Office/Industrial: Expectations Exceeded . . . Thank Goodness

DALLAS – The one theme attendees at the Office/Industrial Sector Spotlight Session at this year’s NAREIT convention took away boiled down to this: During the past year, activities exceeded expectations. On the other hand panel, the panelists, consisting of a mix of office and industrial REIT leaders moderated by Sheila McGrath, managing director with Keefe, Bruyette & Woods, were honest in that their expectations weren’t terribly high to begin with.

The reason? “A year ago we saw continued dysfunction of the federal government, which had a negative impact on the consumer,” remarked Roger Waesche Jr., president, Corporate Office Properties Trust during the Nov. 15 session. William Hankowsky, Liberty Property Trust’s chairman, president and CEO agreed, pointing out that the anticipation for 2011 was that of a long, slow march before the market picked up to any great extent. “But our development pipeline is back, with 10 projects,” he added. “It’s been a pleasant surprise.”

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Richard Clark, president and CEO of Brookfield Office Properties and Joel Marcus, Alexandria Real Estate Equities Inc.’s chairman, president and CEO went in to 2011 with similar expectations that the market would continue to trudge along as it did in 2010. For Clark, however, January through July 2011 saw 82 million square feet of the Brookfield Office portfolio leased. “That matches what we did in 2007,” he added.

One major trend revealed during this session was that build-to-suits are starting to ramp up, not because there isn’t enough office or industrial space out there. But rather, because the space that’s out there these days isn’t fitting the demand of tenants.  Hankowsky told the story of a 250,000-square-foot build-to-suit headquarters Liberty Property Trust is developing for GlaxoSmithKline in downtown Philadelphia. The space will be just that – a space, with group areas for collaboration – and no corner offices. “Even the CEO won’t have an office,” Hankowsky said.

The headquarters was completed in 1999, but the panelists are seeing more demand for flexible workspace today. The problem, however, is that the buildings currently out there, those built in the 1950s, 1960s and 1970s, don’t have that flexibility in mind. This has led to new build-to-suits as well as retrofitting older space.

The panelists also explained how technology is having an impact on demand for space. According to Marcus, the movement is toward better amenities and collaborative space and pointed out that more remote workers means different utilization of office space.

Also important when it comes to tenant demand: Green development. Tenants are demanding some sort of energy efficiencies and sustainability with their spaces these days, the panelists commented. “If the building isn’t LEED,” Clark explained, “it isn’t in the game.”

Furthermore, Hankowsky remarked, green development helps a building increase in value. “There is value on the resale side as there is a greater focus on operations relative to cash flow,” he added.