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Tips for leasing class B buildings.

Although most major metropolitan areas are now plagued by a vast oversupply of office space, vacancy problems are not shared equally within a city. Older Class A and Class B buildings are becoming victims of the overbuilding crisis, and their vacancies often are considerably higher than in the newer Class A towers.

For real estate managers and building owners, leasing older office space has become an extremely arduous task. The solution is often a combination of creativity and an infusion of capital.

Obviously, older buildings have to try to compete on price, says Ron Bruder, president of The Brookhill Group, New York City, a company that has made a name for itself performing turnarounds of older properties. The Brookhill Group also built two Class B buildings (small and outside the central office area) in a very Class A market--Stamford, Connecticut--and was able to get both 100 percent leased.

"You have to realize you cannot get the same rents as the Class A towers," Bruder says. He estimates that Class B rents should average between 15 and 25 percent lower than comparable A rates.

"Companies are looking to save money," Bruder continues, "and if you can show them they don't need $20-a-foot space, that $15-a-foot space is just as good, the company may bite."

Secondly, Bruder says, one has to market with a focus. The tenants for Class B space are not as concerned with image, but they can be attracted by other qualities such as a good location. Operations for which image is a minor concern include corporate back offices and corporate sales offices whose clients rarely visit the space.

Nevertheless, the owner or manager has to present a Class A concern for tenant needs even in a Class B buildings. Bruder advises that individual office installations should be first class. Even if a building is Class B, tenants, especially back-office operations of major corporations, want to maintain high standards. Tenant improvements are costly, but necessary.

Along the same lines, the building has to present a well-maintained appearance, whatever its economic circumstances. It has to be kept clean, with operative systems, up-to-date maintenance, and, if possible, as "modern" a look as can be expected.

In a world crowded with office buildings, it often takes a major renovation or a unique innovation to attract tenants, even if you have the newest tower on the block. However, with a little capital and a great deal of creativity, it is still possible for the Class B office building to compete successfully.

Boston: Improving the environment

The 400,000-square-foot building complex at 10 Post Office Square could not be confused with any of the modern office buildings surrounding it. Built in 1929, its classical facade is still striking today. Its location in the heart of Boston's financial district and the foresight of its owners have helped it to remain a viable property, rather than a dinosaur.

In the early 1980s, the owners, Leggat McCall Properties Inc., financed a multi-million-dollar renovation of the building. The renovation was initially well timed, says Michael Joyce, assistant vice president with Leggat McCall/Grubb & Ellis, the building's leasing company, but soon afterwards the Boston market suddenly boomed, with more than 5 million square feet of space added to the city since 1988.

To attract tenants, the new buildings lowered rental rates, not only pushing down Class B rates but attracting what were once Class B tenants as well.

One problem with 10 Post Office Square, as with other buildings near it, was that it was abutted by a three-story, city-owned parking garage that was an eyesore. Instead of letting this problem ride, 10 Post Office Square and its neighbors negotiated with the city to remove the parking structure and replace it with a 14-level below-ground garage and a street-level park. The park not only enhanced the surrounding buildings but gave something to the city as well.

The transition of the property was a long-term proposition. In 1983, a group of 20 area building owners and tenants formed Friends of Post Office Square and began to develop proposals for presentation to the city. Five years later, the site was purchased, and a unique development agreement was signed between the city of Boston and Friends of Post Office Square. The agreement guarantees the city all profits from the operation of the garage, with approximately 20 percent of the proceeds ear-marked for maintenance of neighborhood parks.

Once the project's capital costs have been repaid to investors (estimated to be within 40 years), ownership of the garage will revert to the city. Friends of Post Office Square also agreed to form a public committee to develop a program for the park.

The money for the project was provided by the city, which raised the capital through a bond issue. As part of the deal, many owners and tenants of the abutting buildings made investments in the bonds and over the long term will actually a get a nice return on their funds.

The $80 million project, Joyce reiterates, was meant to improve the appearance of the financial district and add much-needed parking. However, from the start, the managers and owners of the abutting buildings realized that the park not only would remove an eyesore, but also would increase the marketability of all the buildings around it.

Today, 10 Post Office Square is 85 percent leased and earns rental rates in the $27-to-$28 range, $7 to $8 more than the other older buildings and rehabs in Boston's downtown.

Los Angeles: A community service

In another financial district 3,000 miles away, 700 S. Flower at Broadway Plaza in Los Angeles seemed to have it all. The 600,000-square-foot building is part of a mixed-use project that includes a 33-store shopping galleria and a 500-room Hyatt Regency. It was, however, built 20 years ago, and had begun to pale next to the 8 million square feet of new space that has been built in downtown Los Angeles since 1988.

To keep the building competitive, 700 S. Flower's owners upgraded the whole facility, winning numerous awards for design and energy efficiency. However, renovation alone was not enough to bring in new tenants.

The owners decided it was important that the project reflect its ties to the community and allowed the building management to be involved in numerous community and charitable programs. Among the events held at the property were the "Festival of the Trees" for Family Service of Los Angeles and the Olympic Festival '91 and Festival Sports Expo.

The complex also donated to such organizations as Adopt a Family, Amvets, Para Los Ninos, United Way, Operation Head Start, the St. Turibius Mission School, VFW Children's Christmas Party, Los Angeles Unified Immigration Program, Toys for Needy Children, and many others.

"The initial thrust," says Gerald Eggleston of Cushman & Wakefield, "was certainly not 'let's get involved with the community for marketing purposes.' The initial thrust was simply 'let's be part of the community.'"

