12/16/2021
How to Choose an Office Location and Property to Lease
The Primary Criteria Tenants Need to Consider
When you are seeking new office space for your company, either to facilitate a relocation or to establish a new outpost, your first task should be to assess your requirements and develop a budget. Once you’ve completed those slightly more arduous (albeit critical) assignments, you can move on to the fun part: selecting a location and property.
Just as when you are looking for a new home, the process of finding the ideal location and property for your office can be exciting, slightly overwhelming and occasionally exhausting, all in equal measure. Accordingly, developing a list of the key criteria that you want to evaluate in terms of both the general location and particular property will help you consider your options logically, avoid touring fatigue and minimize your risk of getting swept away by that incredible view or high-tech gym facility, all other requirements be damned.
LoopNet spoke with Moshe Sukenik — Vice Chairman of international real estate services firm, Newmark Knight Frank — to guide you through the process of evaluating both a potential location and a property for your office. Sukenik has nearly 35 years of experience as a dedicated tenant representative, helping companies from a diverse set of industries navigate this undertaking.
Criteria for Selecting the Right Location for Your Office
At the outset, Sukenik noted that, “Every business makes decisions on how to choose the location a little bit differently.” That caveat notwithstanding, from a high-level perspective, the most salient criteria that most office users will want to consider when evaluating potential locations for their office are:
Commuting Patterns
Customer location.
Access to transportation.
Safety and security.
Amenities and neighborhood ambiance.
Before diving deeper into each of these topics, it should be noted that this article reviews criteria to be assessed when selecting a particular neighborhood or general location within a given city or municipality. Multi-state or city searches will be discussed in future articles.
Commuting Patterns
Sukenik suggests that the first step most companies should take is to perform a zip code analysis of its employees’ residences to understand where employees are commuting from. He says that it’s common for a tenant to begin the process of looking for an office with a relatively rigid notion about the neighborhood where they want to be located without actually looking at the data.
As an example, a company might be operating from a preconceived notion that a Midtown Manhattan location is ideal from a commuting perspective, but the data could reveal that a downtown location works equally well for the majority of its employees. Geographic information systems (GIS) software can help perform this analysis. Most brokerage professionals should have access to such software, or a tenant can purchase their own — there are even free options available.
For larger companies, in particular, Sukenik noted that, “The broker’s job is to make sure you assess the right universe of employees, because not all employees are created equal.” He said that for some companies, the criteria will be as simple as ascertaining where the top decisionmakers live.
Customer Location
In addition to considering where your employees live, you will also want to evaluate where your customers are located. This factor will be particularly crucial for customer-facing organizations, such as medical or dental tenants, but it will also notably impact professional services tenants, including accounting, financial services or legal firms. This element also needs to be appraised in reverse; perhaps your company doesn’t host its clients very often, but your employees frequently visit their customers. As with your employees, conducting an analysis of customer zip code information can reveal the most convenient locations for your business from a client perspective.
Access to Transportation
Regardless of where the existing employees and customers reside, companies in urban locations will want to prioritize proximity to mass transit, including bus and rail lines. For suburban office tenants, it will be important to be located near major highways and to consider local traffic patterns. Sukenik said that for companies with employees that travel or receive visitors for business frequently, convenient access to an airport will be an important element, as well.
Safety and Security
The safety and security of your office and employees will be a paramount concern for every business owner. Therefore, it’s important that you review the crime statistics for any neighborhood or city under consideration. The FBI publishes extensive reports that detail crime statistics in Metropolitan Statistical Areas (MSAs) throughout the United States, while numerous other resources drill down to provide crime rates in specific neighborhoods.
Amenities and Neighborhood Ambiance
Sukenik observed that local amenities will be a particularly important factor for most companies in selecting their desired neighborhood. “Pulling together food service options that appeal to the everyday worker … I think is significant to the companies that really care about their employees,” he said.
In addition to food and related services — including purveyors of coffee (perhaps the most essential workplace tool) and bars for afterhours team building and client meetings — fitness facilities, doctor and dentist offices, pharmacies and grocery and convenience stores are some of the other key amenities that tenants should look for in a prospective neighborhood. Evaluating a property’s walk score can be a simple way to gauge the proximity of such conveniences.
Sukenik also noted that neighborhood ambiance, while an admittedly less tangible factor, is an important component. “What kind of feeling does the neighborhood have? And how does it impact the tenant’s sensitivities?” He asked. Different organizations will seek out disparate kinds of environments: for a technology startup, a recently gentrified, grittier neighborhood could be ideal, while a financial services firm will probably prefer a more established, fully developed location. The key is finding a neighborhood where the local culture aligns with your company’s brand and values, and both your employees and clients can feel at home.
Criteria for Selecting the Ideal Property for Your Office
Once you have narrowed your location options to a particular neighborhood or general area, you can begin actively considering potential properties for your office. It should be noted that, occasionally, companies will assess properties in multiple neighborhoods simultaneously; but, for most office tenants, the transition from selecting a neighborhood to choosing a property will be more linear.
Based on our conversations with Sukenik, LoopNet developed a list of six primary criteria that a prospective tenant should consider when selecting a property for their office:
Costs.
Floor plate efficiency.
Wellness, Amenities and Building Image/Branding.
Flexibility.
Infrastructure.
Ownership and management.
Costs
It seems obvious that one of the most important considerations you will want to assess in a prospective property is cost; what may be less self-evident is how you should go about doing that. Most tenants will simply review the cost per square foot, but Sukenik advises against that approach.
“The language that’s spoken and the right analytics are different things,” Sukenik advises. “The language that’s spoken is the cost per square foot — is it ‘$60 space,’ is it ‘$100 space,’ per square foot — the reality is that should not matter in the decision-making process. What matters, is what is my all-in cost and how much functionality do I get?”
