much harder to give good advice and in the end, neither party is usually very happy, even if I collect a nice fee for the deal.

Just remember, money can be spent but respect can only be earned. In other words, respect stays with you forever, while money comes and goes.

How much do you know about office space?

Thirty-one years ago I got into the commercial real estate business. It was quite fortuitous. I was taking ballroom dancing lessons and my instructor asked me if my wife and I wanted to join her and her boyfirend after the next lesson. We did and it turned out he owned a commercial real estate brokerage company and offered to hire me as an office leasing broker. I literally knew nothing about real estate before I got the job. Now, thirty-one years later, I know a lot. I learn something new every day. I read real estate magazines and trade papers and my company is constantly supplying information. This is the total focus of my business life, (notice I didn't say my entire life). So what's my point? Simple, if a landlord hires me to help lease office space in his building, and you come along with an interest who is in a better position to win in the negotiations? If knowledge if power, then I can totally dominate. What if you brought me along on your side? Now, at least you have a fair match.

Next question...How much do market conditions affect the outcome of negotiations? If it's a fair match, as described above, then market conditions can rule very strongly. If it's not a fair match, then the stronger side will dominate. In other words, two well matched real estate experts will end the negotiations within a relatively narrow range for a deal as determined by market factors, while two unequally matched parties can be pushed all over the map.

Conclusion...Which works best for you? Thought so. Get a knowledgable, experienced and respected broker on your side and you will do far better for yourself.

Planning Early Eliminates Wasted Effort

Over my thirty-one year career as a real estate broker specializing in office space, I have seen both good and bad examples of how to conduct the relocation search process. One of the primary differences is the effort invested in the beginning of the process to fully understand the requirement. This is commonly referred to as "needs analysis". It is so important that if it is not done, you will probably be wasting a great deal of your own time.

Its easy to understand why that would be, since each space and each building is unique and your requirements, though they probably have some flexibility, have certain characteristics that are needed to benefit your business. By way of example, some companies have a high volume of incoming and outgoing mail. It would be highly advantageous for such companies to have an exit door directly to the mail room so that the delivery people can pick-up and deliver to one convenient spot and the mail can easily be distributed from that location. Other companies have many visitors and want their space visible from the elevator or lobby as the case may be.

The best approach to begin a relocation search is to first think about your current space in a critical manner. What works and what could work better? Then think about what the most efficient functioning of your business would be like. Now construct a model, (draw a picture in as much detail as you can) of what that would look like. Once you have completed this exercise you will be prepared to work with the professionals in the process of finding the right space for your company.

Next, you need to have an idea of the cost of the space. In order to do that you need to have an understanding of the current market in your geographic area. If you can consider various geographies, you will need to gain knowledge of each. The basic points of information you need are: How many spaces are currently on the market that can accommodate your space requirement? What is the overall vacancy factor in the specific market area? What is the asking rental rate? What concessions are common for the size and type space you require? What were the taking rents on the last few deals done recently in the market? A good office leasing broker will have that information. They should be able to present you with a professionally prepared market report and review with you those statistics that specifically relate to your situation. As we all know, statistics can be misleading, so having your broker interpret the report for you is extremely important. Just imagine how off-base you could be if you thought a market had a 20% vacancy, when 18% of that vacant space was totally antiquated space that most companies would never occupy.

 One important tip that may seem obvious... make sure you accurately and completely communicate the information concerning your requirements to your broker and space planner so they can hone-in on opportunities that will best fit your company's needs. Then, if your broker isn't showing you properties that suit your needs, you probably are not working with the right broker.

Making the "Killer" Lease Deal

With the above title, you are probably thinking that there is some negotiating technique you are about to learn that will make the landlord drop his draws to the basement. What I am going to tell you is that making that "killer" deal could actually be a bad thing for you and your company. Here's why... Every building has operating expenses, real estate taxes and a mortgage to pay. Every deal has its costs, like tenant improvements, legal expenses, brokerage fees, architects fees, construction permit fees and construction management fees. So after the deal costs are paid out of the landlord's pocket, the rent has to cover the operating expenses, real estate taxes and mortgage and at a bare minimum show a modest profit for the fresh capital invested in the transaction cost. When leases are signed in multi-tenanted office buildings and there isn't sufficient rental income to cover the costs the landlord must then find a way to reduce his costs, especially if there is vacant space in the building, so that he can minimize his losses. This will be felt by each and every tenant in the building as services are cut back, supplies are cut back, capital expenditures are curtailed and eventually that "killer" deal will kill the building and you and your employees will feel like they are in a sinking ship.

