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Beauty Is as Beauty Does - But When it Comes to Buildings, Does Beauty Outperform?

There Are Class A Office Properties, then There Are 'A' Office Properties with Class
August 1, 2012
It certainly appears to be true that society favors the beautiful. In real estate there is even a phrase for it: curb appeal. And Realtors know there can be a payoff to property that looks better than the other houses -- or buildings-- around it.

But while beauty may be in the eye of the beholder, is there perhaps a correlation between better economic benefits in a building and its appearance? It being August and an opportune time for a 'soft' news feature, this week CoStar News analyzed the performance of two very specific subsets of office properties and compared their performance with all existing Class A office buildings in the country.

The buildings in the subsets achieved a higher rate of tenant retention during the Great Recession and regained tenants much more quickly as markets have recovered. Rental rates in these properties did not decline nearly as much, started recovering earlier and have moved up much more quickly than rents in all other Class A properties.

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"It's pretty clear, these buildings held their occupancy better during the worst of the recession. In the heat, they held on to their tenants and were the first to recover while the rest have been playing catch up," said Joseph W. Markling, chairman of BOMA International and managing director of Strategic Accounts at CBRE, who reviewed the analysis.

CoStar News worked with BOMA in compiling the two database subsets based on BOMA's own standards: one subset consisted of properties that were awarded regional honors as "The Office Building of the Year (TOBYs) in 2011-'12;" and a second subset had received a special designation for their all-around excellence in building operations and management.

[Editor's Note: This is the first of a CoStar News-originated series that will occasionally over the next few weeks/months examine the topic of the psyche of Why We Work Where We Work.]

Each year, BOMA International awards the TOBYs locally, regionally and internationally. Separately, beginning four years ago, BOMA developed what it calls its BOMA 360 Performance Program - a benchmark used to recognize owners and managers who achieve ongoing standards of operational and management excellence in commercial properties.

The TOBY subset of properties CoStar compiled contains 127 regional TOBY award winning individual buildings totaling 37.6 million square feet. The BOMA 360 subset included 485 buildings totaling 186.9 million square feet.

Beauty's Only Skin Deep

Of course, BOMA 360 designations and the TOBY awards are not architecture beauty contests, Markling said. Rather, the designations and award are meant to be a measure of the total building experience, he said.

"If you ask what are the five best-looking buildings in a market, some [of the BOMA building subsets] might not make the list," Markling said. "But they do show that managers and owners have done the best with what they have."

In other words, looks alone are not what is selling the building to tenants or investors.

Still, Markling acknowledged curb appeal can be a major factor in getting them in the door in the first place. At that point, though, good management and ownership takes over.

By the time a prospective tenant meets a broker to see space, they have already driven through the neighborhood, viewed the building's exterior, driven into its parking garage, walked to its elevator. They're coming into the meeting with their first impressions already formed, Markling said.

From there on out, "you have to sell them on the 'whole experience.' Aesthetics is important, but you have to match it with functionality."

In that regard, owners and managers step up their game when managing and marketing the elite properties, Markling said, a fact that no doubt helps account for their success.

"As an owner, asset manager and property manager, at this level you know you are good and believe that you should outperform the market. At the same time, there is additional pressure to take it up another level and really stand out," he said.

The TOBYs, Markling said, are a more of a personal program; it's a head-to-head competition that asset and building managers enter into.

"It's like winning the Oscars; in that for that particular year, you outperformed the competition," he said.

The BOMA 360 program is more of a corporate-level decision with the owner to participate.

"These numbers show that the designation can statistically put you out in front," Markling said.

Of course, it has yet to be seen when the market has fully recovered and all classes of properties are hot again and the demand for space is high and the offerings few, whether the advantages will hold, Markling said.

"But at least now we know, that when you really need to perform when times are tough, we can show a differentiation," he added.

The Role of Curb Appeal

A building's curb appeal is clearly a factor, according to other industry experts CoStar contacted.

"I believe the higher up the ladder/closer to the decision maker the more important the location/quality becomes," said Stephen Evans, senior vice president, investments for KBS Realty Advisors in Washington, DC, noting that many clients, mxployees and prospective employees equate a company's building with the company itself.

KBS acquires first class office buildings and has one property in the BOMA 360 performance program: the two-building Mid America Plaza in Oakbrook Terrace, IL.

