OFFICE – NOT WHAT YOU SEE
SEARCH BEYOND THE OBVIOUS
Charles Dickens develops the theme of resurrection in A TALE OF TWO CITIES. Real estate.
investing is most profitable when one can resurrect a property to its former glory, generally
rebuilding off the failure of the seller. What must you do in your office due diligence when
early access to the building is difficult? And what if what you do see does not reflect what you
really need to know?
WHAT YOU SEE MAY NOT BE WHAT YOU GET
With retail, you have access as a prospective customer to roam the stores. With housing and
self-storage, you can pose as a prospective renter and obtain access at least to a model unit.
Rare is the office tenant who will allow access to tour their space unless arranged in advance
with an agent of the property manager. What is unique in office due diligence and how may you
want to consider approaching this challenge?
1. ROOF. With a single story grocery anchored shopping center, a square foot of roof
covers a square foot of space for rent. With, for instance, a ten (10) story office
building, that same one foot of roof space covers ten (10) square feet of space for rent.
And the roof is now 10 stories higher up making access for replacing and repairing
potentially more expensive and dangerous. Tracking a leak in the ceiling of a tenant
mid-way in the building may be from a source other than the roof (e.g., water line leak).
Do consider how the water from rain and snow and ice on the roof gains access to the
ground (meaning focus on the roof drains and how they are maintained and cleared).
2. HVAC. Older buildings may have but one heating and cooling system, often coated with
asbestos. Repairs become expensive as access to necessary parts wanes. Replacement
can be expensive, and you end up with a new system with an old inefficient distribution
system. Newer buildings may provide flexibility with multi zone systems allowing
greater cost efficiencies and greater variations in temperature to suit a certain side of a
building and even provide climate preferences for major tenants. LEED certified
buildings take HVAC into the future with greater efficiency and lower carbon footprint.
NOTE – Other than as a deal maker for governmental prospects, there has not yet been
demonstrated that LEED certification is driving market rents across the country
sufficiently higher to justify the cost of LEED renovation or new construction.
3. TENANTS. The “tell” you observe in retail (e.g., few cars in parking lot, dated goods on
the shelf) and housing (e.g., beat up automobiles, trash on grounds) is not as apparent
with an office. The very same indicators can be misleading with office. Which cars go
with which tenant or client? What are the indicators, even once you access tenant
space, whether they are profitable? Your research will need to extend to determine the
reputation of certain tenants in their industry – and the strength of that industry – and
the perceived long term prospects for that firm. Do remember that with many office
tenants, the ‘value” of the firm walks out the door every night (e.g., a law firm).
4. ACCESS. When high speed internet came into the world of office buildings, we suddenly
learned the lesson of the bigger buildings located close together were the first to obtain
access to fiber communications (as it was more cost effective for the providers to
extend their lines to a large cluster of potential users). How may the lack of a turn lane
and traffic light impact ease of access to this building? Will cross easement rights with
an adjacent retail center result in tenant complaints about limited parking during the
holidays shopping season?
5. PROSPECTS. How strong is the market for what the building now has in tenants? If a
tenant leasing a full floor relocates, will you be able to redesign the floor efficiently for
multiple tenants (if that is the only group of prospects interested in space in your
building)? Will you need to lease certain space to satisfy a larger tenant which results in
“land locked” space which cannot be accessed for leasing?
BOTTOM LINE. Office has been proven to have great potential to be a very lucrative
investment. Investors new to the asset need adjust their approach to due diligence.
What you see and perceive may not be the driving factors in making a good investment
decision. Bring in experienced qualified support early in the process to avoid wasting
time chasing an opportunity which just does not fit your investment profile.