Real Estate for February 2003


Learn more:
What to Ask Before Signing on the Dotted Line

Buyer's Market
Now may be your best time to lease office space,
but there's more to consider than the per-foot cost

By Lawrence Bivens

Developers of commercial property and office leasing companies continue singing the blues, as the soft economy over the past two years has pushed office vacancy rates in the state’s metro regions to historic highs. In the Triangle, for example, the vacancy rate stood at 16.6 percent in the third quarter of last year compared to 6.9 percent in 2000, according to Karnes Research, which tracks commercial real estate trends in North Carolina. Vacancy rates in the Triad (18.0 percent) and Charlotte (14.5 percent) also are at never-before-seen levels.

“Vacancy rates are up in all our markets,” says Andrew Jenkins, managing partner at Karnes Research. But that hasn’t translated into dramatically lower rents. The average square foot of office space in Charlotte ran $20.07 last year, compared to $20.41 two years before. “A lot of that has to do with new product becoming available,” Jenkins says, which can bump up the averages.

Still, given the yawning inventories of empty office space, property owners and leasing companies are working harder than ever to find tenants. “There are more opportunities going into 2003 than there were in either 2001 or 2002,” according to Ned Austin, a leasing and marketing representative at Crescent Resources, the Charlotte-based commercial real estate subsidiary of Duke Energy. Many of those opportunities can be found in space available for sub-lease. Rents often are lower in sub-lease office space, plus “it also provides tenants with greater flexibility and more options,” Austin says.

Nowadays, landlords also are more receptive to the idea of leases running for less than the usual five-year period, Karnes’ Jenkins says. They may be willing to consider such perks as “company buy-backs,” which can take the form of an agreement by the property owner to purchase a certain amount of services from the tenant. A landlord leasing space to an advertising firm might agree to purchase a certain amount of the company’s advertising services.


Supple Exceeds Demand

With some developers holding so much empty space, deals can be had, even at locations that offer maximum flexibility. While some businesses prefer to build and own their facilities, leasing existing space has become the No. 1 option — and in many cases the most affordable option in the current economy.

“Certainly, some of the terms have changed,” says Jimmy Barnes, president of Carolantic Realty, a property management and brokerage company based in Raleigh. “Landlords now are having to offer free rent, for example, to lure tenants to their buildings. It’s definitely a time where supply exceeds demand.”

Would-be renters have several avenues they can explore in attempting to make their best deal. In the end, however, it all comes back to dollars and cents. “The way lease deals are structured has changed a lot, but the bottom line remains money,” Barnes says. “One month free rent for each year on the lease term is not unusual. Tenants also in some cases may be able to negotiate rent face rates down a dollar or two per square foot, if they’re willing to consider different locations.”

For example, a 10,000-square-foot Class A office space might normally rent for $20 per square foot. If you’re able to negotiate that space for one dollar less, you’ve reaped an annual savings of $10,000. “Put some free rent on top of that,” says Barnes, “and you’ve got a significant savings.”

There are other ways to capitalize on a buyer’s market. Barnes says landlords are willing to increase what’s called a “tenant improvement allowance” — the dollar amount the owner is willing to spend to set up the office’s interior space. “This allowance is within the quoted rental rate,” Barnes says. “It’s where the owner says that he’ll spend a certain amount of money to repaint, put down new carpet, or build out the space. (The owner) has the flexibility to provide all types of things — it could get you a nicer carpet than normal, for example.”

Still another method to realize savings is to change locations without raising your rent. “Some tenants are looking to upgrade their space or gain a more ideal layout,” says Barnes, “but at a price that’s keeping with what they’re used to paying. With so much rental space available, owners are willing to work with you.”

All that said, Barnes cautions against quick decisions. “Sure, there are bargains out there,” he says. “But tenants would be smart to look past the financial incentives that they’ve negotiated and make sure that they’re still getting all of the other services that they need. You don’t want to get so wrapped up in saving a buck that you look past what the building doesn’t offer.”

You particularly might want to think about who your landlord will be. “Because of our size, we can accommodate rapid growth and expansion,” explains Ed Fritsch, chief operating officer at Highwoods Properties Inc., the Triangle’s largest property owner. It is a luxury that many smaller property owners don’t have. The buildings at Highwoods’ office parks, for example, are linked together by advanced networking systems. If a tenant needs additional square footage that is only available in a neighboring building, the business can be guaranteed secure and reliable data connectivity between its offices.


When Mixed-Use Makes Sense

Class A office space isn’t the only sector of the real estate market where bargains can be found. Another option provided by today’s economy is for companies to consider space at mixed-use corporate parks.