What's the alternative...Make a Fair Deal. How do you know what's fair? That's where a truly professional broker can make a big difference. You need to ask your broker about the prospective buildings you are considering from a financial perspective. Who is the ownership? What type of owner is it? What other properties do they own? How much of a mortgage do they have on the property and when does it expire? What is the occupancy level of the prospective building and the other buildings in their portfolio? Ask about the real estate taxes and operating expenses and about the costs of making your deal. Once your broker has all this information he can predict a fair rental rate. Since your lease will typically run for five years, there are lots of creative ways of making a deal work for both parties. It's very important that your broker acquire the above knowledge so that he can adjust the terms of the transaction to best meet your needs and the needs of the landlord. That is the win-win approach that you should be striving for. If your business can't sustain the minimal difference that it generally makes to get to a fair deal in the building of your choice, perhaps you should consider another building. Also, consider this, if the landlord is so desperate that he will make a bad deal, what kind of businessman are you getting involved with for the next five years?

Who is on your side when you go looking for office space?

If you are an existing company in business for many years, you should have several trusted advisers. They may include your attorney, accountant, an experienced and successful friend or relative, a board member or a neighbor, but there has to be someone on your team right now that you can talk to about your real estate needs. If you have worked successfully with a broker in the past, he might be the ideal person, but it would be difficult to trust an untested stranger to have your interests at heart. If you can form a team within your company of various individuals who have knowledge of differing aspects of the business such as: IT, HR, Finance and Operations you will have a core real estate group that can help you consider the various requirements necessary to satisfy your real estate needs.

Once you can determine approximately what you are searching for with your internal real estate group, you need a qualified broker or consultant to assist you in the process of identifying various potential opportunities and negotiating for the best single solution. Ultimately, a team needs to be formed that can exchange information and work together towards the best final transaction. If the team is formed on an ad-hoc basis, only "as needed", the results will, more often then not, be minimally successful. If, on the other hand, if a team is formed early in the process that will communicate about all aspects of the requirement and prospective solutions, the results have a much better chance of attaining exemplary success. Build a team of experts including a corporate real estate attorney, an architect and a broker in addition to your company's core real estate group, as mentioned above, and you're on the right path.

When deciding on which experts to hire use an interview process and ask each interviewee for the names of the other professionals they would recommend. Also, ask for references and check them out.

Common Area

This subject is has as many angles as your high school geometry class. Common area ina multi-tenanted office building is the space contained within the building that is outside of any tenant's premises and therefore, by definition "common" to all tenants. It can be expressed either as an "add-on factor" or a "loss factor". The former being added to the useable measured space and the latter being deducted from the grossed-up "rentable area". "Rentable area" is the quantity of space upon which your rent is calculated. There have been real estate industry organizations,like BOMA (Building Owners and Managers Association), that have established definitions that exclude "vertical penetrations", which would mean stairwells, shafts and elevators, to attempt to level the playing field between buildings, but the real problem is that virtually no tenant would ever attempt to disprove the claim of a landlord concerning his common area. The reason being, one would have to measure the entire building and all of the various components to determine the common area.

Let me give you an example to clarify: Suppose you wish to rent 1,000 square feet of space in a multi-tenanted office building. The space may measure 1,000 square feet, but because the building has a 15% add-on factor for common area, you will be paying for 1,150 square feet of space. Within the common area in the building will be the lobbies, hallways, bathrooms, utility closets and mechanical rooms. These areas are all necessary for the operation of the building and there combined space is distributed among the tenants in the building.

Now comes the twists and turns of "common area". What happens when a floor in a multi-tenanted building has only one tenant and therefore, no hallway space? Or, what if additional corridor space needs to be created in order to accommodate an additional tenant on a particular floor? Another area of contention is the actual measurement of the space. In the office leasing business, space is measure from the inside of the window to the outside of the corridor wall and from the center of all demising walls, (defined as walls that separate two leased premises). Physically, in order to measure that space accurately, it would have to be totally without interior walls, a condition normally found only in new buildings or where complete interior demolition has occurred. Reliance on measurements from plans is not considered industry standard practice unless the plans are actual "as-built" plans meaning that they have reflect the measurements of the space after the building was constructed.

From a practical matter, "common area" should be taken in context. By that I mean, that the space you are renting of 1,000 square feet, like the example above, at a rental rate of say $20.00 per square foot, (gross, full service) will cost you $23,000 per year, not $20,000 per year. If you cant afford the $23,000 you need to consider leasing less space or finding a building that charges a lower rental rate. Can you find a building that doesn't charge for common area? Yes, there are some rare examples, but then you will have to pay for common area maintenance (CAM), so it works out to virtually the same thing. If you rented space in a one story building that had separate entrances for each tenant and separate bathrooms for each tenant, you would not be paying for common area, but you would be paying for the space for your vestibule entrance and for your bathrooms. Do some buildings charge more for common area then others? Yes, generally because they have more generous common areas which typically denotes a higher quality building.

