Friday, May 10th, 2019 May10th2019

Sell for More News: Office landlords are adding more amenity space than ever before

Published on May 10th, 2019

Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.

 

In the past, 3% of office buildings were committed to amenity spaces.  Today, owners should expect to allocate 10%.  And those who are trying to attract highly sought-after tenants should look to reserve 12% or more.

It’s not an office, it’s an experience…it’s also fundamentally changing the economics for landlords.

New office buildings have everything you could want: game rooms with bowling and virtual golf, gyms full of Peloton bikes and Precor ellipticals, regular yoga and arts classes, and even an organic ice cream bar and cotton candy machine.

These wonderful new perks are the result of an ongoing amenities arms race between landlords to attract and retain tenants. Landlords can no longer just provide a place to work.  They must deliver inspiration. They can no longer just provide high-speed internet.  The entire experience must be technology driven.

Despite the obvious drawbacks of transforming revenue-generating spaces into amenities, the competitive dynamics of the arms race basically force landlords to conform. In fact, 92% of building owners are convinced that offering enhanced amenities will increase leasing velocity and rental rates within in their buildings.

These owners are making big bets that companies will shell out for fancy amenities.  And, so far, they’re right.  A company looking to attract talent will choose to pay a premium for a better employee experience.

But what’s going to happen when the inevitable downturn hits?

When margins get squeezed, companies are going to have to start cutting costs. Maybe paying a premium to have a dedicated chef cater lunch will no longer make sense. Maybe that indoor climbing wall or professional photo lab won’t attract new tenants like it has over the past five years.

This presents a serious problem for landlords that have dedicated such a large percentage of their rentable space to amenities. If tenants suddenly become unwilling to pay premiums for buildings with the latest amenities, owners are going to wish they still had those spaces available to rent.

It’s not only the opportunity cost of dedicating otherwise rentable space to amenities.  There are direct costs too.  Someone must run the yoga classes, there’s a subscription cost for the tenant engagement portals, and the artisanal coffee costs twice as much as the alternative.

There’s also the law of diminishing returns to contend with. As the arms race heats up and more properties add similar amenities, the premium that these amenities can command diminishes.  When this happens, owners have no choice but to add better (and more expensive) perks.

As much as financial considerations are going to force tenants to opt out of amenitized spaces, the baseline expectations for what an office space provides are going to be higher forever, likely at the expense of the owner.

Knowing this, commercial real estate companies have no choice but to participate in the amenities arms race.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com