Seminar focuses on needs of advertising firms.

Just because Manhattan's commercial real estate market is soft, that doesn't mean ad agencies are going to move back to Madison Avenue in droves. Just because you have a signed lease, that doesn't mean you're safe if your landlord is in shaky financial shape. And just because Chiat/Day is making headlines and saving costs by introducing its "virtual office" concept to the New York City ad industry, that certainly doesn't mean it will work for every firm in town.

These are just three of the topics discussed and uncovered at a real estate seminar held recently by Advertising Age magazine and Newmark Real Estate Services for more than 75 top advertising industry executives at the Four Seasons Hotel.

The first of three sessions provided a general overview of the Manhattan office market, including conditions relating to cost and availability of space in Midtown and its "alternative" markets of Noho/Soho, Hudson Square/Tribeca, and Park Avenue South, favored by many advertising agencies.

Based on calculations factoring rents, occupancy costs, improvements to office space and other expenditures, Barry Gosin, president of Newmark, first compared "new" deals in Midtown to deals in Midtown South - and found that even with today's "bargain" rental rates in the "alternative" markets of Midtown South, the cost differential is minimal.

"Once you factor in the somewhat ~hidden' costs that appear in many Midtown South deals, including cleaning and air conditioning charges, necessary core work and improvements, the cost differential is greatly lessened, Gosin said.

At the same time, renewal deals in Midtown South often turn out to be more attractive for ad agencies than a relocation back to Midtown's prime markets - on account of "atmosphere," as well as price.

Phil Palazzo, executive vice president, CFO and general manager of the advertising agency Ammirati & Puris, provided an illustration of this trend. Palazzo discussed his firm's rationale for renewing in its Lower Fifth Avenue address this year rather than moving back to Midtown - even though rental rates on the once pricey Madison Avenue had dropped substantially in recent years.

"In the early 1980s, the main factor for our move from Madison Avenue to lower Fifth Avenue was rent," Palazzo said. "Today we had other factors: we have grown to like the character of the neighborhood, we have grown comfortable and efficient in our space and within the building's configuration, and the dollars still made sense for us."

According to Palazzo, Ammirati & Puris currently spends just 6 percent of its gross revenues on base rent. According to panelist David Weiner, CPA, the average advertising, agency should use a figure of approximately 10 to 12 percent of gross revenues as the rule of thumb when determining its base rent costs.

In another cost comparison, Gosin said that renewal deals in Midtown South generally prove more cost-effective than relocations within the district.

"Even if the face rents on the new deal are less than the renewal deal, numerous hidden and extra costs resulting from a move can make the relocation deal significantly more expensive, Gosin said.

The second session of the seminar focused on specific tactics for lease negotiations, discussing how advertising agencies can get the most for their money - and how to protect themselves from taking too much or too little space.

Focusing on tactics for lease negotiations, real estate attorney Alan Pomerantz of Weil Gotshal & Manges defined the two issues to keep in mind at all times: 1) that the owner knows more about his building than anybody else; and 2) that all points of negotiation must be broken down to their cost and the risk incurred by either party.

"The key issue is to determine how to make the real estate as flexible as the advertising business," Pomerantz said. "It is possible to obtain a lease that will allow you to expand or shrink your space as needed - but those kinds of concessions on the part of the landlord do not come for free."

According to panelist Jeff Resnick, director of real estate for Omnicom Group, a number of tactics are possible in ensuring your ability to return space to the landlord. "You could tie it into the possible loss of specific clients," he suggested. "Or you could base the penalty costs on a number of months of rent or a percentage of the unamortized rental over the remaining term of the lease."

According to Lew Trencher, executive vice president of the advertising agency J. Walter Thompson, a long-term lease is most effective for negotiations. "Especially in today's market, a tenant with a long-term lease has greater flexibility when negotiating terms with his landlord," Trencher said, adding that long-term leases, given current bargain rental rates, are sensible to the extent that they provide security from future market fluctuations. Above all else, all the panelists agreed that landlord stability is a key point to be taken into consideration during negotiations for the long-term success of an advertising agency in its office space.

"Lenders are involved in just about every lease negotiation today on account of the instability of real estate ownership," said Gerald Uram, Esq., a partner in the law firm of Davis & Gilbert. "Make sure you do business with a strong landlord and that the economics of your deal work."

Pomerantz pointed out that banks have the right to terminate a lease once they take over a building - no matter the track record or payment record of the tenant. He and the rest of the panelists agreed that a "Non-Disturbance Agreement" (a clause which forces the lender to acknowledge the tenant) is necessary in just about every leasing deal today in order to protect the tenant throughout any type of change in building owner ship.

The concluding session addressed the question of what will ad agencies look like in the near future and how much will it cost to bring offices up to date with the 21st century.

Based on the concept of promoting client interest and creativity while maximizing the use of real estate space, many agencies throughout New York City are taking advantage of the city's real estate recession and redesigning their work space.

Adelaide Horton, chief operating officer of Chiat/Day, discussed their "virtual office," an office environment that is functional, flexible and uniform; eliminating all hierarchical levels within the company. Desks are assigned daily instead of permanently, lockers replace personal space and within the year, all employees will be linked by an external fiber optic phone system. Most importantly, Chiat/Day has eliminated the need for excess real estate, as most employees work from outside of the office.

"By eliminating ~assigned' space, we have reduced the amount of necessary real estate by over one-third," Horton said. "We only take space we need - useable space; the virtual office is the most efficient fit for our company's needs."

According to panelist Al D'Elia, president of the architectural firm Mancini & Duffy, the key to redesigning an office environment is evaluating the best configuration for each individual company.

"An architect's involvement should begin on day one," said D'Elia. "The difference in cost between what's useable and what's rentable space can be thousands of dollars; companies cannot afford to make estimated judgements on the amount of space required to meet their company's needs "

"Each individual company is a unique case, guidelines need to be set on the costs to build out space," he added.

"Costs can range from $30 per square-foot for plain ~vanilla' space redesigning, to $120 per square-foot for more elaborate services," said Jay Eichel, president of Accord Construction. "Costs on a per square-foot basis have not changed significantly in the past few years, but the small percentage decrease in cost is significant enough to add fuel towards this new trend of renovating and redesigning office space."

"The 21st century will dictate an office environment with less segregation and more communal work space, with employees linked through external systems," said D'Elia. "Companies will need to evaluate their own individual needs and requirements to determine the proper design and configuration for their agency. Finding the best ~fit' will be the single most efficient way to reduce overhead costs and increase the productivity of an agency."