My best advice is to shop around and once you see what's available and what best suits your needs, then you can determine in specific cases whether the common area is in line with the rest of the market or if not, if it worth the extra cost to you?

Don't hesitate to contact me if you have any questions on common area.

Security Deposits

The subject of Security Deposits invariably comes up in lease negotiations. Landlords want them for a few reasons. 1.They want to have a financial commitment from the tenant. 2. They want to have funds available in the event the tenant defaults. 3. They want to have funds available when the lease expires to cover the cost of any damage to the premises in excess of ordinary wear and tear. 4. They may also need to satisfy their lender's requirements to obtain a security deposit from all tenants. 5. They want to have security deposits to pass along to a new purchaser of the property as a show of the tenants' good faith.

While these may all be good reasons from the landlord's perspective, they do nothing positive for the tenant, except that the tenant may not be able to conclude a lease without posting a security deposit. So now comethe questions of the amount of the security deposit, how long it should remain on deposit and if any interest can be paid to the tenant during the lease term or at the end of the lease. Once again, there are no hard and fast answers. The answers depend on the circumstances. Among the considerations are the cost of tenant improvements paid for by the landlord, the credit-worthiness of the tenant, the conditions of the premises, the market forces (competition), the type and the style of the ownership.

As a tenant rep broker I would always take all of the above into account and then have a frank discussion with the tenant so they know how the landlord is likely to approach the matter. As a landlord's agent, I try to assess the valid need to hold useful funds of a company whose success is very important to the cash flow of the building.

If you are having trouble coming up with any answers concerning security deposits, I encourage you to contact me and I will add an objective perspective that may help.

Evaluating the benefits of amenities in and near an office building

There's the steak and then there's the sizzle, right? But sometimes the sizzle is what makes the steak worth the extra bucks. When it comes to amenities in office buildings, amenities can play an important role in attracting and keeping quality employees. They can also play a role in making those employees more productive during their working hours or making their lives a little easier.

What kind of amenities are most often available in an office building? In order of popularity I would say:    1. Parking  2. Cafeteria/Restaurant/Coffee Shop  3. Bank/ATM  4. Sundry Shop  5. Concierge   6. Health Club  7. Day Care  8. Dry Cleaner  9. Shoe Shine  10. Car Wash  11. Office Supply  12. Beauty Salon/Barber  13. Post Office/Mail Handling Shop

Now think about the employees you have, or want to have. Would having any or all of the above amenities in or near your office be advantageous? How about on inclement days when you don't want to leave the building? How much time could your employees save by staying in the building versus going out for lunch over the course of a year? Think about all the convenience of having these facilities at your building so employees don't have to go running around wasting valuable time during the work week for goods and services they need.

Of course, an argument could be made for avoiding leasing office space too close to clothing stores, sporting goods stores or any "non-essential" stores where employees could wind up browsing and wasting valuable work time. There is a line between the types of stores that can help or hinder your employees productivity.

Overall, amenities usually cost the landlord some expense which is passed along in the form of rent to the tenants. If you are comparing equal quality buildings and one has a good complement of amenities and the other doesn't, it wouldn't be a surprise to find the one with the amenities to be at a higher rental rate. If the difference is less then ten percent, it maybe a no brainer. More then ten percent and you have to think about the value to your organization.

    

Negotiating in a Tenant's Market

There is little doubt that with rare exception most office space markets are currently experiencing rising vacancies which lead to lower lease rates and/or better terms. In multi-tenanted office buildings, most new tenants are offered a "work letter" for the purpose of customizing the space to the tenants needs. A growing practice is for landlords to offer a  "work allowance", a sum of money to be spent on the "tenant improvements" whereas others may offer specified quantities of "building standard materials" . In either case, the end goal for the tenant is to have the space built-out to suit their specific needs. This is a very important aspect of the transaction because the cost of the "tenant improvements" can be significant.

In a transaction I am currently working on the rent is $20.00 per square foot on a five-year lease and the landlord is going to pay $25.00 per square foot for the "tenant improvments". If the tenant could have found space that didn't require as much work, the tenant and the landlord could have benefitted. The tenant needs to quantify the work required to the space they are considering so they can determine wether the landlord is going to be spending more or less then anticipated. Armed with this knowledge the tenant can negotiate to receive the monetary benefit of any savings to the landlord.

"Market comparables" apply to leases as well as purchases. It's important to know the terms at which other comparable buildings are doing deals. This is not just the lease rate, but the lenght of lease and the "tenant improvement allowance". Most competant office leasing brokers have that information available to them, however, another way to achieve the same end result is to obtain proposals from several landlords simultaneously based on your specific needs for each building. Of course, this requires that you go through the planning process for each of the buildings.

Let me know if you have any questions on this subject or any other related to leasing or buying offices for your company's occupancy.

Randy Eigen