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Determinants of tenant movements within office markets.

Office buildings currently are a troubled property classification, comparable only to hotels in their poor investment performance. The Russell/NCREIF Index, which tracks $22.5 billion of non-leveraged property held by institutional investors, reported a decrease in returns of 0.2 percent for the three years ending in the first quarter, 1992.

As an asset class, real estate's value loss in the past year exceeded the current income generated by the properties, even in debt-free properties. Office properties experienced a three-year decline in value of 4.2 percent and a one-year decline in value of 10.4 percent.

Tenants seeking office space in such a troubled market can afford to pick and choose the best amenities at the lowest effective rental rates. In fact, in troubled markets tenants may become so absorbed in comparing rental rates and concessions that leasing agents will have to make a particular effort to explain their building's other benefits.

Knowledge of the factors that are important to tenants in deciding where to locate can prove very valuable to the marketing efforts of both developers and leasing agents.

The purpose of the study described in this article was to re-examine the factors that are important to tenants in deciding where to locate.

Our survey of previous literature on office markets suggested five interesting questions.

* Under the current oversupplied market conditions, what are the important factors an office tenant uses to decide where to locate?

* What are the important factors in deciding on a specific building within a desirable area?

* Have these factors changed with the conditions of the office markets since 1976?

* Do location and building preferences vary with firm size?

* Are the existing tenant leasing and space characteristics consistent with what tenants say is important in the location and building selection process?

Methodology and results

A comprehensive questionnaire was developed, tested, and administered to 250 office tenants in the North Palm Beach, Florida, office market. A list of office tenants was obtained by visiting each office building, checking the building directory, and calling each tenant to obtain a name and address for the executive officer of the firm.

Each tenant firm was asked to:

* provide background information about itself;

* rank the importance of a list of location factors in deciding the general area of its office;

* indicate the importance of a set of factors in selecting a specific building;

* provide information about its current building and location;

* indicate the likelihood of changing the firm's location; and

* indicate how the firm allocates its office space.

Sixty-three responses were received, resulting in a response rate of 25 percent. A "spot check"of non-response was conducted by telephone. We believe that no significant non-response bias was present.

Figure 1 provides the basic data describing the responses to the first 40 items on the questionnaire. Although some questions elicited strikingly similar responses from most respondents, others produced substantial variation. The following describes a common pattern followed by a majority of office tenants.
Figure 1 Descriptive Data on Variables
Variables Mean SD(*)
General Location Criteria
1 Proximity to customers 3.6 1.1
2 Proximity to suppliers 2.2 1.1
3 Location relative to suppliers 2.0 1.0
4 Close to transportation arteries 3.7 0.9
5 Convenience to airport 2.4 1.3
6 Close to employee residences 3.0 1.1
7 General ambience of area 3.9 0.8
8 Distance from ocean 1.3 0.6
Specific Building Determinants
9 Rental rates 4.3 0.7
10 Escalation clauses 4.0 1.0
11 Quality of construction 3.8 0.8
12 Building loss factor 0.1 0.0
13 Build-out allowance 3.0 1.4
14 Number of stories 2.3 1.3
15 Existence of loading dock 1.0 0.5
16 Glass building exterior 2.0 1.2
17 View 2.5 1.1
18 Common area finish 3.3 1.1
19 Amount of parking 3.9 0.9
20 Covered parking 2.7 1.3
21 Accessibility of parking 4.0 0.9
22 Landscaping 3.2 1.0
23 Shared conference room 1.6 1.0
24 Corner office space 2.3 1.2
25 Convenience to restaurants 2.7 1.0
26 Convenience to fast food 2.1 1.0
27 Convenience to banks 3.0 1.1
28 Convenience to hotels 2.1 1.1
29 Convenience to shopping 1.8 0.9
30 Convenience to office supplies 1.8 0.9
31 Convenience to airport 2.2 1.3
32 Convenience to residential area 2.7 1.4
33 Distance from commuter routes 3.5 1.2
34 Building visibility 3.5 1.1
35 Building identity 3.3 1.2
36 Availability of food in building 1.6 0.9
37 Security 3.4 1.3
38 Conference rooms 2.2 1.4
39 Presence of health facilities 1.6 1.1
40 Age of building 2.7 1.1
* Standard deviation
N = 63 except for a few variables with missing data
All variables were rated on a Likert scale:
1 = not important
2 = somewhat important
3 = average importance
4 = very important
5 = critically important

On average, tenants said that the criteria of at least average importance for the general location of their offices were general ambience of an area, proximity to major transportation arteries, proximity to customers or clients, and proximity to the residences of key personnel.