For Jordy Whichard, the need for flexible space that offered room to grow made Greenville’s Indigreen’s Corporate Park the ideal home. During the late 1990s, Whichard, publisher of Greenville’s The Daily Reflector, was navigating his family’s century-old newspaper through its acquisition by Atlanta-based Cox Enterprises and the growing pains associated with bringing other Eastern North Carolina daily and non-daily newspapers into the fold. He soon recognized it was time to move the paper’s operations out of its longtime offices in downtown Greenville to larger, more expandable digs. “As we were looking at all our operations, it became clear we’d need excess capacity for the company we were putting together,” Whichard says.

Though Whichard considered building on undeveloped land, he found a better solution a few miles away at Indigreen, a leafy mixed-use park then home to only four tenants. There, the paper purchased a 20-acre parcel and began erecting a 66,000-square-foot production center and an adjacent 27,000-square-foot building that would house the paper’s administrative, circulation, advertising and editorial staff. “Driving our decision was primarily the need for a significant amount of space for both manufacturing and offices,” says Whichard, whose company employs 180 at Indigreen.

While the notion of a ready-made environment for companies was first attempted three centuries ago in Europe, it was not until after World War II that American communities began in earnest to develop industrial space that could help them recruit new businesses and grow jobs. Given the nature of today’s business, with its cat-quick pace and unforgiving emphasis on productivity, accessibility, flexibility, efficiency and security, companies of all stripes are opting for mixed-use commerce parks such as Indigreen.

“Mixed-use parks are a trend you see in both rural and urban areas,” according to Don Kirkman, president of the Piedmont Triad Partnership and a former president of the North Carolina Economic Developers Association. As many U.S. firms move their manufacturing overseas, developers are scurrying to convert the facilities that once housed them into space for other uses. “There’s a move toward parks that are capable of accommodating a variety of operations,” Kirkman says.

Indigreen offered Whichard’s media company flexibility in terms of both the scope and scale of its operations. Not only is the park an appealing base for the firm’s administrative and printing facilities, it is also capable of accommodating additional waves of growth. With a 20-acre parcel of land — and more available if needed — there is plenty of room to one day extend Cox’s North Carolina campus.


Accessing Opportunity

Traditionally, the three most important considerations when choosing real estate are location, location, location. But nowadays that ageless maxim has been changed. Today’s business executive mulling expansion or relocation questions should focus on access, access, access. But access to what?

“Location includes a number of points,” says Fritsch. Some firms operating nationally and internationally may need to be close to a major airport. For others, a location near a major interstate highway is more important. They should also consider space that is convenient to executives and employees, Fritsch says. “They’ll want to make sure there are ancillary services nearby for staff such as food and shopping,” he notes.

Increasingly, commerce parks are being designed with proximity to knowledge workers in mind. That is certainly the case at complexes such as Charlotte’s University Research Park and Centennial Campus in Raleigh, both of which entice new tenants with a steady supply of student labor and faculty expertise from adjacent universities. The need by Knowledge Age firms to tap rich veins of human resources was behind the development of the Carolina Commerce and Technology Park near Lumberton. Known as COMtech, the massive site is within minutes of the University of North Carolina-Pembroke, which will soon be basing its graduate business programs there.

But COMtech is also close to I-95 and a soon-to-be-constructed I-74 corridor, in addition to abundant supplies of traditional manufacturing workers. “For a rural area, we’re very unique,” says Tony Norman, CEO of the park. Though brand new, COMtech already has helped ink a partnership arrangement between UNCP and Quality Homes, a thermal-paneling manufacturer that recently placed its operations at COMtech. The firm will collaborate with the university in the research and development of affordable, energy-efficient wood products. “They came to us because they wanted to be near a university,” Norman says.

Companies considering space at Raleigh’s Centennial Campus must submit plans for how they intend to partner with North Carolina State University, which controls the complex. “That could simply mean how they would work with students participating in internship and co-op programs,” explains Leah Burton, partnership developer at Centennial Campus. Plans can also include engaging faculty talent in a consulting capacity and may also reach into the realm of a sponsored research initiative. Firms at the campus receive access to a range of other university resources — library borrowing privileges, discount tickets to athletic events and use of recreational amenities, for example. In return the university gains a new pipeline for research funding, along with a vehicle for students to gain real-world experience in their disciplines without venturing too far from their classrooms and labs. “Faculty are also able to explore working with companies without having to take a sabbatical,” Burton says.


Ready-Made Sites

Typically, developers of office and industrial parks already have identified accessibility issues long before the first tenant arrives. Zoning and land-use issues that can tie up building projects for months also have been resolved. “Much of the benefit of a park is that you don’t have to go through zoning issues — the developer has already taken care of those,” explains Keith Walsh, a commercial real estate professional with The Walsh Group Inc. in Swansboro. Water, sewer, electricity, gas and telecommunications infrastructure also have usually been taken care of at parks. “That’s a big part of the development process,” Walsh says.

