Avoiding a White Elephant Stampede: Building Facilities with Lasting Value

[ By Bill Rafkin ]

Koll Development convinced a client in Plano, Texas, that the cost of two low-rise buildings was comparable to a single mid-rise tower; the buildings' floor plates are sized to conform to multi-tenancy if needed in the future.

Today, many companies are locating their back offices in smaller cities. In most cases, this makes good economic sense and brings good jobs to regions that typically need them the most. Usually, these smaller cities have a low cost of living, a well-educated workforce, a strong work ethic and reasonable and accommodating property taxes. Additionally, many tertiary cities have a good quality of life.

Unfortunately, "pioneer" companies entering a new city often build large, self-contained corporate campuses that provide plenty of amenities, but are isolated from other commercial areas. If the company ever relocates, these monolithic campuses may be hard to reuse.

Successful companies take a long-term real estate view and design a campus that is better integrated into the market and community. These facilities consist of several low-density buildings that can be easily re-let or sold in the event of vacancy. They have good parking ratios, access to major freeways and abundant green space. In other words, successful corporate campuses have all the characteristics of desirable multi-tenant real estate, especially if located in the path of demographic growth.

Koll Development (KDC) developed a large, prominent office building for a major advertising firm five years ago that allowed the company to consolidate its numerous and disparate offices throughout the region. The location, chosen jointly between KDC and the tenant, was in a planned development in Plano, Texas, with prime access to the North Dallas Tollway (a major north/south thoroughfare) and close to high-end executive housing and retail. Although the company wanted a mid-rise building with specialized amenities, KDC worked with the client to design and build a campus with lasting value through smart design.

The project was designed as two separate buildings, connected by a common lobby entrance, elevator cores and outdoor dining facility. Each building faces the street with individual identities; each building has a different address. There are separate underground and surface parking facilities. Furthermore, the floor plates of the two low-rise buildings were reduced to a size that can easily conform to multi-tenancy if needed in the future. That reduced the risk of creating a white elephant that KDC and its tenant would regret in the future.

Hundreds of hours of meetings with the tenant and architect produced a flexible, efficient and appealing design. Some compromises were made from the tenant's perspective, such as smaller floor plates and shallower bay depths, but in the end it created an outstanding and creative work environment.

The cost of two low-rise buildings was comparable to the cost of a single mid-rise tower since certain construction costs cancelled each other out. For example, although twin buildings consumed more land than a single tower, the additional land cost was offset by not building a mid-rise parking structure. The two low-rise buildings had more roof area, more elevators and more common space, but the low-rise structure required less engineering, lower soft costs and less time to complete. The net cost of the two designs was virtually even.

Call Centers in the Path of Growth

In Greensboro, KDC worked with Citigroup in selecting a site located in the path of growth, rather than in a planned office park or more rural area. Consequently, the building site ended up being less expensive than the alternatives, once completed. To compensate for limitations on the site, KDC worked with the state of North Carolina, Guilford County and the city of Greensboro. The municipalities improved roadway access, and installed turn lanes, curbs and gutters, storm drains and sidewalks at their expense. The city will annex the site into the city limits in the near future, giving the office building a Greensboro address and providing other services. As a result, Citigroup ended up with a terrific site and great access. What could have been dull, antiseptic, generic buildings turned out to be anything but. The buildings are designed for maximum flexibility and appeal. Rather than having one central core area, the buildings are designed with two separate cores at each end. Each core has its own elevators, stairways, rest rooms and mechanical and electrical rooms. This way, the large floor plates can be carved into divisible spaces to accommodate multi-tenant occupancy if needed in the future. The buildings have high ceilings to accommodate raised flooring, and to provide a feeling of space in the large, open office area. They are sited on their lots to provide maximum curb appeal and to minimize distance between the entrances and the surface parking areas. Each building has a ratio of parking spaces to office space of five per 1,000 square feet. In addition, there is abundant green space to provide a top-notch environment for workers.

Citigroup welcomed these suggestions. In the past, they had been challenged with reusing older, single-purpose buildings. Consequently, any feature that added flexibility and growth was welcomed. KDC estimates that these changes added two to three percent to the total development budget; however, the additional cost was more than offset by innovative financing.

As planned, KDC and Citigroup pre-sold the buildings to a REIT. Citigroup's resulting rent was a function of the cap rate paid for the buildings. KDC and Citigroup believe that the flexible design and effective execution contributed to the attractive cap rate paid by the REIT. Although construction costs were slightly higher as a result of these design initiatives, the cap rate translated into lower rent for Citigroup. The design initiatives created a better investment for all parties involved: Citigroup, KDC and the REIT. Many companies design office buildings and warehouses for their sole use, without concern for their long-term value. Corporate mandates sometimes require certain locations and certain designs of their facilities, but if too unusual, those directives can compromise the value of the real estate. Prior to building, companies should consider a facility's future, knowing that real estate ownership can create or hurt shareholder value, just like any other corporate investment.

Bill Rafkin is senior vice president of Koll Development Company (KDC), in charge of acquisitions and investments.

For more information

Koll Development Company: www.kolldevelopment.com

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