In a 1976 survey of business executives, C.H. Wurtzebach found that the proximity of labor markets, proximity to transportation facilities, TABULAR DATA OMITTED and the working environment were relatively important. Thus, these factors have not changed much since the 1970s. Surprisingly, convenience to an airport was considered only somewhat important. Distance from the ocean in North Palm Beach was not important.

Office tenants indicated that rental rates were the most important criteria in selecting a specific office building. This supports Wurtzebach's findings. Accessibility of parking and escalation clauses in the leases were classified as very important. The amount of parking, quality of construction, building visibility, distance from commuter routes, security, common area finish, building identity, landscaping, convenience to banks, and build-out allowances were of average importance.

Convenience to restaurants, the age of the building, covered parking, convenience to a residential neighborhood, the view, corner office space, number of stories, convenience to an airport, conference rooms, convenience to fast food, and convenience to hotels were only somewhat important. Convenience to shopping, convenience to office supplies, availability of food in the building, a shared conference room, presence of health facilities, existence of a loading dock, and the building loss factor were, on average, not important to office tenants.

A careful analysis of responses to the question concerning the building loss factor suggests that many of the respondents may not have been familiar with the concept.

Examining the area and building factors that are important to office tenants indicates that there may have been some variation by firm size.

The effect of firm size on preferences

Figure 2 presents the mean responses by firm size. Small firms were identified as those employing 15 or fewer people. Medium-sized firms were those employing 16 to 60 people, and large firms were those employing 61 or more people. Of the survey respondents, 79 percent were identified as small firms, 17 percent as medium-sized firms, and only 3 percent as large firms. The large-firm percentage represented the views of only one firm. Thus, the conclusions about large firms are limited.

Figure 2 indicates that the importance of proximity to supplies of products and services increased as firm size increased. Small firms indicated that this factor was, on average, not important.

Small firms placed greater importance on their location relative to major transportation arteries. They felt that this factor was very important while the others felt that it was only of average importance.

The large firms placed greater emphasis on convenience to the airport. They rated it as very important perhaps because of their more frequent air travel.

Small firms appeared to place greater importance on building identity. They felt it was at least of average importance, where it was only somewhat important to larger firms.

Tenant ratings and actual occupancy

Figure 3 shows the results of an analysis of the tenant response consistency. Most of the current location and building characteristics appeared to be consistent with the factors identified as important in the office tenants' location and building decision process.

However, although tenants indicated that convenience to restaurants, fast food, banks, hotels, shopping, office supplies, and residential areas was of no importance or only somewhat important, most were located within one to five minutes.


The office tenant survey results indicate that the factors of at least average importance for the general location of most tenants' offices were general ambience of an area, closeness to major transportation arteries, proximity to customers or clients, and closeness to the residences of key personnel. Although office market conditions have changed drastically, these location factors have not changed much since the 1970s.

Rental rates were still the most important factor in tenant office location decisions at the building level. Accessibility of parking and the escalation clause in the lease were classified as very important by office tenants. Numerous other factors were identified as being of at least average importance.

The importance of proximity to suppliers increased with firm size. Small firms indicated that this factor was not important. Convenience to the airport was more important to large firms. Smaller firms placed greater importance on building identity.

An evaluation between what office tenants said were their important location and building criteria and what they had actually chosen was conducted. Most current location and building characteristics appeared to be consistent with the factors identified as important.

The next step in this research will attempt to determine how these location and building factors are priced in the marketplace.

Current Literature on Tenant Movements

Numerous studies have analyzed the pricing of office building space (see Glascock, Jahanian, and Sirmans|9~ and Clapp|3~ for detailed reviews) and provided insights as to how rents vary across buildings as well as how landlords adjust rents over time.

Several researchers have studied rents at the individual lease level (see Benjamin, Shilling, and Sirmans;|1~ Colwell and Cannady;|5~ and Brennan, Cannady, and Colwell|2~). They provide evidence that lease provisions are priced in the office market.

Another group of studies examine the link between rents and vacancy rates in the adjustment process (see Smith,|18~ Rosen and Smith,|14~ Eubank and Sirmans,|6~ and Gabriel and Nothaft|8~). They suggest that higher vacancies bring about lower rent changes and lower vacancies allow higher rent changes.

Vandell and Lane|20~ examine the rent and vacancy issue within a quality of building context. They find that good architecture seems to provide higher rent levels. However, architecture is not related to vacancies.


