Marc DeLuca is Eastern Regional President of KBS, one of the largest investors of premier commercial real estate in the nation.
Office buildings, especially in markets like Dallas, Houston, Washington D.C. and Southwest Florida (registration required) are repopulating once more. Despite delays in offices reopening due to the Delta variant, other parts of the world have demonstrated that this spike may end up being short-lived, and we’ll likely see the same in the U.S., which may bode well for office stakeholders.
Pandemic or not, Class-A commercial real estate owners are always concerned with preserving and elevating their property’s value. Well-managed properties, in return, are typically better positioned to support the needs of their tenants and help with retention, delivering as a byproduct of a stabilized asset.
However, renovations that contribute to the continued growth of a building’s value tend to be expensive. Construction costs are rising as skilled labor and materials have grown scarce. This sparks the question: Is it worth it to spend money on real estate improvements?
At my company, KBS, we are committed to investing capital wisely. We recognize that strategically incorporating capital improvements on upgrades at our buildings enables us to exceed the expectations of our tenants and investors.
In short, spending capital to improve a building and the experience of its tenants is worth it because the most expensive space in real estate is vacant space — that is, space that isn’t generating rental income. The longer a space sits vacant, the more money it costs, so spending a small percentage upfront ends up costing less in the long run. We’ve seen the impact of capital-expenditure programs and improvements on occupancy at our properties, which maintained average percentages in the high 90s even throughout the pandemic.
So, to improve your office properties, use these strategies to help minimize vacant space at your buildings.
Plan out your capital expenses in advance.
Continually evaluate your properties and the markets in which you invest to determine the best strategy for making improvements. This approach allows you to react nimbly, and with calculated strategies, to damage due to natural disasters such as hurricanes to economic disruptors like Covid-19 that change the way tenants view and use space. Planning out improvements enables you to better serve tenants and support their ongoing needs, especially when it comes to acquiring and retaining talent.
Complete improvements that match each property.
Every office building is unique according to its address, geographical market and tenant makeup. Because of this, consider only adding improvements that align with the characteristics of each property, not simply because it’s “on-trend.”
For example, at many of our buildings, we’ve implemented a spec suite leasing program that fills turnkey office space needs quickly. These spec suites are state-of-the-art spaces that align with what today’s tenants are demanding, including Covid-19-safe collaboration space and workspace configurations, leading-edge technology capabilities and flexible design. We also furnish many of our spec suites to allow prompt move-in. In addition, while typical spec suites are between 1,000 and 5,000 square feet, ours can be up to a full floor. Many smaller companies that hesitated to consider their real estate needs during the crisis are now finding themselves in immediate need of space, and they’re able to move into these spec suites right away.
While the program wouldn’t necessarily work for every property, it can be fruitful at assets in areas where this type of space has been most in demand. That’s why it’s important to consider the location, the asset and the tenants before beginning any improvement program at properties. Due to the volume of our spec suite program and associated economies of scale, we’re able to mitigate our exposure to inflationary construction costs. This way, we can offer tenants spec suites at a lower price than what they could deliver for themselves. Additionally, tenants can move right in because they don’t have to wait for permits or construction delays.
Work with tenants as if they’re your partners.
Being a hands-on office building owner and manager can help develop business relationships with tenants that resemble partnerships. This results in the ability to have an open dialogue with tenants so that you can provide the best possible work environments for them and their employees.
For example, during the pandemic, my company took many steps to assist tenants in bringing their teams back to the workplace in a safe and efficient manner. These steps included ensuring increased sanitization of common areas during the day and following new safety protocols, as well as upgrading building technology when possible. One example of this is achieving UL Verified Healthy Building for Indoor Air status.
Investing in these types of steps can demonstrate to your tenants that you’re in this together and that you’re willing to go the extra mile to help them make the transition back to the workplace seamless.
Believe in underwriting strong capital expense plans, aimed to strategically add value to the overall building, improve the experience for your tenants and combat vacancy. By planning upgrades in advance, implementing renovations that match each property and working with tenants as if they’re partners, you can maximize the value of your assets and minimize the most expensive space in real estate: vacant space.