The Tenant Advisor December 2010

Inside this issue:

How to Minimize the Cost of Office Space

Houston: A Tale of Two Office Markets

The Way People Work is Changing

The Market Dynamics for Large Office Space Users Could Turn Quickly

Elements of a High Performance Office Space

The Tenant Advisor is on the web @

www.coydavidson.com

Plus: Office Relocation Checklist

Contents

If You Only Do Three Things How to Minimize the Cost of Office Space

Houston: A Tale of Two Office Markets

The Flight to Quality

The Way People Work is Changing

The Need for Collaboration is

Client Success Story: The Methodist Hospital Methodist West Houston Hospital Campus Set to Open

The Market Dynamic for Large Office Space Users Could Turn Quickly

Office Vacancies are at Cyclical Highs, but Shortages Loom

Elements of High Performance Office Space

5 Building Selection Criteria for a High Performance Team

Office Relocation Checklist

A Step-by-Step Guide

All articles contained herein are the opinion of the author and not those of either Colliers Appelt Womack Inc. or Colliers International (collectively, "Colliers"). Colliers neither endorses, sponsors nor necessary shares the opinions of the author, regardless of whether any article is posted by any employee, officer, agent, or representative of Colliers. Colliers has not authorized or verified any statement of fact made in a article, and any such statement does not constitute a statement of fact by Colliers. Colliers is not responsible for the monitoring or filtering of this newsletter, nor does Colliers claim ownership or control over any the newsletter content

Coy Davidson

Senior Vice President

Office Services Group

Direct: 713.830.2128

coy.davidson@colliers.com

www.coy.davidson.com

It's been over two years since the Credit Crisis and nearly three years since the

start of The Great Recession. Although the recession officially ended in June 2009,

most markets around the country are still waiting for some signs of life as the

economy continues to struggle with job creation, the required prescription for ailing

commercial real estate market.

As 2011 approaches, another challenging year is behind us, and while the

economy is improving albeit slowly, many companies are taking a closer look at

their real estate as a means to not only control costs but also to increase

productivity and be more competitive in this new economy.

Understanding where we are in the real estate market cycle and the specific

nuances of the current market phase will play an important role in developing an

effective real estate strategy for your workplace going forward. For example, we

are seeing recurring evidence of a bifurcated market where the trend of a “flight to

quality” is tightening up specific markets and real estate asset classes.

The recent economic climate has offered a tremendous opportunities for office

tenants to trade up to higher quality buildings and secure attractive leasing terms

at a perceived value. As a result the availability of large blocks of Class A office

space is beginning to diminish

Texas is leading the way in new job creation, and while Houston has lagged

Dallas, and Austin in that regard, the recession’s impact was not as severe on the

office market. The current state of Houston’s office market fundamentals would

suggest the window of opportunity for office tenants still very much exists but could

close sooner than many parts of the country.

I am pleased to provide you with this issue of the of my newsletter, which is

tailored for the corporate office space user and addresses these topics. You can

view all these articles and other related topics on my blog “The Tenant Advisor” at

www.coydavidson.com.

I hope you find the content informative.

Coy Davidson

Coy Davidson Senior Vice President Colliers International | Houston

Understanding the 3 L’s

Every office tenant wants the highest quality office space available that fits within their operating budget. The ability to achieve this objective requires an understanding of what drives costs and how to manage them. The probability of success will be increased by utilizing professional expertise throughout the leasing process.

There are three factors that impact the cost of your office space:

1. The Location you choose

2. The Lease Structure and Negotiations

3. The Layout of your Space

Unders tand ing these factors and the close interplay among each is critical in getting the most value out of your office space. If a tenant fails in this regard it is typically because they did not properly address one of these factors.

