UNDERSTANDING BEST OPERATING PRACTICES IS CRITICAL FOR OFFICE OWNERS Intimate knowledge of the property type and identification of hidden costs often translates to higher values when it’s time to sell. A By Cody Payne and Blake McCool of Colliers International s strong job growth over the past decade has brought more and more investors to Texas, many of these buyers have looked to office product due to the appealing going-in returns that the property type offers. In addition, many cross-product owners look at office invest -ing to make higher returns outside of their current portfolios. As buyers look toward the office market, there are many factors that need to be considered before making an informed decision. Along with these basic considerations, the im-pacts of COVID-19 on real estate in -vesting are also important to under-stand when looking at an office deal. The Dallas-Fort Worth (DFW) mar -ket in particular has experienced an influx of cross-product buyers from other asset types such as retail, multifamily and self-storage during this cycle. The high -er rate of return is the primary catalyst behind their moti-Cody vation to purchase Payne office investments. Colliers All asset classes International are different and so are their opportunities, whether im-mediate or long-term. Understand -ing what sets office apart from other types of commercial investments is key to a successful operating strat-egy. Pictured is Regent Place, a 47,000-square-foot office building in the Las Colinas submarket of DFW that recently traded hands. Prior to its most recent change in ownership, the asset had sold at an undervalued price, a common occurrence in DFW office transactions in which brokers do not specialize in the property type. Hidden Costs of Ownership One important factor to consider when buying office properties is that there are many hid-den costs of own-ership that can eat your income alive if not properly ad-dressed. There is a section within the finan -cials when looking Blake at an office build -McCool ing for sale that in-Colliers cludes what many International refer to as “below the line” items. These types of ex -penses can destroy an owner’s net operating income (NOI) and poten -tially make owning an office build -ing an investor’s worst nightmare. These items generally consist of tenant improvements, commissions and other various capital expendi-tures that can easily become actual reoccurring costs annually. There are also several common operating mistakes that buyers are prone to making when making an office investment. These include not understanding the time it will take to hit leasing projections, as well as having an inaccurate idea on how ex-pensive renovation costs will be for a building. The leasing aspect of an office in -vestment is very methodical. Under -standing tenant size requirements, which tend to vary from area to area, is important, and having a proper leasing strategy implemented for your building is equally key to suc-cess. Time and time again, we have seen inexperienced leasing agents let an office building sit for years without achieving desired occupancy. While representation is important on the leasing side, it is also just as crucial for buying and selling as well. purchase. In today’s market, it is equally im -portant to understand how to create value in an office investment and to grasp where this value can come from. Value-add opportunities can be found in multiple aspects of an office investment — it’s primarily a matter of knowing where to look. income on the roofs of buildings and implementing paid parking systems at the building. . COVID-19 Implications Adding Value Know Your Product There are numerous opportuni-ties throughout the DFW metroplex for experienced investment sales brokers in the office space to flip buildings that were previously listed by brokers who did not have an ac-curate understanding of how these properties run and operate. Last year, Colliers International sold an office building in Las Colinas for approximately $500,000 higher than its previously list price, simply due to the lack of understanding the previous broker had. We saw the true value of the building, articulated that to buyers and showed them how they would continue to increase this asset’s value and cash flow after its One opportunity that is always considered is the question of wheth-er rents are at or below market rates. If rents are low, there is an obvious opportunity to increase cash flow and therefore the overall value of the project. There are several ways to help with the successful increase of rental rates, including exterior and common area renovations, as well as adding certain amenities. Features such as outdoor green space with seating, advanced conference facilities and upgraded food and beverage options can all go a long way in justifying higher rental rates. Value-add opportunities in the office market can also stem from decreasing expenses wherever pos-sible. The structure of a lease is one prominent way through which own-ers can find ways to cut expenses. For example, if tenants are paying triple net reimbursements, then they pay a prorated portion of real estate tax, insurance and common area mainte-nance. Apart from decreasing expenses, more value-add opportunities can come from generating additional income on the property. Two com -mon and practical examples of this strategy involve utilizing cell tower While it is essential to understand the day-to-day aspects of office in -vestments, we now face a unique time in which the rapid spread of COVID-19 has affected everyone in the United States and throughout the world. The global economy has changed, and that includes the commercial real estate industry. While many people we talk with have told us that they are going to put their real estate purchasing on hold until COVID-19 concerns diminish, we have also had an equal amount of people reach out to us asking if they can buy more in-vestments because of how low inter-est rates are. We recently received a term sheet for a value-add office building with a 3.75 percent interest rate. Many lo -cal lenders are giving phenomenal deals for buyers in this market. Our team recently closed a mid-rise office project in Dallas that had over 10 of -fers and great activity even with the economic concerns surrounding CO-VID-19. All of that is to say that even if the most dire of macroeconomic situa-tions, smart real estate plays can still be made in fundamentally sound markets like the DFW office sector. It just takes the right knowledge. Cody Payne and Blake McCool are senior vice presidents in the Dallas-Fort Worth office of Colliers International focusing on capital markets advisory and disposition services of Class A and B office product. 16 • May 2020 • Texas Real Estate Business www.REBusinessOnline.com
Texas Real Estate Business May 2020: Page 16
