Back-filling Office Space in Class B and C Locations
The U.S. office market is in a healthy state of equilibrium, with vacancies in the low teens and net absorption levels that are keeping pace with new development. But the solid state of the overall market isn’t shared equally across the board. Some cities, and some neighborhoods within cities, are attracting new residents and jobs, and have practically no vacancy. In other places, vacancy rates are over 15 percent and net absorption is flat. For owners in this second category, keeping space leased requires a more focused approach.
“The U.S. is experiencing one of the longest economic expansions in history, with no indication of recession in the near term. That gives investors the confidence to focus on Class B and C assets in secondary markets, where there is still opportunity to create value in properties experiencing high vacancy rates,” said Cole Sweatt of TRI Commercial/CORFAC International in Roseville, California.
“Maintaining a building with Class A features in a secondary market offers tenants a truly valuable proposition,” said Lloyd Berger, founder and president of Berger Commercial Realty/CORFAC International in Fort Lauderdale, Florida. “Rents may be more affordable while still offering office workers convenient amenities in an easily accessible location that’s usually within close proximity of major towns or cities. It’s a successful strategy that we’ve seen work for many of our landlords.”
The best strategy for keeping tenants in place is to be responsive to their needs throughout the term of the lease. But even an owner who can renew every tenant’s lease may see vacancies rise, since many companies are adopting open-space layouts and work-from-home policies that require less office space per employee. If more tenants in the area are reducing occupancy than increasing it, some buildings are going to have high vacancy — so how can you ensure your building isn’t one of them? The good news is that a building in a secondary market doesn’t need to compete against Class A buildings in live-work-play markets; it only has to go up against other nearby buildings, which are likely to be in the same situation. With this in mind, here are a few ways to make your building stand out from the crowd:
Add Amenities: Companies view it as a loss of productivity whenever their employees need to leave the property during the workday — whether it’s for lunch or a work-related task like printing or delivery services. Employees would also prefer the option to stay on-site if possible. Food and beverage options are the most important amenities to attracting and retaining tenants, but offering convenient business services can also make a big difference. In markets where these amenities are widely available, owners might consider more lifestyle amenities such as a fitness center, but only after careful consideration of the cost and value of these amenities.
Preserve History: The opportunity for historic preservation is stronger than ever, as tenants increasingly view occupancy in renovated historic buildings as a plus rather than a compromise. “In Cleveland, owners and buyers are looking for ways to increase a property’s value through retrofitting, and there are a lot of unique opportunities offered by older and even historic buildings,” said Kevin Joseph of Weber Wood Medinger/CORFAC International. “We’ve found this approach to add value when it comes to meeting modern or traditional office environments.”
Emphasize Health and Well-being: The conversation around sustainability has moved beyond energy consumption to focus on building features that promote employee wellness and sense of well-being. In some cases, owners can make use of natural light or outdoor spaces to gain an advantage. In addition, programs like blood drives and on-site flu vaccinations can help attract the growing number of companies that factor wellness into their occupancy decisions.
Get Wired: The quality and speed of internet and cell phone coverage can be vital to corporate productivity. Anything a building can do to enhance its power and connectivity will appeal to many tenants — especially those in fast-moving fields like technology.
Create Shared Spaces: Tenants seeking greater space efficiency would like to eliminate the need for underutilized areas like conference rooms and large, open seating areas. Owners are often reluctant to provide such spaces for tenants to reserve or share because it can reduce the amount of space they need to lease. But in a competitive market, it’s better to retain tenants at a reduced size than to lose them to another building that offers a better value. In addition, shared amenities encourage interaction and networking, which can greatly increase a building’s appeal to new tenants and employees.
For example, 1901 Congress Avenue in Boynton Beach, Florida, is located in a secondary market in South Florida that has experienced high vacancy for years. The property was just 65 percent occupied when a client of Berger Realty acquired it and invested in a major renovation, resulting in an increase in occupancy to more than 90 percent, Berger said.
A building in a Class B or C location may not be able to offer the same level of features and amenities as a trophy building in an A location. But there are cost-effective ways to boost your building’s appeal in any location. When competition gets tough, the buildings that do the best job of meeting tenant priorities will win the day.
Andrew Jaffe serves as President of CORFAC International, a global network of entrepreneurial commercial real estate brokerage firms, and as Senior Vice President at Commercial Properties Inc., a full-service property management and brokerage firm based in Phoenix, Arizona. In the course of his career, Andrew has completed transactions with a combined total value in excess of $1 billion.