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Episode #11 - What Industrial Tenants Need to Know About Office Space


Episode Summary

The Industrial Advisors sit down with Greg Inglin, Executive Vice President at Colliers International, to discuss what industrial tenants need to know when making decisions about their office space.


Episode Transcript

Matt McGregor: Thank you for joining our podcast. This is Matt McGregor and Bill Condon, your hosts. And today we are talking about a very interesting subject that industrial guys don't typically talk about, which is office.

Matt McGregor: So many industrial tenants and even brokers, go into a deal really looking at the criteria of the warehouse and the cubic storage capacity and the location of it and the access and the truck [inaudible 00:00:32] and all that, and when it gets to the office design, even if it's a huge office design, a huge amount of square footage, there's not a lot of thought into it.

Matt McGregor: And so we decided to do a special podcast today on what industrial tenants and brokers should be thinking in terms of the design and criteria when thinking about office design in industrial space.

Bill Condon: Yeah, and we're really fortunate to have as a guest today, Greg England with us. Greg is one of the top office brokers in the entire country and has probably leased more office space over the last five years in Seattle than any other broker. So pleasure to have Greg here with us.

Matt McGregor: Thank you Greg.

Greg Inglin: Thanks guys. I'm glad to be here.

Bill Condon: Yeah. Good to have ya. I think a good place to start might be, office space as it relates to recruitment and retention of talent. Talk a little bit about that.

Greg Inglin: Yeah, I mean that is the number one thing when it comes to office space. What these tenants are looking for, it's really about hiring the best people and keeping the people they have. Because I mean, if you just follow the headlines, it's like an arms race between these tech tenants for hiring good people, and we're fortunate in the Northwest that this is a place they want to be.

Greg Inglin: But if you think about it in college football terms in recruitment, right? You think University of Oregon has this awesome facility, right? They want to show it off when they tour people, and recruits and prospects.

Greg Inglin: The tech sector is very similar. I mean they get benefits, and great salaries and all that, but it's also about having great space that people want to work in. And then the other part of it is about efficiencies and productivity.

Greg Inglin: I mean these real estate directors and executives making office decisions, they want to get the most out of their people. So that might mean having a cafeteria as part of their bigger space because their people can eat lunch, a good lunch, and he can get right back to work. Right?

Greg Inglin: The decisions on office space, particularly for the large tenants, they're not worried about the last 50 cents of rent, right? They're worried about location and the quality of the space that is going to lead them to hire good people.

Matt McGregor: That's a great point. And industrial tenants, I don't know, and we'd love to understand the process that you go through because I would say industrial tenants, you spend 99% of your time negotiating everything to do with the warehouse, and then the landlord will shoot us over some, you know, if you need 8,000 or 15,000 feet, they'll shoot us over some space plan and maybe we'll go through one or two little changes in space plan, and it goes back and forth a couple of times and it's good.

Greg Inglin: Right.

Matt McGregor: So nobody's thinking about how many people are in here, how big, per square foot per person and [inaudible 00:03:19] and you know, all of the things for recruiting and retention. So what should industrial tenants think about in regards to that?

Greg Inglin: Well, you know, there, there's some great architects out there that have done some studies on this, and the things that mattered to people in an office environment, and think about your own office environment, is natural light. That's important to people, right?

Greg Inglin: So, you think about an industrial warehouse and you know, maybe the office space has windows just on one side. But whether it's skylights or windows, the amount of natural light coming in affects the employees, right? And there are studies that show people have less sick time, right? With the more natural light they have.

Greg Inglin: So maybe lower cubes, higher ceilings, just something that gives it that volume, and you think about the work environment that you would want to be in, versus just as an afterthought. The other thing, and this applies to all office space is, it's tending to be more open these days in office space, particularly with large tech tenants.

Greg Inglin: But even professional services. We're seeing law firms start to have, or financial firms even, have more open space and more, we call them cube farms back in the day, but they're lower cubes or their benching style and you can fit more people in. But the reason they also like to do that is those employees are interacting more with each other because they see each other, they hear each other.

Greg Inglin: If you go that route, you also have to think about privacy with phone rooms, breakout rooms, things like that. If you're planning a 200,000 square foot office space versus a 5,000 square foot office space, it's all relative, right? It's got to be to scale. But I think natural light, ceiling heights ... kind of how people interact with each other are really the keys to how successful that build-out's going to be for that tenant.

Bill Condon: Yeah. It's interesting you mentioned collaboration. I think that in the office world when you, when office tenants are looking for space, oftentimes that that space really reflects who they are as a brand. What they want their brand to be.

Bill Condon: So if they're very highly collaborative, they have that open feel. What are you seeing in the office world as companies are becoming more and more aware of their space reflecting their brand? Are you seeing certain trends in that space?

Greg Inglin: Yeah, I think you see it a lot of times in the lobby areas where they might interact with the public, or their clientele more. They certainly want to have their branding in the, you know, when get off the elevator and you enter this space. I mean that's probably the most key area. So there's a lot of branding there, but even as you work your way around the office, instead of just a painted wall on a hallway, they might have a history of the company there. That the architect has helped develop. Or their mission statement painted on the wall, pictures of their employees or their families and things like that.

Greg Inglin: The other thing they do, maybe not so much branding, but collaboration is, back in the day it used to be the kitchen area right is an afterthought and you throw it kind of along the corridor, kind of internal where it might be darker because that's the hardest space to figure out what to do with.

Greg Inglin: Today, those tenants are actually putting the kitchen area in the best corner, with the window line. And it's much bigger because when you do that ,more people use that kitchen, right? More people ...

Bill Condon: Camaraderie.

Greg Inglin: Yeah, they come together, you have company parties there, and that interaction that employers are hoping to see amongst their employees, that just happens naturally in places like that.