Three Things You Must Do

Location: Requirement number one is to get into the marketplace and conduct a credible market search to identify viable and cost effective business locations, even if you consider it likely you will renew your lease. Location drives costs for both labor and rental costs and the Landlord strives to lease space at the maximum current market conditions will bear. These values can vary significantly among market areas or a particular building owners situation. Se lec t i ng the r i gh t loca t ion requ i res a comprehensive evaluation of the marketplace which may uncover hidden opportunities. A credible market search creates competit ion for your tenancy, which is beneficial for requirement number two.

Leasing: Requirement number two is to structure a t r a n s a c t i o n t h a t c o m p l i m e n t s y o u r objectives and negotiate favorable financial terms based on current market conditions. Great deals are not just simply found, but are structured with an e f fec t i ve negot ia t ion strategy. In today’s market, Landlords are offering more f l e x i b l e t e r m s a n d aggressive concession packages to retain and attract tenants. Taking full advantage of market conditions and creating

l e v e r a g e i n l e a s e negotiations requires the p r o p e r t i m i n g a n d approach.

Layout: Requirement number three is to maintain cost control over the design and construction process. The efficiency of your office space and the cost to build it out is the third major con t r i bu to r to your occupancy costs. Today, many companies are increasingly focusing on space utilization with the objective of doing more with less. Securing the proper volume of office space via efficient design, s p a c e s t a n d a r d s a n d c o n s t r u c t i o n management can yield significant cost savings.

Who You Need on Your Team

Y o u n e e d t h r e e professionals disciplines to identify, negotiate, design and build-out the office space that best serves your financial and operational objectives. They include:

Broker/Tenant Rep

Architect/Space Planner

Construction Manager

In addition you will n e e d l e g a l counsel experienced in real estate to assist with the lease contract. Hiring a team of experienced professionals who work hand-in-hand will insure the best possible occupancy solution at the best value.

I f You Only Do Three Things

The Tenant Advisor

“The ability to minimize occupancy costs requires and understanding of what drive costs and how to manage them.”

How to Minimize the Cost of Office Space

The Flight to Quality

Houston has proven to be one of the more resilient office markets in the United States and the pain inflicted by the “Great Recession” has been much less severe than many major market around the country. That being said, Houston has not been immune to the impact of the most recent recessionary economic cycle.

At the end of the third quarter, year-over-year Class A Rental asking rental rates dropped 2.0 percent in the CBD to $35.16 psf, while while suburban Class A space decreased a minimal 0.2 percent to $27.30 per square foot. Year-to-date, Houston city-wide, has recorded negative 311,225 square feet of net absorp-tion, after recording 1.1 million square feet of nega-tive absorption in 2009.

Despite slow leasing activity overall, there is a positive attitude from

landlords of top tier assets based on completed transactions and an increased deal flow, that an improving economy, albeit slowly is pushing many tenants past the stage of indecision and into action. O n e o f t h e m o r e encouraging signs that we are seeing with our clients is the move to quality assets and ownership. The concept of “flight to quality” whereby tenants with lease expirations in a challenging economic climate are able to leverage deflating asking rents and liberal leasing incentives into more premium office space under a cost structure equivalent to what they were previously paying.

The evidence of the flight to quality is two-fold, as we are seeing move from Class B projects to Class A, as well as tenants who were previously in older Class A project move to the newer Class A projects coming on-line, or that have been completed in the last couple of years.

Bifurcated Market

This trend of flight to quality creates somewhat of a bifurcated market forcing landlords of the lower quality space to slash their asking rents significantly and offering substantial periods free rent in a scramble for tenants. With, positive net absorption yet to appear, it is simply a case of musical chairs in an at tempt to increase occupancy levels.

High Quality Landlords have a Distinct Advantage in this Economic Climate

The flight to quality also applies to the quality of the building ownership. What I term as a high-quality Landlord relates to a healthy financial position for the building owner, as well as superior property management. The benefit of having a quality landlord is important, as they have the adequate capital to weather the current economic cycle, maintain the building properly, as well as fund the tenant improvement obligations of lease transactions.

