A New Focus in Commercial Real Estate

Bob Johnston

Paramount Real Estate

bjohnston@paramountre.com

www.paramountre.com

Topic: Commercial Real Estate

There is a real temptation by tenants in today’s soft market --- and by listing brokers and landlords as well --- to focus almost exclusively on rental rate.  In short, the lowest price should to be enough to positively influence a tenant’s decision to lease space in a building.  The result --- we’re “commoditizing” commercial space alternatives while losing the focus on what is right and best for the tenant.

Let me be the first to say that economics are always important, but they are not the most important element when it comes to making a real estate decision.  I have often told clients, “What difference will it make if the landlord provides the space at no cost if it doesn’t work?”  Retail clients generally seem to have a better handle on weighing the “intangibles” when they make a space decision.  They understand that there are issues far more important than price --- such as exposure, vehicle traffic counts, ease of access, parking and neighboring tenants --- that will impact their long-term success more than marginally reducing their base rental rate.

So many components go into a good real estate decision, and price is only one of those components.  Tenants need to look at a “total cost solution” rather than just a “rental rate” solution.  The latter is the proverbial tail wagging the dog kind of decision, and decisions like that never work well over the long term.  That’s why establishing a preliminary budget is critical to the process so that companies don’t waste time looking at what they can’t afford.   Companies often do themselves a disservice by discounting the role a well thought out facilities plan plays in their long-term success.  Space, like any other component of a firm’s business plan, should function strategically to ensure the long-term success of the firm, and the list of items that ensure long-term success generally relegates price to the lower tier of importance.

Companies must address and evaluate and rank the importance of critical issues such as parking availability, access, visibility, building efficiency, flexibility to expand and contract, on-site or close-by amenities, public transportation availability, security, sustainability issues,  building management, landlord financial viability, and ---financial structure.  Whether internally generated or broker generated, tenants must understand the total cost structure of the deal.  One deal may provide more dollars for tenant improvements; another deal may offer less tenant improvement dollars but more free rent.  Yet another may offer to graduate or step the rent and pay moving costs.  And in the end, a simple issue like ease of client access or proximity to public transportation may trump the lower base rent deal.

Guard against making an impulsive, “head in the sand” facility evaluation.  Make sure you have completed the proper due diligence before signing on the bottom line!