Your Office Space Demand Questions, Answered
In a recent NAIOP Advantage Series webinar, “The Forces Shaping Office Space Demand,” Dr. Josh Harris of the NYU Schack Institute of Real Estate and well-known industry economist Dr. Mark Dotzour provided insights and data from the new NAIOP Office Space Demand Forecast and identified linkages between overall economic activity and the demand for office real estate. We checked in with Dr. Harris for a bonus question-and-answer session following the webinar.
Q: How do you recommend owners, investors, etc. brace themselves for OAAS [Operations as a Service] model shift where rents are higher, rent terms are shorter, tenant improvement (TI) packages are higher, and cap rates are inevitably weaker?
A: That is a great question that I am very much giving active thought to. This is maybe where education and maybe a little creativity on the lender’s side and the investor’s side is required. If a tenant is willing to pay, hypothetically, $25 per square foot for a 5- or 10-year lease and they’re willing to take bumps of 50 cents per square foot every few years – something very traditional – how much would they pay for the flexibility of 1- or 2-year leases? If they are willing to go from $25 per square foot up to $35 or $40, and the expenses you have to pay out are only a few bucks more per square foot if you’re efficient, and the key is efficiency, I don’t see how you don’t just increase the value of that space. Office users really need to get a grip on is how to handle tenant turnover without such high leasing costs. The thing that I see drag down pro formas more than anything is paying $15-20 per square foot for TI. If you are able to get one tenant out and put a new tenant in on a short term lease but don’t give them really any TI … I don’t see why you can’t increase the value of the building upon sale.
Q: Any specific guess as to where Amazon HQ2 will end up?
A: Amazon’s top 20 list makes it look like the D.C. suburbs are highly in contention. My intuition is somewhere along the “Acela Corridor” that runs from Washington, D.C. to Boston. I personally think Newark is a smart choice. It is a transit-connected, affordable city with direct access to the tech workers of New York.
Transit and tech are what I think will make a site a winner. Of course, the role of financial incentives should not be overlooked. This whole public RFP process may have been a major play to get cities and states to up the ante on their economic development incentives.
Q: If CBDs offer transit services that office tenants want, how are “urban suburban” locations with less transit service able to compete (even though they have “less” traffic congestion)?
A: The “urban suburbs” compete with short drive times, minimal traffic, and affordable but high-quality living options.
Workers tend to exchange transit dollars for housing dollars: While many prefer a cheaper house/apartment and the freedom that owning a car affords, in expensive cities like New York City or San Francisco, workers typically pay the monies they save by not owning a car to their landlord.
The suburbs often also have higher quality public schools. As the famed millennials get older, more will get married and have kids, making this a bigger issue.
Transit is not a luxury in big cities, it is a necessity. By contrast, an “urban suburb” with commuter rail or other transit back to the CBD can be a double winner.
This webinar was presented on December 5, 2017. NAIOP members can register to view the archived webinar. The Advantage Series is an exclusive member benefit, delivering expert insights into the latest research to help you make informed business decisions. Register for the upcoming Advantage Series webinar, “Piecing Together the Population Puzzle,” on Feb. 20, 2-2:45 p.m. ET.
Brielle Scott is Senior Communications Manager at NAIOP.