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| For a complete text of this article, please see the premier issue of Real Estate MID-AMERICA. For more information on REMA--or the remainder of Real Estate Media's print publications, please click on http://www.remediainc.com/. | |
| One of the remarkable things about a free-market economy is that no matter how difficult things are, someone is doing well. In office markets across the Midwest, that someone turns out to be tenants, creditworthy tenants, especially, but as a whole it's a fine time to be out shopping for space, or to be across the negotiating table with your current building owner. Those owners are doing whatever possible to retain those tenants or attract new ones. A lot depends on what kind and how many buildings a company is responsible for taking to market, but there are common themes. For the first Real Estate MID-AMERICA Executive Forum, editor Dees Stribling spoke with four representatives of office ownership that do major office lease deals in the Midwest. Angela Gentry provided editorial assistance. REMA: It's a tough time for office owners and leasing agents. What are some of the strategies that you are pursuing to retain tenants? Arvid Povilaitis: In terms of retaining tenants, some of the things that we've done recently in terms of our organizational structure were done as a longer-term strategy. We're creating service centers that bring all of our management and leasing folks together. It creates an environment of enhanced customer service, accounting, management and property leasing and delivers those services to each of our buildings from a central location.
Harlan Stanley: It's tough leasing right now, so obviously if you can retain a tenant you're saving a lot of money. One thing we can offer a current tenant that other buildings can't is adjustment in their current rent, and to the extent that we can use that as an economic advantage to retain tenants, we're trying to do that. When the markets are more tilted toward owners, you wait longer to try to address renewal tenants, but now we're trying to be aggressive about that and address the situation early--as much as two years. Unfortunately, tenants are making more requests, but that's not surprising. Everyone knows that the operating environment is weak and that there's an opportunity for tenants to take advantage of that. They are asking for rent abatements, concessions and improvement allowances. We won't do absolutely anything, but our job is to try to accommodate the tenants. For instance, we're giving them more expansion rights than they had before and in some cases the ability to cancel out of leases if they want a cancellation clause. Bob Chapman: Retaining tenants begins before they move in. We have what we call a complete customer satisfaction program in which the process starts long before a tenant actually moves in, and it's a 10-step process getting a tenant moved in, and making sure they're happy after that. If you wait for the broker to call you the day these guys are thinking about renewing, it's too late. You have to know long before that what the specific customer needs and wants. Our property management people, and our maintenance people, meet tenants on a regular basis, and regional people like me also meet key clients regularly. Craig Bjorklund: We pretty much buy our own product. So we're buying almost all new office buildings that are fully leased up. Our primary strategy to retain these tenants is to have personal relationships with them. That means making sure that the managers of the property, the tenant service coordinators, security and engineers actually get to know the tenants and their employees. It also means that management has day-to-day contact with the decision-makers and that meetings occur on a somewhat regular basis, and that the tenants feel comfortable calling our people to let us know what they need. Once the tenants feel like they know you and you care about them, there's a much stronger chance of retaining them. It's a matter of responsiveness and follow-up. It's the engineers knowing how to get things done and getting back to people ready to help them out. Tenants have come to us from buildings where they never saw a manager. REMA: What about retention strategies? Is there any end in sight for the tenants' market? Bjorklund: Opus relies primarily on outside brokers to do our leasing for us. Our primary attraction is that our properties are in pretty good locations and that's why they were so successfully leased up the first time. That still holds true for every property in my office portfolio. Also, we've kept them up so that they still look new relative to the marketplace. We haven't employed a strategy of competing for every deal on an economic basis. We work a little harder to attract tenants based on the quality of the product and location, verses being the cheapest product on the market.
Chapman: We like to be the dominant player in particular submarkets. So we identify in a particular city which two or three submarkets where we'll have our business emphasis. Chicago is a little bit tougher since it's so big, but if you get into the secondary cities like Columbus or St. Louis or Nashville, in the two or three submarkets we choose, we will have a market share of 15% to 25%. Povilaitis: In terms of attracting new tenants, it's critical to be a dealmaker and let the brokerage community know by your actions that you're a dealmaker who aggressively pursues deals. Continuing to partner with brokers is also important as is pricing aggressively. We look at the platform of services we have and price them in a way that makes our properties attractive for tenants. Stanley: One way of course is just marketing-getting our material out and trying to identify prospects. We're trying to be more aggressive about that, and we're also doing more cold-calling than in the past. In some cases we're offering incentives to brokers in order to attract deals, especially incentives that brokers don't necessarily have to share with their house. Stanley: It's less a factor than it was, but there's no question that it's still there. Some of it was short-term, and that burns off. But the overall concern remains. The problem with sublease space is that the user doesn't have the same economic objectives as the owner, so they can offer rents that are substantially less than what you would be willing to do. Povilaitis: Sublease space is still a factor, but it has diminished. We have had sublease space in the Chicago MSA probably drop from 4% of the space, or 5% depending on the statistics, to 3% or 4%. People are starting to come out of their offices with plans for growth in the next couple years. The second-tier markets outside of Chicago are a little bit slower to act on the uptick in the economy. But they're also markets that over time have been relatively more stable and haven't had the decline that Chicago has had. Bjorklund: Subleasing is certainly still a significant factor, even though the level of leasing activity has picked up from a year ago. But activity is still slow, certainly in the suburban Chicago market and Milwaukee, where a lot of that space is still sitting there. But time is running down on some of the subleases, and as the term gets lower it becomes less of a factor, and you're almost looking at it more as direct space.
REMA: How are you containing operating and other costs? Stanley: We're doing a number of different things. We're more religiously bidding out our service contracts. As you look at the operating costs, most of those are covered by different service agreements, so we are bidding those out to try to control costs. The bidding process is a wonderful way of making sure that you're paying market and maintaining your competitive edge. The other thing that we're doing-and others are doing it too, like Equity Office-is leveraging off our base of operations. It's large enough that we think we get some leverage on both a national and regional basis. Not all owners can do it, but those who can do it should do that, and we certainly are.
Chapman: We're constantly fighting assessors on property taxes as well. We also have some national initiatives to take advantage of our buying power. We're constantly trying to renegotiate with utilities to get volume purchases, since that's where the big dollars are. On the other contractual items like cleaning, we try to get economies of scale too. |
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