Office Market Myths

The dictionary defines a myth as a belief or set of beliefs, often unproved or false, that have accrued around a person, phenomenon, or institution. That definition accurately describes oft heard claims from many real estate brokers to the effect that their services will result in the best possible “deals” for the users of leased office space. However, upon close examination, some of these claims will be seen to be self-serving and contrary to the space users' interests, as discussed below.

Extensive knowledge of recent market “deals” will ensure that the user will get the best possible lease terms.

“Deals” are typically described in terms of a cost per square foot of space. As discussed in the article on Office Leasing Jargon, since no standard method exists for the calculation of this measure, it cannot be relied upon as an accurate description of the economics of any given lease agreement. However, in their attempts to impress prospective clients, this fact does not deter many brokers from speaking of the economics of various deals about which they claim to be knowledgeable. Furthermore, given that this measure can be calculated in a number of different ways, it can be used to further the broker's interest at the expense of the space user. If the broker can persuade the user that a particular cost per square foot represents a “good deal,” or maybe the “best deal available,” the broker can very possibly conclude a representation assignment without going through the extensive amount of work required to truly ascertain the best available deal, as described later in this discussion.

In thinking about this subject, we are reminded of an incident that took place some time ago when we met a broker who had just left a large real estate firm. That firm had maintained records about the many deals with which its brokers had been involved, and the broker we met had a copy of the latest report summarizing them. He offered us a copy so that we could become as “up to date” on the market situation as was he, and we accepted his offer. When we inquired of the broker as to how the deal figures were calculated, he said he did not know. Consequently the report was useless and merely represented additional evidence of the myth regarding deal knowledge.

Additionally, if one really thinks about the nature of the “deal information” that many brokers so freely talk about, one has to wonder about its accuracy and value. Forgetting for the moment about the problems inherent to the description of a deal, consider the position of a broker who has, in fact, negotiated particularly attractive terms for his client's lease. If the landlord with whom the deal was negotiated ever learned that the broker was broadcasting the details, that landlord would surely never again offer that broker any “special” terms, for the landlord would know that as soon as he did so, everyone on the street would know about it. One can readily understand that brokers who have earned a reputation for violating the confidences of the people with whom they negotiate never get the really special deals that do, in fact, get done. The terms and conditions of those deals properly remain the business of just the parties involved. Similarly, if a broker who represents a landlord divulges information to other brokers about the deals that landlord has done or is willing to do, that broker is violating his or her fiduciary responsibility. And that is true even if those other brokers work for the same real estate firm as does the divulging broker. Most tenants would be wary of placing much confidence in the brokers from a  firm that engages in such practices.   

When it comes to negotiating a lease, it should be obvious that a landlord would not agree to certain terms just because the tenant's broker claims that some other tenant received similar terms. It is only the pressure brought about by other landlords competing for the tenant's occupancy that causes any one landlord to put forth the best terms he is willing to offer in any particular situation. Thus it is the process of creating a competitive environment, as described in the article on Choosing A Broker, that results in the best possible terms for a “deal.” A broker's alleged knowledge of other deals in the marketplace is useful only for impressing potential clients.
Specialization in a given geographic area provides more comprehensive knowledge of available space and market conditions.

Before the advent of computerized databases containing extensive information about all the buildings within a given area, brokers were forced to specialize within a fairly small geographic area. It was only by so doing that they could even hope to keep up to date on which buildings had available space and at what asking price. However, that is no longer the case. Very comprehensive databases are available to any broker wishing to access them, and some are even available to the general public. As a result, the commercial brokerage business has become “information neutral.” No single broker, or group of brokers, has superior knowledge about available space. In fact, most anyone wanting to determine which buildings might satisfy a certain set of requirements can do so. The real difference among brokers comes about as a result not of market knowledge, but of how that knowledge is put to use.

Comparing building proposals based upon a nominal square footage requirement and/or a nominal build-out allowance will allow a realistic determination of occupancy costs.

The conventional method used by brokers to compare occupancy costs associated with different buildings is usually based upon the following elements.

An assumed number of rentable square feet that the user would be leasing;
A tenant improvement (build-out) allowance expressed as some number of dollars per rentable square foot;
A rental rate expressed as a dollar per rentable square foot figure; and, possibly,
Some amount of concessions expressed in terms of months of free rent, moving allowances, assumption of existing lease obligation, etc.

This conventional method of developing and describing alternatives serves landlords and brokers very well, for it represents the easiest and quickest path to making a deal. It does not, however, serve the user's best interest. Proposals based upon an assumed number of square feet and an estimated construction cost per square foot do not accurately reflect what total costs will be. Not only can these proposals be misleading about which building provides the lowest cost, they can result in a very unpleasant surprise when the user faces a large capital expenditure at the front end of the lease to cover construction costs exceeding the allowance.

This condition exists for several reasons. Each building has its own floor plate, column spacing, and floor loss factor, and each building's ownership typically exhibits a varying willingness to divide the available space to fit the user's needs. Thus significant differences exist for the actual rentable square footage the user would have to occupy in each building. Consequently the assumption that the same number of rentable square feet will be leased in each building under consideration is invalid. Additionally, a dollar of build-out allowance in one building does not buy the same amount of construction as a dollar of build-out allowance in another, even when the functional specifications are the same. This results from variations in what each building defines as “base building” versus “tenant improvements,” along with differences in what each building charges for the same construction items (i.e., walls, doors, electrical outlets, etc.) These variations result in large differences in actual construction costs for identical functional build-outs. Surprising as it may seem, a lower tenant improvement allowance in one building may buy more improvements than a higher allowance in another.

As evidence of the existence of this condition we present, in the table below, a summary of the key figures obtained from five different buildings during our work with a client on an office relocation project. The space program created by the client's architect indicated a requirement of 14,950 usable square feet to accommodate the new office layout. Space plans were drawn by the same architect for each of the five buildings, and each building was asked to prepare a turnkey proposal based upon the space plan and a standard set of construction specifications. Floor coverings, wall coverings, and custom millwork were identical in each proposal, with the remainder of the build-out conforming to the standards set by each building.

Building A
Building B
Building C
Building D
Building E
Usable area (sq. ft.)
Floor loss factor (%)
Rentable area (sq. ft.)
Total construction cost
Unit construction cost per rentable sq. ft.
Average annual occupancy cost per rentable sq. ft.
Total lease term costs (not discounted to present value)
Total lease term costs (discounted to present value)

Interestingly, the new office layout was accommodated satisfactorily by each of the five buildings. However, considerable variation exists in the size of the space, as measured by the number of rentable square feet, as well as in the unit construction cost. These variations result in significant differences in the total lease term costs associated with each building. A similar degree of variation is always present in any situation wherein several buildings are being considered for a given user's office requirement. Thus it should be apparent that an expectation of realistic results based upon a comparison of occupancy costs using nominal values for rentable area and/or construction costs is an expectation based upon a myth.

Because of these variations, there exists no quick and easy method of determining occupancy costs for different buildings being evaluated for a particular user's requirement. However, we have developed an approach based upon securing turnkey proposals which has proven to be extremely effective. While this approach requires a substantial amount of our time and effort, it minimizes the exposure to surprises, holds down the construction costs borne by our clients, and provides for accurate and insightful comparisons of the total occupancy costs associated with the buildings under consideration. While too lengthy to include in this web site, we would be pleased to discuss it. Just contact us.