As 2014 Comes to a Close, Start Planning for 2016

By Manuel Fishman, Real Estate Attorney, Buchalter Nemer: That is not a typo. Your operating and capital budgets for 2015 are in place and, absent unanticipated tenant defaults, the pro forma for 2015 is set and the goal is to execute—and get ready for the following year.

By Manuel Fishman, Real Estate Attorney, Buchalter NemerFishman

That is not a typo.  Your operating and capital budgets for 2015 are in place and, absent unanticipated tenant defaults, the pro forma for 2015 is set and the goal is to execute.  The economists will tell you that, subject to the risk of foreign events causing global unrest (see Ukraine, Hong Kong, Ebola, a steep recession in Europe), the United States economy will continue to grow and interest rates will remain low, but inch up.  Commercial real estate continues to provide better than average returns when compared with other investments, and several markets have rebounded to pre-recession levels (let’s not talk about San Francisco and Seattle).

What will be the value differentiator for your building, and how do you plan for that?  Look at your operating expenses for 2014 and identify the two largest “controllable” categories – they are likely third-party vendor (elevator, HVAC, fire life safety, security and other building systems) and water/energy costs.  These costs will only continue to rise over the near term as the cost of energy gets more expensive, and the need to hire professionals to manage complex building systems increases.

My recommendation is to start now and plan for 2016.  How?  What I talk to clients about is the radical change in office use during the past 10 years.  Average square footage used by employees has dropped by over 40 percent during this period, and many offices have converted to an “open space” format and eliminated file rooms, server rooms, record centers and other “hoggers” of space (even eliminating corner offices), while at the same time reducing consumption of utilities.  How in most cases by incorporating wireless technology into the leased premises, while at the same time backhauling data off site.  Building owners are accelerating this process by incorporating IP (“internet protocol”) based building management systems that remotely monitor and meter/bill electricity and water consumption directly to the tenant – on a net basis.   Municipalities are also accelerating this process by adopting building code changes that mandate energy efficient lighting, outlets, plug loads and building materials.

What does this mean for you as the owner of commercial property?  According to a recent study, approximately 72 percent of floor stock, or approximately 46 billion square feet, is located in buildings constructed more than 25 years ago.  Just to put that in perspective, the first IPhone was introduced in 2007; the first IPad was introduced in 2010.  My point is that most buildings were designed for office use in an era before the Internet and before the explosion of mobile devices and mobile office applications and high definition video conferencing.

What this means is that many portfolio/asset managers and company owners need to embrace the benefits of technology as both a proactive effort to control variable costs, and as a value differentiator for your buildings that will support occupancies and amenities for a new class of tenants, who operate differently than the old-line law firms and accounting firms.  Having gone through this process with clients, I have learned that there are many good vendors, engineers, architects and consultants that can assist in developing a strategy.  As a lawyer, I am usually brought in at the stage when a letter of intent is to be signed with a consultant or vendor that is proposing the installation of an “IP backbone” or some other infrastructure.  I also get involved in making recommendations to lease forms to support new technology and energy controls.  I try and stay current on developments with the Federal Communications Commission and attend several wireless telecommunications conferences.  I generally find myself preaching to vendors and carriers that real estate owners derive their revenue from having happy tenants that pay rent, and that carriers need to be flexible with their demands and installations, so as to not limit the tenancies of a building by contract provisions for exclusivity or control over building systems, something to which utility providers seem accustomed.

My experience is that the development of a letter of intent and the negotiation of an in-building IP based systems agreement for a commercial building that supports fiber based land line communications and wireless communications across various platforms and is enabled for multiple carriers takes more than 6 months.  Most importantly, building owners need to invest in the system or run the risk of losing “control” of a system which is being installed for “free” by a carrier or integrator.

So start planning for 2016, and think about leveraging technology to differentiate the value of your industrial or office property.