With environmental regulations playing a more prominent role in development, many parks undergo extensive wetlands and other environmental surveys well prior to any prospect ever considering them. Since 2001, properties can undergo an exhaustive certification process through the N.C. Department of Commerce, which offers its stamp of readiness once a checklist of 30 criteria has been met. The earliest incarnation of the program, which was initiated by the AdvantageWest regional partnership, targeted only industrial sites. Its scope was broadened to include other types of properties when it was adopted by the state. “Be it an industrial or commercial project, certification provides the client with maximum certainty that a site is ready to build on,” explains Secretary of Commerce Jim Fain.

At 612 acres, COMtech has the distinction of being the largest of the state’s certified sites. And in the case of Indigreen, certification was actually granted in 1998 under an earlier program operated by the Global TransPark Commission (now North Carolina’s Eastern Region). Being assured of Indigreen’s “shovel-readiness” was a major factor in The Daily Reflector’s ability to erect its two new buildings in record time. “If we’d started out on a greenfield space, it would likely have added as much as a year to the construction process given the permitting and zoning requirements,” Whichard says.


Security Enters the Forefront

With painful images of the World Trade Center atrocities still fresh in most minds, tenants and landlords are paying unprecedented attention to security — in all of its manifestations. “It means more than just having a security guard,” Fritsch says. “It’s all about the ‘survivability’ of your operations.”

Here again, size can matter. Many of today’s Class A parks have redundant electric and telecommunications networks. Charlotte’s University Research Park is served by two separate power sub-stations, one on either side. To the extent power is disrupted at one station, the other can easily provide service to the entire park. The same is true for Internet service. Tenants at Centennial Campus may access both academic and commercial data networks, for example. “The emergence of the 24/7 global operation has made this a concern,” says Ned Austin of Crescent Resources. 

Austin and others knowledgeable about real estate say that multi-building, multi-tenant sites offer better security than a standalone building in an isolated location. “There’s a heightened level of security in an office park,” says Austin, whose company is now providing security guards to escort workers to their cars after hours. He recommends companies looking to lease space inquire about security procedures and programs as a matter of course. “Most business people don’t want to be in the security business,” Austin says. “They’d prefer their landlord take care of that.”


Perception is Reality

Assuming all other components are in place, company leaders should ask themselves how a prospective location fits into the image they are trying to project. All office parks and most mixed-use complexes pay close attention to cosmetic aspects of the property such as landscaping, buffering, streetscapes and building facades. They are sensitive to the appearance that some operations — heavy processing industries, for example — would give their parks as a whole, and even a tenant’s placement of signage on the building is a matter that has to be negotiated in order to ensure that its color, size and design are consistent with the park’s look. 

“These measures are not designed to discourage business,” explains Van Groce, an owner of Groce Companies. His firm built and manages SouthPark Business and Industrial Park, an attractive 400-acre mixed-use development in Sanford. The new complex boasts an excellent location and was recently granted certification by the state. But Groce has paid close attention to making the park as aesthetically appealing as possible. “Some of these businesses will be bringing people in from other parts of the county and the world,” he continues. “They don’t want to be perceived as a backwater.”

Others caution that a park location can place limits on a tenant’s capacity to establish its own distinct image. “A company might find it difficult to differentiate its product,” says Keith Walsh, the Swansboro real estate executive.

That was a consideration for Whichard, whose newspaper has carefully cultivated its image for more than a century. He preferred The Daily Reflector makes its new home on a site with architecture, design and landscaping that his employees and contractors would find comfortable, and that the visitors, advertisers and subscribers who occasionally drop by could also appreciate. Each of those qualities exists at Indigreen and is protected by covenants. “Uniformly, we’ve been very pleased with everyone’s reaction to our move here,” Whichard says.



What to Ask Before Signing on the Dotted Line

Are you eyeing new office space? Here are a few questions worth exploring with a potential landlord before making a final decision:

What is the age and condition of the building’s roof? To the extent major work is ever needed, it could constitute a noisy disruption to your business.

  How reliable is the building’s HVAC system? Having the air conditioning fail in mid-August could shutter your operations for days while repairs are made.

  Is security provided on a 24/7 basis? Is there a single point of access to screen all visitors? A written outline of security measures and procedures should be available on demand.

  Will there be enough parking to accommodate all your employees and any visitors? Observe the distance from the farthest parking space to the building. Does the lot have ample lighting? It’s also worth checking to make sure there are no additional fees involving use of the parking lot.

  Will staff have access to the building after hours and on weekends? Examine policies surrounding the number of keys provided and procedures for tracking after-hours entry.

  Is access from the main highway or road adequate to handle the flow of automobile traffic into and out of the complex? Observe the patterns surrounding morning, noon and evening rush hours.

  Are there any tenants in the building that are direct or indirect competitors? Most business experts caution against being down the hall from the competition. 

  Are there covenants in place governing the use of the property? Prospective tenants should ensure that the nature of the park or building will remain the same should its ownership change hands.

  Have all promises made orally been written into the lease? A “Special Provisions” section should detail expansion rights and renewal terms. Have your attorney review the entire document before signing.  -- Lawrence Bivins

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