In order to properly estimate your all-in costs, you’ll first need to understand if the rent is being quoted on a triple net (NNN) or full-service gross (FSG) basis, or some variation thereof, such as “net of electricity.” In simple terms, in an NNN property, all metered and occupant-specific utility and maintenance costs, including electricity and janitorial services, must be managed and paid for separately by the tenant. The tenant also reimburses the landlord for fixed operating expenses that account for their share of the property’s common area maintenance, taxes and insurance. In an FSG property, the owner handles these bills, and the costs are included in the rental rate.
Sukenik noted that you will also want to estimate the cost of your proposed buildout and what portion of that expense is being covered via a tenant improvement (TI) allowance provided by the landlord. Furthermore, in addition to a TI allowance, is the landlord offering free rent? If so, can the TI allowance be converted to free rent, assuming your buildout costs are low? And is the reverse also true?
There are other obscure expense items that a tenant should keep in mind. For instance, you’ll want to ascertain what kind of HVAC system is being used and how it impacts electricity costs, including after-hours costs. Tenants should also evaluate the proposed operating expense escalations, or increases, per year, and understand how new expense categories that arise mid-lease will be handled, among other factors.
Floor Plate Efficiency
Sukenik noted another component that will greatly impact overall costs is how efficient the property’s floor plates are; i.e., how well your desired layout can be accommodated in a building based on the location of columns, window line, elevator, lobby, etc. If a property’s floor plate is inefficient relative to your planned layout, you may have to rent additional space, thereby increasing your costs.
To assess floor plate efficiency, you will want to conduct a test fit of any properties under serious consideration. The test fit will measure how well your proposed office layout conforms to the property’s floor plate. If you have hired a workplace strategist or architect, they can provide this service. For smaller tenants, the property owner will typically pay for one test fit to be conducted by their architect.
Wellness, Amenities and Building Image/Branding
Wellness. Sukenik said that wellness has recently become a critically important factor for almost every tenant. One of the primary wellness considerations is access to natural light and views. Of course, light and views come at a (often steep) cost, and Sukenik cautioned that tenants will need to evaluate how relatively important those benefits are for their particular business and employees.
Outdoor space is another wellness consideration that is “going to be much more significant going forward,” Sukenik said. Sukenik noted that tenants are also starting to prioritize items such as HEPA air filters, anti-microbial building materials, touchless entry points and larger elevator cabs.
Amenities. In addition to wellness, you will want to evaluate amenities available at the property, such as food services, fitness facilities and banking, among others. Amenities within the building are perhaps more important in suburban locations, where picking up lunch could require a car trip, as opposed to dense urban areas where there may be a variety of food options within convenient walking distance. Even in urban environments, though, Sukenik said that business owners can see a benefit to amenities located within the property. “The employers do often look at it both as an amenity that the employees like, and that it could save a half hour not having to leave the building, so it may enhance productivity,” he said.
Suburban office users will also want to assess the building’s parking facilities for both tenants and visitors, including issues such as access, security, coverings and total number of available spaces.
Building Image/Branding. Beyond amenities and wellness features, tenants will also want to be mindful of the building’s image and how it aligns with their culture and branding. For instance, does the lobby convey the appropriate profile to potential clients? Is the tenant mix suited to your organization? And does it enable synergistic opportunities with other businesses? The property in which your business resides becomes a major facet of your organization’s branding and it should be considered from that perspective, as well as the impact it can have on employee recruitment and retention.
A tangential concern will be signage opportunities. “Whether you value the signage or not, it serves two purposes,” Sukenik noted. “Sometimes it’s wayfinding, that’s one thing, and the other [use] is the big sign behind the desk, which is much more about image. I think [the importance of the big sign] depends on the business’ specific philosophy more than anything else.” Nonetheless, Sukenik acknowledged at least one nearly universal truth when it comes to signage: “I think what everyone will be concerned with is that no direct competitor has superior signage; no matter what size you are, that’s going to be on your mind.”
Flexibility
Commercial office leases typically cover long periods of time — anywhere from three to 15 years or more. During that kind of interval, a lot can change for your business. For this reason, flexibility will be critical when evaluating a potential property. You’ll want to be assured that you’ll have the ability to grow, contract and even terminate your lease.
Infrastructure
Some of the most critical infrastructure facets to consider in a prospective property are the HVAC systems and elevators. For both of these items, you’ll want to investigate how old the existing systems are, how often they are maintained and serviced and whether there are any plans to replace them in the near future, which could be disruptive to your occupancy experience. For HVAC systems, in particular, many tenants will want to know if they will have thermostatic control; i.e., the ability to affect the temperature directly within their space.
Tenants will also want to understand the property’s technology infrastructure. Sukenik said that it can be beneficial to have appropriate experts evaluate this aspect of the property before a term sheet is negotiated. He added that it’s important to understand your own power requirements, as well as how and where power is being delivered to the building and your space. The same is true for telephone and internet service; the key considerations are the location of the entry points and the identities of the service provider(s). Some companies, depending on their needs, may also want to appraise the building’s backup or redundant power systems.
Ownership and Management
The final criteria that you should prioritize when evaluating a potential property is the reputation of the building owner and management company.
As Sukenik noted, “There are certain owners who just simply do a better job of running a building than others.” An experienced tenant representative can help apprise you of which building owners and managers are apt to provide the best overall experience.
Understanding the profile of the building owner is also valuable. Some properties are owned by families that intend to keep the building in their portfolio for generations to come, while others will be held by institutional entities that tend to sell a property within three to seven years of acquiring it. “You want to understand the motivations of different owners, because different owners own real estate for different purposes. That’s going to inform the negotiation process and foster an opportunity to create some win-wins.”