Credit is King

In Houston, the downward pressure on Class A rental rates while noticeable has not been severe. We are seeing more l ibera l concession packages and a more creative deal making perspective from most l andlords, especially for credit-worthy tenants. This is seen in longer term leases with healthy tenant finish allowances, abated parking charges and a tenant motivated to lease space that provides a high quality work environment for their employees.

“Flight to Quality” Extends to the Investment Market

The general perception that the higher quality assets are performing better extends to sales activity as well. Nationally, we are seeing investment capital flow into Class A, urban

Houston: A Tale of Two Off ice Markets

The Tenant Advisor

core office in gateway cities, as this is perceived as the next market segment to improve substantially. C i t i e s m o s t o f t e n mentioned included New York, Washington DC, Boston, San Francisco, Los Angeles, and (to a lesser extent) Dallas and Houston. The recent report that Brookfield Office Properties is under contract to purchase the 1.2 million square foot Heritage Plaza in downtown Houston, at a price of $285 per square foot is evidence of this in our own backyard.

In Houston, the CBD, Galleria, Greenway Plaza and the Energy Corridor are generally considered “core submarkets”.

I believe the Houston market will continue to soften somewhat until more robust job growth returns, but the window of opportunity to “trade up” to higher quality office assets at a perceived value will be t h e f i r s t t o close, particularly for larger tenants. How soon, is the ultimate question.

The Need for Collaboration is Changing Office Design

In today’s competitive e n v i r o n m e n t , s h a r i n g information and expertise can be critical in driving both individual and organizational s u c c e s s . F r o m forward-thinking business leaders to younger workers

who have grown up in the Web-based world, working collaboratively is now business as usual.

The agile office is one that promotes collaboration and innovat ion whi le st i l l observing employees' needs for concentrated work

time. The way people are working is changing. Smart companies are providing their employees with space that actually supports this new work style.

In the past, employees typically worked in silos independent from co-workers the majority of the time, but

now collaborate more in groups. Collaboration is more than weekly meetings in conference rooms. Today, informal meeting areas, lounges, rolling tables, benching, hoteling for offsite e m p l o y e e s , v i d e o conferencing and even

collaboration via Social Media have emerged in the workplace.

The trend is toward a more open, flexible floor plan and while many companies still maintain a private office environment for at least some of their office space, workstations are getting smaller and the dividers are getting shorter as a result of workers' need to collaborate more. Even the layout of workstations is changing to enhance space utilization and density.

The Need for Flexibility

For years tenant reps have been attempting to structure flexibility into our client's lease agreements through expansion, contraction, s u b l e a s e a n d l e a s e termination options. The I importance of these options for lease flexibility has not diminished. However today there is an increasing premium being placed on flexibility with the space itself through office design to meet constantly changing space needs.

The Way People Work is Changing

The Tenant Advisor

“The agile office is one that promotes collaboration and innovation while still observing employees' needs for concentrated work time.’

Cl ient Success Story : The Methodis t Hospi ta l

West Houston Hospital Campus Set to Open

Back in 2007, I represented The Methodist Hospital System in the acquisition of 86 acres at Barker Cypress and Interstate 10 for development of their West Houston Hospital Campus.

This month the 478,500 square foot full service hospital and adjacent 150,000 square foot medical office building opens for business. I am very excited to se this project reach completion.

several years, the space that is available today is scattered across many buildings and many floors, as opposed to new construction which is almost always found in large blocks of contiguous space. Furthermore, big tenants can't rely on large speculative developments that might provide relief in coming years due to the dearth of downtown office development underway. At the end of the third quarter just 10.7 million square feet was under construction, however, nearly 25 percent was 1 World Trade Center in downtown Manhattan, leaving very little for the balance of the 53 downtown markets tracked by Colliers.

What does this mean for R e n t s a n d O f f i c e Development?

