How Tenants Approach Stay or Go Decisions

IRVINE, CA—Deciding whether to stay in their current space or relocate is a decision tenants shouldn't take lightly. PM Realty Group's second-quarter Orange County office market report shows what other industry executives have been saying: that leasing demand has remained steady as tenants are becoming more confident in making longer-term decisions and weighing the possibilities of relocation or renewal in order to capitalize on favorable lease terms. GlobeSt.com spoke with the firm's SVP Oliver Fleener about how tenants face the decision of a move, both within California and outside the state to less-expensive markets.

GlobeSt.com: How do tenants approach the decision of staying in their current space or moving to a different space within the area?

Fleener: There are four things you go through. The first thing you want to do is an employee scattergram on it, especially if you're considering a broad move, like from L.A. to Orange County. If you have a good listing broker, come up with a scattergram on where employees live to see if it makes sense to move that far away. Of course, often it's an executive decision—the top executive at the company wants an office near his house. The second thing to look at is the building condition. Is the building newer or older? Does it have the efficiencies and features that you need? Third is to ask if the landlord's reception is fitting your needs. And finally, the financial side: Will it cost more or less to rent in another building. If the move is less than 15 cents or 20 cents per square foot, it ends up being a wash. Most tenants get stuck in the emotional aspect of it, and you have to pull out the calculator and show them that saving $200 over a five-year period isn't worth it. Then again, if company is in the process of trying to revitalize its culture or image, a move may make that more feasible.

GlobeSt.com: What about a move to another state, especially as firms try to decide whether to stay in California or move to a less-expensive state?

Fleener: I've dealt with a couple of corporate clients like L-3 Communications, Lockheed Martin and NEC. A lot of these groups end up in Texas. I don't know if we've seen a relocation as much as a shutting down of California locations and maybe expanding in other areas like Dallas.

GlobeSt.com: Do you feel that this problem is a threat to the California real estate market, or more specifically, the office sector in this state?

Fleener: What I have seen is not such a threat but an adaptation. We used to hear that everybody was going to be working out of their home and there would be nothing but virtual offices. It's a trend that started, but productivity is a coin flip—they're spending more hours working, but how productive are they actually being at home? Executive suites and hotel spacing came into vogue and then backed off a bit with the recession, but we're starting to see this trend come back a bit more. It's not as much of a discussion point as it was, but it's more of a reality.

When it comes to California real estate, we do adapt, and we make the office buildings and real estate as useful as possible. The thought of having a corporate headquarters come here and put 10,000 people in a call center—California is not the state for that. The cost of labor is too high. They're more likely going out to Phoenix, Dallas or North Carolina. But what we are seeing stay here are the intellectual jobs. There are a lot of capital jobs, executive-type groups and entrepreneurial firms here, and it's still a very special place to live. The weather is fantastic.

From the Orange County or Southern California perspective, what we're really expecting right now is more natural growth. We're seeing more on the smaller tenant size—around 5,000 square feet moving to 7,000 square feet and a 20- to 30-man shop expanding to a 40-man shop. Northern California is getting more than that because of the growth of tech companies, but here that size growth is more common.

GlobeSt.com: What factors will keep firms here rather than relocate?

Fleener: When it comes to most corporate companies, they tend to like to have coastal locations. Every major company has an office on the East Coast and one in San Francisco, L.A. or Orange County, depending on where the executives are. They want a coast-to-coast presence, which will always help California. A big corporation will always choose San Francisco over Nevada. Also, it's important for employee retention. Again, we're seeing a lot of very qualified people coming into the market—MBA grads and those at the higher end of the job spectrum—and they're going to want to live more on the West Coast than in, say, Montana. It's a pretty easy decision. The urban living is a little bit better here, too, which is important with younger employees and tenants who like the urban lifestyle.

GlobeSt.com: What incentives, if any, are landlords giving tenants to remain in California?

Fleener: Each city will have its own incentive program, and smart owners will work hand in hand with these city incentives. Some owners can offer an aggressive lease rate. Larger companies want tax incentives, too. The other thing about California, from a landlord perspective, is that typically the buildings out here are newer. In Orange County, the oldest buildings are 20 years old, compared to back East where there are buildings that are 50, 70 or 100 years old. That's a benefit we like to promote as well—not to mention the infrastructure.