Retaining and Attracting Tenants in a Soft Market

Summer 2013

With tenants in most markets continuing to favor new over existing office space or opting to renew in place, how can a building owner close a deal, apart from offering low rates, free rent, and significant tenant improvement (TI) dollars? Plenty, according to David Pogue, national director of sustainability, CBRE; Thomas Kruggel, senior vice president, Hines; and Mike Lipsey, The Lipsey Company, a training and consulting firm for commercial real estate professionals. In addition to providing high quality service to tenants, they offered the following tips:

Take the tenant’s pulse frequently — Through consistent communication with tenants, Hines discovered that it needed to supply more Wi-Fi service to the upper floors of several buildings. The firm communicates directly with its tenants, but also conducts third-party surveys to dig deeper into their wants and needs. A tenant that may hesitate to speak freely to a building manager, may well reveal observations and concerns through an anonymous survey.

Know your submarket — Tenants like and respond to a range of amenities and product types, so it’s important to understand the nuances of each submarket. In San Francisco, for example, Market Street is the dividing line between two distinct areas. Hines creates certain products for the “south of Market” high-tech tenant and different buildings for the “north of Market” tenant that tends to be more conservative.

Emphasize the cost savings of leasing space in an energy efficient building — CBRE has found that for every one point improvement in the EPA Energy Star score, there is a .83 percent reduction in energy costs. Sharing this information with prospective tenants and providing concrete figures that illustrate cost savings in one building versus another, provides meaningful information to tenants that relate directly to their financial bottom line.

Dave Pogue 

David Pogue

Promote the net zero energy building — Newer buildings coming on line that have a “net zero” carbon impact on the environment excite tenants. Not only can the building generate its own power, but it can produce additional energy that can be sold back to the local municipality.

Highlight improved indoor air quality — Buildings certified with the Leadership in Energy and Environmental Design (LEED) credential feature powerful HVAC systems that among other things, pull fresh air into the building and carefully filter internal spaces. Highlight the improved air quality in the building and its effect on employee health and comfort.

Better air, better light, greater productivity — In general the high-quality internal environment of a LEED building, which includes cleaner air and more natural light, results in greater employee productivity and fewer sick days. This has been documented in studies conducted by Carnegie Mellon University, Johnson Controls, and others. Links to these studies or summaries of the results can be provided to existing and potential tenants so they are better informed.

Involve tenants in environmentally-friendly efforts like recycling — Tenants like to feel engaged and they respond to building managers that are clearly committed and enthusiastic about creating a healthy workplace and reducing negative impacts on the environment. Pogue said that the key to making a recycling program effective and attractive to tenants is frequent communication with them, especially about the results. For example, once a paper recycling project is well underway and working, let tenants know how many trees were saved through their efforts.

Help tenants reduce electricity costs through individual metering — By isolating usage, tenants can understand precisely how much electricity they consume. Making this information available, and also structuring a triple-net or net- of-electric lease, typically results in reduced consumption because it affects the tenant’s bottom line. When tenants can control the amount of electricity they use, they generally do. Individual metering is not an expensive process for the building owner when there are full-floor users. However, it can get costly if there are multiple tenants on one floor.

Mike Lipsey

Mike Lipsey

Flexible space build-outs — Forget hard walls and immovable objects. Create a flexible build-out and stress to tenants that they can quickly change office configurations as work tasks change and teams expand and contract. Lipsey said this is a great strategy for another reason as well: it allows the building owner to save money on build-out for future tenants, by reusing or modifying what is already there.

Identify and promote nearby amenities — According to Lipsey, nearby amenities cost the landlord little to nothing, but can be used to attract tenants to a building. Public transit, a Federal Express office, banking, Starbucks, sundry shops, and inexpensive restaurants are all examples. Property managers should keep a list on their website of nearby businesses and circulate this to building tenants. This is a great way to build relationships with tenants apart from responding to requests about spaces that are too hot or too cold!

Stress availability of or improve access to surface parking — Employees like surface parking, said Lipsey. Often there are cross-easement deals that can be made with nearby retail to increase surface parking options for an office building.

Shared conference facilities — A building owner can take a less desirable interior space or lobby — perhaps 2,000 or 3,000 square feet — and turn it into a free conference facility for building tenants with state-of-the-art audio visual equipment and top-of-the-line furniture.

Workout facilities in the basement — Landlords can take otherwise undesirable space, like that in the basement, and turn it into a 5,000- to 8,000-square-foot workout facility with showers, the latest high-tech exercise equipment, and sauna.

Include a daycare center — Consider including a daycare center in larger buildings. Lipsey stated that, “when you see mom or dad coming down to the daycare center on their break or at lunch hour, you know that this is an enlightened way to do an office building.”

Think beyond the commuter car — It costs very little to be bicycle-friendly yet it can mean so much to tenants and their employees. Another suggestion: offer free use of electric cars to building tenants so they can access them to attend a meeting or run an errand across town in the middle of the day.

LEED Is Critical to Attract Blue Chip Tenants

“Tenants like green, but do not want to pay extra.” This is a refrain heard frequently in the commercial real estate business. Thomas Kruggel, senior vice president, Hines said that the green building is critical even if the typical tenant won’t pay extra. Why?

“The tenants that really make a difference to your bottom line — the blue chip tenants such as large financial institutions — are making green building initiatives a requirement,” he stressed. “If the building does not have a certain LEED score, a certain Energy Star score, or if it does not provide sustainable practices, that building does not get on the tour list.”

“If an owner does not have a LEED Gold or LEED Silver building, he cannot lease space to Merrill Lynch,” he went on. “Now all of a sudden, the value of the building is reduced because he has reduced the blue chip caliber tenancy on his rent rolls. That is powerful. Maybe tenants are not willing to pay for green, but the landlord ought to pay for it to command a strong return on investment.”