But by donating so much to charitable organizations and hosting many community activities, the name of the project was put before the public, while at the same time an assortment of people were attracted to the center for the community activities.

The BOMA chapter of Greater Los Angeles recognized the company's efforts by recently awarding it a Pueblo Award. This is the second year in a row that the award, given to honor an outstanding record of community service, has been awarded to Broadway Plaza, of which 700 S. Flower is a part. In addition, the tenants expressed a feeling of goodwill from being associated with the venue and its programs.

"It turns out," Eggleston says, "when you do things that are good, it can only turn out to benefit you in some way."

The actual marketing program for 700 S. Flower focused on four key issues: location, efficiency and quality, amenities, and parking. But by hosting community activities, the management was actually reinforcing the concepts of the marketing program: the building was in a convenient location and has plenty of parking available--a rarity in downtown Los Angeles.

The synergy created by community events has led to a building that is 80 percent leased in a very competitive environment.

Chicago: A major overhaul

The 500,000-square-foot office building at 300 S. Wacker Drive had a relatively charmed life. It was built in 1971 and for 17 years had been leased to the federal government.

But in 1988 the government vacated the space and by the time Markborough Properties, Toronto, bought the 35-story building in 1990, it was 98 percent vacant.

"This was definitely a Class B building," says Tom D'Arcy, a vice president for Markborough. "It had asbestos. There was no sprinkler system, the owner didn't have the capital to do major renovations, and it looked like a 'post office building.'"

Markborough put the building through "one of the most extensive renovations on a building in downtown Chicago," D'Arcy says. The company removed the asbestos, renovated the mechanical systems, installed sprinklers, put in a whole new lighting system, and designed and built all new bathrooms.

More importantly, 300 S. Wacker had wonderful location aesthetics that had never been taken into consideration and which Markborough brought out in the renovation process. The company concentrated on renovating the lobby, expanding it by 60 percent. The small, granite lobby suddenly became a big, white marble showplace, with access to views. A glass front was built to overlook the plaza of the Sears Tower, several blocks away. In the rear wall, Markborough cut windows looking out onto the Chicago River.

The company also enhanced the street-scape, putting in a granite sidewalk, recladding the exterior and columns, and installing decorative elements such as brass hand-rails.

"A lot of the buildings up and down Wacker Drive were the same age as ours, but, because we had a virtually empty building, we were able to go in, gut all the floors, and finish it like a brand new office," D'Arcy says. "If you walk into the other older buildings on Wacker, they might have done some cosmetic things like renovating the lobby, but you are not going to get a totally new office-building feel."

In look and atmosphere, Markborough accomplished its "new building" goal, but it did not actually try to compete with the new buildings. Wisely, the company set the rental rates of 300 S. Wacker lower than the new Class A office towers, but slightly higher than other older buildings.

Since renovation, Markborough has attracted numerous financial service, insurance, and law firms. The building has now reached 50-percent occupancy in a very stubborn office market.

Houston: Public/private partnership

Greenway Plaza was a unique development from the day it opened in 1969, and recent amenity additions have made it even more so.

The plaza is often referred to as a mixed-use project, but that wording seems inadequate for the vast property. "It has more mixed uses than probably any other facility of its type in the country," says Neil Tofsky, executive vice president/marketing of Senterra Development, the firm that manages and leases Greenway.

The Plaza boasts over 4 million square feet of space, including office, retail, hotels, a private health club, residential condominiums, and the Summit Sports Arena, home to the Houston Rockets basketball team.

Although definitely a Class A project, at almost 25 years of age it needed to communicate the message that it was still a modern and innovative development. There were too many other wonderful office towers in a struggling Houston market for Greenway to sit back and wait for tenants.

Greenway had always placed transit and access as key components of its marketing strategy. Focusing on those elements, the owners decided to open a major transportation center. This had the potential to be an expensive project, but federal programs were in existence that could offset the costs.

Because Senterra could not receive Urban Mass Transit Association grants directly, the company worked in close cooperation with Houston's Metropolitan Mass Transit Authority, which got a $400,000 grant. Metro then signed a lease with Senterra to develop the transportation center at Greenway. "This was a unique public-private partnership," Tofsky says.

The center, which opened in 1990, has been immensely successful. It now is a terminal for buses servicing Metro Park & Ride locations, for shuttles to Houston's Northwest Transit Center, and for regular shuttle service to both Houston airports.

Because one major residential area for Greenway workers, the Woodlands, was outside Houston's county line, Greenway management worked with the state to bring in bus service from there as well.

"We have state, private, and public bus service, all interconnecting at this transportation facility," Tofsky says.

To round out the services at the facility, Continental Airlines installed a ticketing booth; a car and truck rental facility has also been added. And, as in any good transportation hub, phone lines offer direct access to cab companies and area hotels.

"Of course, the bulk of people still drive to work in Houston," Tofsky says, "but what the transportation center does is put us at the forefront of transit options as the city starts to examine more transportation alternatives."

Despite a tremendous 4.2 million square feet of office space in 11 buildings, Greenway Plaza still has a 12 percent vacancy rate, about 10 percentage points below the city as a whole.

"When you have a complex the size of Greenway, you have to use your critical mass to continue to bring in certain amenities that are not available elsewhere," says Tofsky. "If you don't, you are losing a golden opportunity to separate yourself from other segments of the market."

Steve Bergsman is a freelance writer based in Mesa, Arizona. He has written on real estate topics for a variety of national magazines.
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Author:Bergsman, Steve
Publication:Journal of Property Management
Date:Jan 1, 1993
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