"We recently purchased an office building [the McEwen Building acquired for $40 million in May 2012] in the suburbs of Nashville, which is within a mixed-use project that includes a quality office building, attractive retail tenants within the building, and a Whole Foods, BrickTops restaurant and other amenities in the shared parking lot," Evans said. "During tenant interviews prior to our purchase, plus discussions with a prospect tenant for the one vacancy, a very highly ranked criterion for locating in the building is that tenants drove the competition and decided 'I want to be at the McEwen Building.'"

"We also see this trend with assets KBS purchased over the past 10 years; those that are of higher quality/better location outperform/out lease the more non-descript commodity buildings," Evans said. "So a tenant -- at least the decision maker -- is giving some weight to 'I want to work there.'"

Stewart Proctor, principal of Structure Commercial Real Estate in Tallahassee, FL, recently relocated the headquarters for a national company.

"The CEO who was leading the company when they moved was very focused on exterior curb appeal," Proctor said but added that, "We were working with the CFO, he was obviously focused on price point, but curb appeal did play in the decision. Not so much how the building looked form the street, but address, and what the surrounding neighborhood is like, and the affect that has on his 100+ employees, their mutual comfort, safety and productivity."

Tenant Retention High

Separate studies also show that the BOMA 360 buildings have a much easier time retaining tenants, which also no doubt plays to their economic advantage.

"If an employee has worked in a Class A environment, then a company trying to recruit him or her to their Class B office may have a tough time -- and to a Class C? Forget about it," said Michael Bull, president of Bull Realty Inc. in Atlanta.

On the other hand, Bull said, "if you never fly first class to Vegas and stay in a high roller suite, then you are fine in coach and staying in good hotel. If you never drive a best-in-class 120-mph performance boat, then driving a 50-mph boat is still fun for you."

According to a new study by Kingsley Associates, buildings that have earned the BOMA 360 Performance Program designation have higher tenant satisfaction scores in 52 out of 54 categories compared to commercial office buildings without the BOMA 360 designation. Most notably, 92 percent of tenants in BOMA 360 buildings report high overall satisfaction.

Kingsley Associates surveyed tenants in categories including maintenance, leasing, security and air quality. BOMA 360 buildings outperformed a comparable set of commercial office buildings without the designation in all of the top survey categories.

74% of tenants in BOMA 360 buildings noted they are satisfied with the value they receive for the rent they pay, compared to 68% of tenants in other buildings.
More than 90% of tenants rated personnel in BOMA 360 buildings as "good" or "excellent." And
80% of tenants in BOMA 360 buildings rated the indoor air quality "good" or "excellent" compared to 74% of tenants in other buildings.

No Guarantee of Success

The 1.5 million-square-foot Columbia Center office tower in downtown Seattle received a regional TOBY this past year. Today, more than one-third of the building is vacant.

There is a $300 million loan on the property rolled up into a commercial mortgaged back securities: Morgan Stanley Capital I - 2007-HQ12.

The loan was transferred to special servicing in February 2010. As of that time, the sponsorship, Beacon Capital Partners, informed the Master Servicer and the Special Servicer, LNR Partners Inc. that they could no longer invest in any improvements on the property and starting in March 2010, could no longer pay debt service.

After origination of the loan, the law firm of Heller Ehrman filed for bankruptcy and did not occupy the law firm's fully built out space, approximately 147,000, according to the CMBS servicer's note. In addition, the largest tenant, Amazon, which occupied 177,311 square feet vacated at lease maturity in 2/2011.

The loan maturity date was extended from this May 2012 to May 2015 and returned to the Master Servicer for monitoring. The loan status is classified as a performing matured balloon note.

"I am sure curb appeal affects everyone's decision to a certain degree," said Eric Haskins, senior vice president, LEED green associate with Jones Lang LaSalle in Portland, OR, talking generally about office properties. "I would say it will affect the owner/user's decision the most because they are buying the building and operating there. The next closest would be the tenant, but I have to say some tenant's don't care and are all about the bottom line. The ones that are concerned the most are more often concerned about recruitment because they are in a highly competitive industry and they want to make sure their office is appealing to talented recruits."

"As for the investor," Haskins added, "I think neighborhood and surrounding marketplace always factor heavily into their decision, but as one investor once said, 'there is no such thing as an ugly 100% leased building.'"

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.
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