CREJ - Office Properties Quarterly - December 2017
Both landlords and tenants in metro Denver’s office market are feeling the financial pinch of facilities improvements. In virtually every submarket, wish lists are increasingly crystallizing into must-have lists. For landlords, that means adding new amenities and upgrading existing ones. For tenants, it’s all about recruitment and retention. The common driver, not surprisingly, is the millennial workforce, which continues to reshape cultural changes affecting tenant spaces and building common areas. In its current construct, the open-plan office just isn’t so open anymore. This is nothing new. “Second-generation” open offices typically include more private or semiprivate areas within the suite to offset the core transparency and cultural intent of the initial design. The failures of some openoffice environments have been pretty well-documented. From a cost perspective, the net effect of higher density and a smaller real estate footprint could not always overcome the many physical and psychological barriers faced by business owners and their employees. Landlords, already schooled in the capricious nature of millennial office users, have been quick to respond by fine-tuning upgrades to their own lobbies and other common areas. Ironically, the current dynamic between landlords and tenants is perhaps more complementary in one regard than at any time in the recent past. While the lease negotiation process can be adversarial, landlords and their millennial office tenants are largely moving toward the same goal of “hybrid” or multiuse areas in which work and leisure can share the same space. But those improvements don’t come cheap. While tenants do have the benefit of rolling retrofit or renovation dollars into an allowance that landlords pay up front, building owners must fund their own improvements out of pocket. Cost parameters for the design and construction of both building-side amenities and tenant suites can vary wildly based on dozens of current and projected market factors. But there is good news for both sides. Consumer education coupled with the availability of wide-ranging and high-quality products have inspired both landlords and tenants to become much more savvy shoppers. Consider this case study of a tech company in the southeast Denver submarket. Original estimates for build-out of the 10,000-square-foot space came in at about $65 per sf. The space would include fully exposed ceilings throughout the “open” sections of the suite, including new spiral heating, ventilating and air-conditioning ducts with drywall ceiling accents; upgraded lighting package with suspended LEDs and decorative lamps; full glass fronts for enclosed offices; and upgraded finishes, including carpet tiles and polished concrete. The final build-out ended up at $38 per sf without significant compromise. Exposed ceilings were minimized to include only high-visibility portions of the suite. “Traditional” ceiling tiles were used in private spaces and conference rooms. Drywall accents in the ceiling design were replaced with pre-manufactured ceiling panels for sound absorption. A more modest lighting package included comparable fixtures at considerably lower prices. Use of glass was constrained to highly visible portions of the suite like conference and small-group huddle rooms. A building standard carpet was chosen to accent smaller, more strategic areas of polished concrete. The tenant was confident enough to scour showroom floors and choose some discounted pieces of sculpture and furniture, which added to the eclectic style of the office. Again, the focus here was on recruitment and retention through a blend of premium and midrange products that inspired a creative and highly mobile staff and management. In another case, a building owner in the same submarket estimated a lobby renovation to cost approximately $77 per sf. The new space would be a mixture of open and enclosed areas, including new walls and infrastructure improvements. The original design called for the entire ceiling to be opened up in an expansive lounge/break area. A custom rotating flat screen/whiteboard would add $6 per sf to the cost. Folding, movable glass doors enclosing a conference room came in at another $5.50 per sf. Although the landlord did retain many of these improvements, it eliminated some of the higher-cost alternatives. Opening a ceiling, for example, can run $32 per sf or more, including new ductwork and suspended light fixtures. Walls can range from $125 per sf for drywall to $400 per sf for full-glass demountable partitions. The point is, there are myriad products available to support the build-out of hybrid spaces with flexible, moveable systems in both tenant suites and building lobbies. And both sides are taking full advantage of them. The wild card for tenants is furniture. Office furniture is rarely included in the tenant improvement allowance, which can lead to some startling product choices. It is not uncommon, for example, for a small company to purchase IKEA – or similar caliber furniture – for portions of its build-out. While IKEA is a successful worldwide brand, it’s just not the kind of product that will stand up to the constant wear in an office environment. Worse, low-end residential products are standing in for well-manufactured mobile brands. Think training room tables and chairs without wheels. While this type of tenant – or landlord, for that matter – may save a buck on the front end, a cheap product choice can negate the flexible and mobile characteristics for which the space was designed in the first place. It happens. Furniture choices are almost limitless in today’s office market. Pricing can range from $18 per sf to $60 per sf or more. Most reputable manufacturers carry multiple lines at competitive prices that meet or exceed standards for wear. Both tenants and landlords should bite the bullet and invest in those products designed and tested specifically for offices and common areas. In fact, the cliché “you get what you pay for” holds true for the entirety of hybrid spaces. There is enormous value at various levels among professional product and service providers. But there also is a threshold that landlords and tenants should caution not to cross if the stated goal is well-designed multiuse space.