Q&A: Has Office Real Estate Become a Concierge Business?
- Feb 07, 2020
Conversations about the office sector tend to be centered around buzzwords such as smart tech, coworking and employee experience. In a competitive business environment, the best way to retain tenants is to ensure that they can focus on their business without having to worry about their workspace, according to Chris Bilotto, vice president of asset management at alternative asset management company The RMR Group.
In the interview below, Bilotto, who is also vice president of Office Properties Income Trust, a REIT managed by RMR, reveals what it takes to be successful in the office sector beyond a good investment strategy. He also sheds light on how to create an immersive and attractive environment for tenants.
What are the strengths and weaknesses of the office sector today?
Bilotto: Generally, landlords have experienced consistent rental growth for central business districts and suburban markets over the last several years. Overall absorption has been steady, tenant demand continues to keep pace with new development. The market continues to see investment in live-work-play concepts across the country along with large build-to-suit developments in suburban markets designed for companies to move headquarters. These projects offer first class amenities and services, allowing companies to attract and retain talent.
The challenges we see include the following: Major metropolitan areas are seeing more competition for talent due to low unemployment. The cost of living has increased dramatically in several markets. Both the advent of coworking and the expansion of Big Tech has fueled office absorption significantly over the past few years. The prospect of continued growth at the same pace in both areas is uncertain. Office landlords will be looking to other sectors to evolve and fill the gap to drive growth.
Tell us about the trends that will define the office business in 2020.
Bilotto: We believe that companies—and by extension, landlords—are going to expand their focus on the overall employee experience. In a tight labor market, recruiting top talent will require a robust experience, so employers may favor properties offering shared meeting space, fitness and shower facilities, lounge areas, enhanced data connectivity and service amenities such as easy onsite food delivery, on-demand dry cleaning and pop-up concepts.
Another major trend is the growing consciousness around the environmental impact of real estate. Increasingly, tenants are making it a point to search for highly efficient buildings. The introduction of technology to monitor utilization along with certifications from LEED, WELL and WiredScore are examples of where we are seeing a consistent trend.
What are the emerging markets investors should keep an eye on?
Bilotto: We believe Sun Belt markets in the Southeast—Charlotte, Nashville and Southern Florida—and the Southwest—Dallas, San Antonio, Austin and Phoenix—are emerging geographies. Most of these markets have consistent features including major universities that can provide a pipeline of talent, a lower cost of living that allows younger employees to settle down and start families, and pro-business incentives to attract new companies and start-ups.
How have tenants’ needs changed during the past year? What are the amenities an office building shouldn’t lack in 2020?
Bilotto: Ultimately, tenant companies value work environments that encourage productivity and inspire employees to produce results. Our goal at RMR is to create an environment in our buildings where tenants can focus on their business and never have to worry about their real estate.
Certain workplace amenities are increasingly becoming staples for tenants in today’s office market including robust data and connectivity infrastructure to support a tech-driven workforce, training rooms and shared conference facilities to foster learning and collaboration, and activated fitness centers with classes and on-demand food offerings that offer employees flexibility and more time to focus on work.
While it may seem that office real estate has become a concierge business, landlords in select markets can support these costs with increased rental rates and more efficient operations. Proper market diligence is needed to inform the level of amenities or service offerings to avoid “over-improving” a building.
How have recent technological advances impacted The RMR Group’s management strategies?
Bilotto: Technology has given us more real-time information about our business allowing us to have more insightful discussions around strategy. With more than 30 offices nationally, we can aggregate local market and operational building data, which in turn informs our leasing and property management operations. Effective data analytics can significantly influence our day-to-day operations, empowering us to more acutely identify areas to enhance the tenant experience, recognize market risks and opportunities for value enhancement, and understand additional ways to improve margins.
The RMR Group manages several medical office buildings across the country. What makes this sector successful and how do you see this going forward?
Bilotto: With over 10,000 people turning 65 every day in the U.S., the aging population requires more frequent interaction with health-care providers, and therefore there is and will continue to be an increased need for medical office properties to house those physician practices.
We’ve seen that the delivery of health-care services is being pushed out of hospital campuses to be closer to the consumer into “off-campus” medical office buildings, driving medical office building vacancy rates down. We also have seen the delivery of health care moving to settings located closer to other amenities, in some cases taking advantage of underutilized retail properties. These are trends that we believe will continue.
In this prolonged growth cycle, long-term lease income is preferred as opposed to value-add or opportunistic investment strategies. What are your expectations regarding leasing activity in the year ahead?
Bilotto: Office Properties Income Trust, managed by The RMR Group, seeks to acquire properties in markets that have strong economic fundamentals to support rent growth. We focus on properties primarily leased to single tenants such as built-to-suit buildings, corporate headquarters and properties where tenants have invested meaningful capital, as well as properties leased to government tenants—single or multi-tenant—with a focus on agencies that have high-security needs or a mission strategic to the properties’ location.
We typically look for properties with seven or more years of remaining lease terms. Ultimately, we believe having a longer weighted average lease term with high-quality credit tenants can help to weather risks during market correction periods. We anticipate leasing will be modest in 2020. Even though there is pressure on the coworking model and an abundance of construction deliverables, we anticipate the market will grow to level set the absorption.