Economics 101 taught most of us that when demand exceeds supply, prices go up. With such a scenario almost upon us, higher r e n t s a r e a l m o s t guaranteed, perhaps not imminently, but certainly within a few years. This will mark the beginning of the next development cycle, usually with a limited num-ber of build-to-suits leading the way. In the interim, however, rents for the limited number of large blocks of space available to lease can only go up. Modest economic growth is a prerequisite for the unfolding of such events but a key point is an economic boom is not

The Market Dynamics for Large Of f ice Space Users Could Turn Quick ly

By: Ross Moore, Chief E c o n o m i s t , C o l l i e r s International USA.

Despite The third quarter national office vacancy rate moved marginally lower during the July - September period, but at 16.3%, vacancies were still near cyclical highs and at levels experienced following the tech bust of 2001-2002. Most observers would agree it is a tenants' market characterized by abundant supply and depressed rents. Landlords are generally very flexible on t e r m s a n d r e m a i n extremely aggressive both in their efforts to attract new as well as retain existing tenants. One part of the market, however, that could turn quickly into a landlord's market is office buildings that house large tenants where office users often occupy 200,000 square feet or more.

Very Few Large Blocks of Office Space Currently Available and Almost No Construction Underway

If you look at current data on large blocks of available office space in select downtown markets. What can be observed is that beyond Manhattan, many cities have just a handful of options available to large tenants. While this is not completely unusual, what is different this time around is with relatively little new supply over the past

The Tenant Advisor

required. Landlords may be able to move tenants around to accommodate any large requirements in the market but this just delays the inevitable. The U.S. office market is about to embark on a unique period characterized by economic expansion with no signif icant off ice development other than downtown Manhattan. This will be an interesting time, and possibly a profitable time for landlords, but very challenging for certain tenants.

Ross Moore is the Colliers International’s Chief Economist with a focus on providing bot tom-up and top-down analysis of commercial real estate markets across the United States. In addition to his North America wide reports, Ross also authors all global research produced by Colliers.

Office Vacancies are at Cyclical Highs, But Shortages Loom

There is no question that projected occupancy costs are a primary factor in building selection for office tenants. Companies will only select buildings that fit within their projected operating budget and have the required volume of office space to meet their needs. However, today companies are paying closer attention to how office space and real estate impacts the performance and productivity of their workforce. As a result, companies are placing an increasing emphasis on additional factors beyond the economics and the availability of space when selecting an office building.

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The choice of building is increasingly important for staff considerations. The quality of your building and office space is an important factor for both recruitment and retaining quality employees. Today, in order t o i n s u r e a h i g h performance workplace it is cri t ical that bui lding selection is aligned with H u m a n R e s o u r c e strategies. The building and your office space portrays the image that reflects your organization both to your employees and your customers. When a customer enters your premises, your office space is the first impression they have of the culture of your organization.

Access

Whether you choose a CBD or Suburban location,

access is a key issue in making the proper building selection. The reality is, at the end of the day people are time poor and the ability for your employees to get to your building as quickly and as efficiently as possible is an important p r o d u c t i v i t y f a c t o r . Choosing a location is primarily a workforce and customer demographic dr iven decision, but selecting a particular building with good access to freeways and public transportation, as well as a convenient parking garage is important for a productive workforce.

Retail Amenities

Today office tenants are placing a higher priority on being close to retail amenities whether they are actually located in the building, complex or very nearby. This includes both restaurants and service retail such as banking and postal services. The ability to access these amenities without getting in your car is considered a significant boost to productivity.

Building Systems and Design

The more comfortable people are in their workspace, the more productive they will be. The number one complaint most tenants have regarding their office space is related to temperature issues. Selecting a new or renovated building with the proper HVAC systems, and the ability to maintain a comfortable workspace makes for a more

productive staff. Also important is natural light. Selecting a building that is well designed and allows for a space plan that maximizes natural light has s h o w n t o i m p r o v e productivity according to numerous studies. In fact, the California Energy Commission issued a report on the relationship between windows and office worker performance that concludes that basic design choices such as more natural light, more windows and bet ter ventilation can dramatically effect worker alertness, p r o d u c t i v i t y a n d performance.

