Fundamental Shift in Real Estate – From Cost to Value

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Matt Waggoner
Senior Vice President

There is nearly a 30 percent delta in cost from two similarly aged downtown towers in the Indianapolis CBD. For the sake of saving face, we will define the higher cost building as Building 1 and the lower cost building as Building 2. Building 1 was distressed and bank-owned less than 24 months ago. The ownership had disappeared on a bad loan, and the property was not being maintained at a Class A level. Challenged by shrinking tenants and increasing competition, the outlook was dim. Building 2 has maintained a steady occupancy through the recession period, highly marked by larger professional service firms. Building 2 traded owners several years ago, and it has slowly experienced a drop in tenancy since the acquisition.

In just six months, Building 1 is now getting 30 percent more in rent than Building 2. Why? VALUE.

Building 1 was purchased by a very reputable developer who approached the asset with a value-add mentality. In an effort to differentiate the building, the owner made fundamental changes in core areas, along with aesthetical and mechanical upgrades that brought the building back to Class A. They focused on targeting firms that wanted a unique office environment, with common area amenities and a greater communal environment within the building. Finally, they attracted all industries, knowing that technology, professional service, and law firms are all seeking these types of unique opportunities.

This concept is further highlighted in this December article by Gensler (here). The article touches on a data-driven approach that identifies the most effective way your company should work. It’s no surprise that technology and mobility have created significant changes in the way that employees work, but aligning an office space that’s conducive to these changes can be challenging for many companies.

As a result, many companies are considering more than just rental rates by evaluating how real estate will ultimately provide a higher return on investment. When looking at building options, they’re considering the following questions:

  • What if we kept three more employees from leaving our firm each year because of our office environment?
  • What if our employees ultimately worked longer hours because our building provided them “third spaces” to have a change of environment?
  • What if the employees were happier, and therefore more effective when they work, resulting in more productivity for the firm?

Value is defined as the importance, worth or usefulness of something. In other words, it’s the return on the investment (increased morale and engagement, improved employee retention, and higher productivity and profitability). The owners of Building 1 realized this need to add more value, and the results confirmed their decision.

Our tenant representation approach is specifically designed to explore questions like this, which allows our clients to develop a comprehensive strategy prior to engaging the market. Our goal is simple – to help companies maximize the value of their real estate by aligning their office space strategy with their company’s culture.

Did you like this post? Read about the continuing evolution of shared office space here.

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