Invest in the Best
Scott Spector April 20, 2016, 9:30 a.m.
Are we entering a tenant’s market? Do amenities have an impact on where tenants go? How much should landlords invest in their properties to remain competitive?
These are the kinds of questions we hear all the time now. While the commercial real estate market is still on solid ground, we’d be remiss to brush off reports of Manhattan landlords discounting office lease prices. An in-depth look at recent data from CoStar Group tells the story in dollars and cents. This March alone, landlords cut pricing on two dozen Manhattan office spaces, with much of the activity happening inside smaller buildings.
While I would not call this a dramatic shift, I would say that the slowdown is similar to that of the residential market. Firms are simply not looking for as much space, and landlords are having to work a bit harder and be more creative, to seal the deal.
The need to refresh and stay relevant is important for landlords of all sizes—and the decisions they have to make are numerous and consequential. Landlords need to consider if they want to pre-build; lease “white box” offices; rent out raw space or try a hybrid option. In our line of work, we’re encountering a good deal of pre-build activity. Even though there is an increased upfront cost, creating a move-in ready space helps landlords attract tenants who are looking to put their furniture in, customize the office with art and décor, and go.
“White box” offices are another popular alternative. They refer to spaces that are primed and ready for tenant improvements, yet include very little customization. White boxes typically come equipped with HVAC systems, a finished ceiling, walls that are prepped for painting, and a concrete floor slab. Raw spaces leave options wide open, but also mean lots of work and increased time for the tenant. Last, but not least, is the hybrid space, which involves a minimal amount of customization, but might include a basic pantry. All of these decisions are subject to negotiation between the would-be tenant, the landlord and the brokerage teams between them—and there’s no single right answer.
Amenities have also become an important way for landlords to differentiate their buildings from the competition down the block (or across town). A new building can go all out, adding a swimming pool and health club into its plans; an older building can keep pace by enhancing its appeal with a green roof and lobby lounge. Since the trend of co-working has taken off common amenities are becoming, well, more common.
Shared amenities offer multiple advantages. They save square footage, and therefore rent expenditures for the tenant. A café space with indoor seating for employees means further cost-savings for a company, which can then reduce the size of its pantry. A roof deck provides another place for staff to meet and mingle. Shared conference spaces, particularly if they are operated by tenants, may eliminate the need for multiple meeting rooms.
For the landlord, these and other attractive amenities can increase a building’s desirability. Fitness centers, bike rooms, playrooms, showers, juice bars, coffee shops and gaming areas are all popular options. Take the Empire State Building or 75 Rockefeller Plaza, for instance. The owners of both marquee properties have made sizable investments by amping up amenities to woo the next generation of commercial tenants, and the strategy has paid off.
Lobby areas can also be a strong selling point for landlords. One Fort Greene building owner that our team recently spoke to wanted to discuss a ground-floor lobby with a hospitality vibe borrowed straight from the Ace Hotel aesthetic. A lounge with couches and a collaborative café were an option they were considering to set the tone and make their building a desirable location for companies looking to work socially.
Upgraded entrances can make a statement, as well. We field many requests for new elevator cabs and finishes, updated corridors, ADA-compliant restrooms, modern, energy-efficient lighting, artwork installations and front desk areas with security features. All of these investments set the tone for the type of tenant a landlord hopes to attract; what works well for a not-for-profit may be the opposite of what appeals to those in the financial sector. Each decision reinforces the direction the landlord wants to take.
The way space is delivered, the shared amenities within it and the look of the lobby and common areas can all excite and entice potential tenants. How much leverage does the tenant have in today’s market? While the answer to that is still unknown, it’s apparent that landlords are investing now to position themselves for whatever comes next. Well played, landlords. Well played.