Going Green

The corporate space user is increasing their focus on sustainability as a means to reduce occupancy and operational costs as well as their commitment to be good stewards of the environment. There is a growing desire among corporate leaders to achieve environmental sustainabi l i ty through LEEDS certified design principles, effective energy management and building e f f i c i e n c y . W e a r e increasingly hear our clients tell us they only want to consider buildings that are LEED certified as sustainability moves from niche to normal. Today, a green design is a key factor in recruiting talented employees particularly Millenials, and GenX-ers

E lements of a High Per formance Off ice Space

The Tenant Advisor

5 Building Selection Criteria for a High Performance Team

Today, in order to insure a high performance workplace it is critical that building selection is aligned with Human Resource strategies

The Tenant Advisor

PRELIMINARY

Notify present landlord of termination date

Advise staff of date and location of move

Solicit RFP's, interview and engage moving company

Create a master change-of-address list

PRE-MOVE: GENERAL

Reserve elevators and loading docks for moving day

Bid and award moving contract

Bid and award telephone and computer cabling

Inventory existing furniture

Code furniture and equipment on a color-coded floor plan

Audit keys

Order any new office furniture and equipment

Order new stationery

File change-of-address forms with post office and forward mail

Check your insurance coverage for the move

Obtain the Certificate of Occupancy and any other required permits or licenses

Advise suppliers (telephone, bottled water, coffee service) of new address

Mail moving notices

Banks and financial institutions

Photocopiers

Clients and customers

Professional organizations

Credit accounts and credit cards

Insurance companies

Accounts receivable and payable

Newspaper and magazine subscriptions

Telephone company and internet service provider

Prospects and special services

Hold a meeting at new premises three weeks prior to move. Bring in all parties involved (design/ construction / mover / cabling company / information technology specialist) to ensure all details are covered and all responsibilities clear

Schedule public relations effort, including plans for news releases and an “office-warming” party

Change locks / access codes on new premises as close to moving day as possible to secure access

Decide on security procedures for the move

Arrange for listing on lobby directory of new building

Arrange for post-move cleaning

OFFICE RELOCATION CHECKLIST

The Tenant Advisor

PRE-MOVE: INTERNAL

Organize a “staff moving committee” if appropriate and delegate responsibilities

Schedule and prepare agenda for your employee move orientation meeting

Finalize new seating plan and identify each location

Prepare labels for moving furniture and boxes to new locations

Assign move supervisors in each department

Develop a master relocation project schedule

Schedule and implement a clean-up program (purge files, dispose of trash)

Schedule staff for unpacking, including stocking supply cabinets, storerooms, file rooms, and removing tags from all furniture and equipment to ensure your company will be operational as rapidly as possible after move

Arrange for off-site storage of old files

Pack contents of all filing cabinets and desks, ensuring everything is properly labeled

Arrange for staff to tour new premises a few weeks prior to move

Schedule post-move training for security, fire, and life safety procedures at the new facility

Distribute access cards and keys for new premises

MOVING DAY

Arrange with the building manager to have the air conditioning on during the move

Remove computer equipment (server) and phone system prior to arrival of movers and commence reinstallation at new site

Draft an emergency contact list for vendors such as elevator maintenance, building management, utilities, telecommu-nications and moving company

POST MOVE

Install and test telephone system

Distribute new phone list and map showing the locations of departments

Install and test all computers

Do a detailed walk-through of the premises and report any damage to moving company

Transfer your insurance to the new location. Obtain Certificates of Insurance from your insurance company

Confirm termination of old leases

Collect parking passes, security cards and keys for the old facility. Confirm the return of any deposits held by the land-lord for these items

Audit final invoices against contracts

Complete and file all warranty information for all new furniture and equipment

Update fixed asset accounting system for any new furniture and equipment purchased

Confirm the change-of-address corrections made

Schedule press release and client announcement

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