Heckman|10~ studied Class A office buildings to demonstrate that while national forces are important, the major activity is within the local market. The primary response process is from vacancies to rents. This result was supported by Rosen.|13~

Shilling, Sirmans, and Corgel|16~ also analyzed this issue, but from a macro perspective. The results indicate that landlords react to fluctuations in demand by building up or drawing down the inventories of unlet or vacant office space. Other things being equal, higher levels of vacant office space mean that owners lower their rents and reduce the difference between desired and actual vacancies.

In recent studies, Wheaton and Torto|24~ and Voith and Crone|21~ examine office rent changes and the natural vacancy rate. Both studies find support for the natural vacancy process.

Smith and Kroll|17~ use cluster analysis to identify market segments with higher marginal utility preferences for selected project unit amenities, with the ultimate goal of rental rate optimization. The research revealed that distinct clusters do exist and that in certain cases, the price elasticity is different across clusters.

In the market efficiency literature, McIntosh and Henderson|12~ conducted an efficient-markets test of the Dallas-Fort Worth office properties market. The results provide further evidence of the efficiency of real estate markets.

Frew and Jud|7~ developed and estimated a cross-sectional model of the commercial office market in which the building vacancy rate is a key factor in the determination of rents. Individual buildings in Greensboro, North Carolina, were used as the unit of analysis and simultaneous equation procedures were employed to produce estimates of rent per square foot. The estimates confirm that the vacancy rate must be included when estimating the price of commercial office space.

In a review of the post-World War II data on national office building construction and vacancy, Wheaton|23~ reveals a recurrent 10-to-12-year cycle. Specifying and estimating a structural econometric model for these series leads to several conclusions about the office market. First, office markets appear to clear quite slowly, and long-run expectations play an important role in market behavior. Second, supply is more responsive to market conditions than demand.

Weaver|22~ also introduces conjoint analysis to allow appraisers to analyze office space demand by generating market-derived data to support professional judgements concerning future demand for office space by prospective tenants. The data indicate that above-average levels of interior design and amenities are also clearly favored by lessees in Atlanta and in Dallas-Fort Worth. This technique provides a much more detailed profile of lessees and allows appraisers to forecast lessees' responses to a specific office site more accurately.

In a 1976 Journal of Property Management article, Wurtzebach|25~ surveyed 1,500 firms of various interests and sizes in a large southwestern metropolitan area to identify those factors that influenced the selection of office facilities. Each respondent was asked to specify the relative importance of nine factors believed to have an impact upon the relocation decision. These factors included: labor market, proximity to airports, proximity to banks and financial institutions, location of allied industries, location of competitors, accessibility by bus or highway, recreation facilities, cost, and environment.

The respondents were asked to indicate whether each specific factor was "very important," "somewhat important," or "not important" in selecting office facilities. The most important factors affecting office facility selection were labor market, bus, highway, cost, and environment. The unimportant factors were recreation facilities, location of competitors, proximity to airports, location of allied industries, and proximity to banks and financial institutions.

The factors indicated as most important were analyzed by firm size. The author found that differences did exist according to firm size. The labor market and the bus/highway factor were found to be of greater relative importance to larger firms in selecting office facilities. Cost was the most important factor for all tenants, and large tenants placed a greater relative importance on this factor than did small tenants.

Robert H. Pittman is an independent consultant based in Atlanta. He has published numerous articles in professional and academic journals in real estate and market analysis, and has served on the editorial boards of the Journal of Real Estate Research and the Economic Development Review. He holds a Ph.D. in economics from Northwestern University.

Previously, Mr. Pittman was executive vice president of Hoyt Advisory Services, a real estate research and consulting subsidiary of the Homer Hoyt Institute in North Palm Beach, Florida. He also served as deputy director of the Industrial Development Research Council, a professional association of corporate real estate executives based in Atlanta.

Will McIntosh is senior vice president and director of research for MID Realty Advisors, Inc., in West Palm Beach, Florida. He holds a Ph.D. in finance and real estate from the University of North Texas. He serves on the editorial boards of the Journal of Real Estate Research, The Appraisal Journal, and The REIT Report.

Mr. McIntosh has served as associate professor of finance and director of the Center for Real Estate Studies at the University of Kentucky. He has also worked with Arthur Rubloff and Company of Ohio.


1. J. Benjamin, J. Shilling, and C.F. Sirmans. "Security Deposits in Office Leases as Signals." Working paper, Louisiana State University, October 1989.

