Monday, October 22, 2007

Class conscious: Is it worth the cost to be in a Class A building?

Deciding where to lease office space can be a confounding process, whether a company is a mom-and-pop operation looking to move out of the family garage or an established business nearing the end of its lease.
It's also one of the most important decisions its owners and managers can make because it can affect not only the company's financial health, but its employees' and customers' satisfaction.
"Obviously, one of the key factors in choosing where to lease space is the rent," says Scott MacIntosh, senior economist with the National Association of Realtors. However, the amount paid each month should be weighed against a variety of other factors that contribute to the value of the space, he adds.
"If a business is in a Class A building, the operating costs -- such as the municipal taxes, the salary of the property manager, maintaining the common areas -- will be higher, and that all is charged back to the tenant," he says.
Higher-priced offices -- generally located in city centers -- do have distinct advantages compared to suburban spaces, he says, but each has its merits.
"If I'm a big law firm and my clients expect me to be in a Class A building, that's where I need to be. For other tenants, it's important to be where their clients are, and that might be in the suburbs.
"Some companies, particularly high-tech companies, look at the needs of their employees" when deciding where office space should be, he adds. Often, they'll do a survey of where employees live, and what sort of commute they'd have if the office is downtown, compared to a suburban location.
"In the suburbs, you get free parking. You don't get that downtown. But you might have public transportation available, and more facilities nearby that your employees would appreciate, such as restaurants," he says.
Signing a lease, especially one that obligates the tenant for several years, should be done with full knowledge of what the lease entails, says James Cantrell, a past president of the Institute of Real Estate Management and partner in the San Francisco-based real estate consulting firm Cantrell, Harris & Associates.
But not everyone does, he acknowledges. A common mistake is when the tenant fails to notice who pays for repairs, such as if a rock is tossed through a front window or if the heat goes out. Not everyone needs a conventional office space, says Michael Moore, president of Office Business Center Association International, a trade association based in Mt. Laurel, N.J.
So-called "shared office space" offers the advantage of relatively short -- in some cases, month-to-month -- leases, compared to conventional office space, which typically requires a several-year commitment, he says.
"If you compare costs on a square-footage basis," Moore says, "a shared office space is more expensive. But when you compare it to setting up on your own, they're more economical, because you don't have to go out and buy furniture and copiers" and set up high-speed Internet services, for example.
Shared office space is ideal for businesses testing a new market, and small companies not ready to commit to a long lease, he adds.
NAR's MacIntosh says finding a broker to help is a good idea, but isn't always easy to do.
"They all say they have the best information," he says. However, it may be possible to seek advice from other tenants "to see who used whom for a particular transaction. Talk to various associations, such as the local branch of the Building Owners and Managers Association. See if they can recommend anybody."
Companies should be prepared to pay slightly more for a shorter lease, all else being equal, as landlords prefer to have tenants who will be occupying the space for a longer time, MacIntosh says.
"Construction costs are high these days, so there aren't a lot of new office buildings going up. Our National Association of Realtors forecast calls for vacancy rates to decline, which makes it more of a landlord's market. In a landlord's market, rents go up, so it becomes very useful to have a broker working on the tenant's side so the tenant can be aware of each new space that becomes available."
DANIELLE STARKEY is a freelance writer for the Sacramento Business Journal, an affiliated publication. For more inforamtion see; www.houstonrealtyadvisors.com