1. Managing Office Property
Lecture 4
Department of Real Estate Management
Faculty of Technology Management and Business
(Semester 1 2012/2013)
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2. Introduction
• An office building can be defined as
a property that provides facilities
(space) to a tenant engaged in
services rather than a location where
goods are sold (shopping centre) or
manufactured (industrial building)
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3. Supply and Demand
• Developers build office space based on two
types of demand
– Space-created demand
– Money created demand
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4. Desirability
•Decarlo (1997) categorised office desirability into four grades:
GRADE LOCATION RENTAL RATE TENANTS
A Best Highest Most Prestigious
B Second Slightly less than A Good, Solid
Best
C Older area Below A & B Lower income
D Near CBD Lowest Not usually maintained
Location Desirability
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5. Desirability
• Why are some office buildings at full
occupancy with high rental rates while
others are half empty at bargain-basement
rents?
– The answer is ‘desirability’
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6. Desirability
• The grades are achieved by ranking 12
criteria:
– Location – Elevators
– Neighbourhood – Corridors
– Transportation – Office interiors
– Prestige of – Management
building – Tenant mix
– Appearance – Tenant service
– Lobby
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7. Market analysis
• Regional analysis
– Reflect availability or scarcity
• Neighbourhood analysis
– Prestige of the local area, transportation,
parking and proximity to business and
services
• Absorption rate
– The no of sq feet that have been historically
been leased in the market area.
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8. Market analysis
.
• Site selection
– 4 key factors influencing the
selection of office facilities (Kyle,
2000)
• Cost
• Accessibility
• Environment
• Labour market
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9. Property Analysis
• Measuring the building
– Gross area of entire building
• The total sum of the areas of each floor including lobbies and
corridors within the outside faces of the exterior walls
– Gross rentable area
• All areas within the outside walls, less pipe shafts, vertical
ducts, elevator shafts, balconies and stairs
– Net rentable area
• Total sum of gross rentable area – (public corridors,
washrooms, janitorial and electrical closets, air-conditioning
rooms and other rooms or areas not available to the tenant
and the tenant’s employees
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10. Property analysis
• The property manager should be sure that
figures are accurate and truthful to avoid
confusion and lawsuit.
• In describing the space, the lease
document should contain language such
as ‘suite 300’, which approximately 3,000
square feet’.
• As a rule of thumb, the higher the loss or
‘load factor’ (unusable space), the lower
the rent, because the tenant receives less
usable space.
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11. Property analysis
– For example: if the net rentable area is 80,000
sq ft, but only 70,000 sq.ft are usable due to
corridors, the load factor is:
• 10,000/80,000 = 12%
– So, gross area of entire building – (Shafts,
ducts, balconies and stairs) = rentable area
(tenant pays rent on) – (public corridors,
restrooms, mechanical rooms) = USABLE
AREA (tenant occupies)
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12. Property analysis
• Usable area
– Any area in a given floor that could be used
by the tenant.
– This area includes a point from the perimeter
glass line to demising walls
– It also includes column areas within such a
space
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13. Setting the rent schedule
• Factors to consider:
– 12 criteria for ranking the building
– Additional amenities
– General economic conditions
– Owner’s break-even point
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14. Setting the rent schedule
• Example from the market survey
– If the rent is RM4,000 permonth on 2,500 sq.
ft of space,
• the quoted rate = RM1.60 psf permonth or
RM19.20 psf perannum.
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15. Setting the rent schedule
• Example from Break-even Analysis
– A break even analysis determines the min
rent needed to pay all of the building’s
expenses and costs, as well as the owner’s
expected return.
– the formula:
• B/E rent = (expenses + mortgage + return)
rentable area of building in sq.ft.
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16. Setting the rent schedule
• For example:
– Rentable space = 50,000 sf
– Expenses = RM291,258
– Owner’s equity = RM1,000,000
– Owner’s rate of return = 10% = RM100,000
– Mortgage payment = RM568,742
– Mortgage = RM4,500,000
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17. Setting the rent schedule
• Therefore:
– B/E rent = (RM291,258 + RM568,742 + RM100,000
50,000 sqft
= RM960,000
50,000 sq.ft
= RM19.20 sq.ft per annum
• so the min rent charged is RM19.20 sq.ft per annum or RM 1.60 sq.ft
permonth to cover all of the building’s expenses, costs and the
owners’ return
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18. Tenant selection
• Major tenants
• Small tenants
• Attracting tenants
– Newspaper adverisments
• Direct mail
• Publicity
• Signage
• Brochures
• Miscellaneous media
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19. Leasing consideration
• On-site vs off-site
• Property management vs leasing agents
• Small vs large leasing firms
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20. Leasing techniques
• Cold-calling
• Space planner
• Existing tenants
• High status tenants
• Comparison of buildings
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21. Maintenance
• Smart (intelligent building)
– 5 classifications of smart buildings
• Level zero – has no intelligent amenities and does not
qualify.
• Level one – provides infrastructure core
• Level two – provides level one capabilities + conference
space, photocopying and business centre
• level three – provides level two capabilities +
telecommunication services utilizing building cabling system
• Level four – provides level three capabilities + sophisticated
office automation and ICT.
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22. References
• Decarlo (1997), Property Management,
Thomson.
• Kyle, R, (2000), Property Management, 6th
Edition, Dearborn.
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