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?

UNIQUE CHALLENGES

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.

Andy Chess