2. T.P. Brennan, R.E. Cannaday, and P.F. Colwell. "Office Rent in the Chicago CBD." AREUEA Journal 12: 243-60, 1984.

3. J.M. Clapp. "Empirical Analysis of Office Markets: An Evaluation of Interdisciplinary Research." Unpublished working paper, University of Connecticut, 1988.

4. "The Intrametropolitan Location of Office Activities." Journal of Regional Science 20: 387-99, 1980.

5. P.F. Colwell and R.E. Cannady. "Trade-offs in the Office Market." In J. Clapp and S. Messner, editors, Real Estate Market Analysis: Methods and Applications, chapter 8 (Praeger Press, 1988).

6. A.A. Eubank, Jr. and C.F. Sirmans. "The Price Adjustment Mechanism for Rental Housing in the United States." Quarterly Journal of Economics 93: 163-83, 1979.

7. J. Frew and G.D. Jud. "The Vacancy Rate and Rent Levels in the Commercial Office Market." Journal of Real Estate Research 3: 1-8, 1988.

8. S.A. Gabriel and F.E. Nothaft. "Rental Housing Markets and the Natural Vacancy Rate." AREUEA Journal 16: 419-29, 1988.

9. J.L. Glascock, S. Jahanian, and C.F. Sirmans. "An Analysis of Office Market Rents: Some Empirical Evidence." AREUEA Journal 18: 105-119, 1990.

10. J.S. Heckman. "Rental Price Adjustment and Investment in the Office Market." AREUEA Journal 13: 32-47, 1985.

11. Landauer Real Estate Counselors. "1992 Real Estate Market Forecast." New York: Landauer, 1992.

12. W. McIntosh and G.V. Henderson. "Efficiency of the Office Properties Market." Journal of Real Estate Finance and Economics 2: 61-70, 1989.

13. K.T. Rosen. "Toward a Model of the Office Building Sector" AREUEA Journal 12: 261-69, 1984.

14. K.T. Rosen and L. Smith. "The Price Adjustment Process for Rental Housing and the Natural Vacancy Rate." American Economic Review 73: 779-86, 1983.

15. M.A. Sharkawy. "Evaluating Spatiotemporal Consistency of Secondary Office Market Data." Journal of Real Estate Research 5: 341-354, 1990.

16. J.D. Shilling, C.F. Sirmans, and J.B. Corgel. "Price Adjustment Process for Rental Office Space," Journal of Urban Economics 22: 90-100, 1987.

17. C.A. Smith and M.J. Kroll. "Utility Theory and Rent Optimization: Utilizing Cluster Analysis to Segment Rental Markets." Journal of Real Estate Research 4: 61-72, 1989.

18. L.B. Smith, "A Note on the Price Adjustment Mechanism for Rental Housing," American Economic Review 64: 478-81, 1974.

19. H. Tauchen and A.D. Witte. "Increased Costs of Office Building Operation and Construction: Effects of the Costs of Office Space and the Equilibrium Distribution of Offices." Land Economics 59: 324-36, 1983.

20. K.D. Vandell and J.S. Lane, "The Economics of Architecture and Urban Design: Some Preliminary Findings." AREUEA Journal 17: 235-60, 1989.

21. R. Voith and T. Crome. "National Vacancy Rates and the Persistence of Shocks in the U.S. Office Markets." AREUEA Journal 16: 437-58, 1988.

22. W.C. Wheaton. "Forecasting Office Space Demand with Conjoint Measurement Techniques." Appraisal Journal 52: 389-398, July 1984.

23. W.C. Wheaton. "The Cyclic Behavior of the National Office Market." AREUEA Journal 15: 281-299, 1987.

24. W.C. Wheaton and R.G. Torto. "Vacancy Rates and the Future of Office Rents." AREUEA Journal 16: 430-436, 1988.

25. C.H. Wurtzebach. "Major Factors Affecting Selection of Office Facilities." Journal of Property Management, September/October: 221-224, 1976.

"Asset Management" Topics for 1993

This section is designed to give insights to sophisticated asset managers about financial and operational aspects of management at the portfolio and asset-class levels. Articles on trends, techniques, and new methods are welcome. Pieces based on primary research are of particular interest.

* Portfolio restructuring and its meaning for management

* Can real estate be valued as a commodity?

* Securitization vehicles and their impact

* New performance indices--are they valid?

* What corporations want in third-party managers

* Are asset managers demanding more control?

* What to look for in selecting fee managers
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Title Annotation:Asset Management
Author:Pittman, Robert; McIntosh, Will
Publication:Journal of Property Management
Date:Nov 1, 1992
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