Greg Inglin: Or you might have breakout spaces, where teams of three to five people can just sit down on a couple of couches and maybe there's a whiteboard nearby. Just kind of make it easy for people to get away from their cube and can get together and ... again, it's an employer's, their greatest investment, again, isn't the real estate, right? It's the intellectual capital that their employees are bringing to work every day. Right? I mean that's, that's really what they're investing in.

Greg Inglin: So you're trying to create an environment that's going to bring that out in people. I mean, that's where the value is. The value is in keeping good people and what they produce. Retraining somebody or retraining for a spot where you just lost three people. We think about the cost of that, right?

Matt McGregor: For sure.

Greg Inglin: Compared to spending a little bit more on a little better office layout.

Matt McGregor: Yeah, I can even see that being dramatically important for industrial owner landlords, because there's so few cool office build-outs that you ... Quite often you walk into warehouses when you're showing them to tenants, they all look very similar, right? A lot of them.

Matt McGregor: But when you walk in a cool, really cool, great office space like Greg is describing, in the industrial sector, it really pops. Probably more than anything. And so from a leasing standpoint, second, third generation, if you've spent that extra money and thought, I would think that that would really help landlord as well.

Greg Inglin: Well, and when you think about where the executives are spending most of their time, it's that office. It's the office space, right? And so that could make a difference between a company choosing one building over another.

Greg Inglin: I mean, we recently sold a building in Auburn and the office was contemporary. It was cool. And everybody that walked through it was really impressed. And it would be a standard office build-out in a downtown high-rise. Right? But for the industrial space, people were blown away because you just never see it.

Matt McGregor: That's right. And you know, Sumner Ridge. I know we built two buildings up on the hillside, that both pre-leased, to Greg's point, really because of light and the view. Right? And because those guys went in those corporate offices and they went, "Wow." Right. This is a huge difference. And we pre-leased against great buildings that are still vacant today.

Greg Inglin: It doesn't have to be expensive necessarily, right? I mean, that office build-out. You don't, you don't have to build out to Google standard, right? Within an industrial setting. But if you think about the light or things that stand out to you, let's say you have 20 staff working in there. Maybe some executives, but also administrative and support people. I mean it takes time and energy to refill those positions, right? So if you can give those folks a better office environment, it's going to pay you back, right?

Matt McGregor: That's a great point.

Bill Condon: Yeah. You know, my sister just went to work for a company that's based here in Seattle and one of the things that they have, they have a separate ...downstairs they have this bar that's a really cool space that allows, a lot of people go at 4:30-5:00 after they're done working and you know they're still talking work, right? But it keeps people there.

Matt McGregor: Greg's got a bar in his office.

Bill Condon: He does. He does have a bar in his office. Yeah.

Greg Inglin: It keeps people there!

Bill Condon: All the bottles [crosstalk 00:10:34]

Matt McGregor: That's right, exactly. Greg, real quick on, you mentioned different sizes. We're familiar with terms like dock height doors and clear height and things like that. Tell us about the terms in office, like how many square foot per person are you supposed to have? What's a floor plate, and what are these ... Give us the quick five office terms, but more importantly, square foot per person. What are the rules with that?

Greg Inglin: So it varies, right? If you have a lot of offices, it's going to go up because it's not as efficient, right? But I mean generally speaking, it used to be 200 square feet per person. Today it's more, I'd say it's closer to 160-165.

Matt McGregor: That's a lot of kind of working space cubes.

Greg Inglin: Yeah, I mean it'd be for an average office, say a 5000 square foot office, you might have two or three private offices, one conference room, a kitchen area, kind of a cube area, and then a server room or something like that. That'd probably average out to 165. So 165 square feet per person is just a kind of a general average. Up to 200. It's still going to fit in that range.

Greg Inglin: But I mean the terms that you'll see most frequently, I mean floor plate size, which you want to understand. How your space is fitting in the building. I think you hear low factor. So on office space, without getting too far in the weeds, there's two things. There's a usable square footage, and a rentable square footage. And the difference between those two is a load factor.

Greg Inglin: So the usable is actually, if it's 10x10 it's 100 square feet, right? But if there's a 10% load factor, you're going to pay rent on 110 square feet, right? Because that 10% that you're paying but you don't feel like you're using, is the divided space of the lobby, or the gym.

Bill Condon: Common area?

Greg Inglin: It's common area.

Matt McGregor: Okay.

Greg Inglin: Yeah. Or amenity area, which we haven't talked about, but that's important. So if you have a big gym, or some breakout space that everybody can use, you share in that through your load factor. That comes down to efficiencies, right? So if one building has a pretty low load factor, it's going to, it's going to plan out more efficiently than another building that has a higher load factor. Your space will go further.

Greg Inglin: The rest is pretty similar. I mean we deal with, ROFO rights and things like that which you guys do. I think operating expenses are another thing that you know are probably different than office, in how those charges are passed through to the tenants. So understanding operating expenses is important because that can differentiate one building from another.

Greg Inglin: And then it's really ... you want to know ceiling heights. We like to know the height of the windows. In our office building where we are today at 2 Union Square, the finished ceiling height is eight and a half feet, and the top of the window line is eight feet. In the new office buildings I'm working on today, the top of the window line is at 10 feet.

Greg Inglin: So you're getting a lot more window line in newer office buildings, which is kind of changing that tenant experience.

Matt McGregor: So you think maybe industrial developers should consider on their panels a taller window line?

Greg Inglin: If it's possible. I mean if on that corner of the building, let's say, where the office is going to go, if you can do a higher window line, the more window you can get, I think the better. Whenever I tour tenants, and I mainly work on the agency side, so listing broker, but when tenants come through a space and there's a window in front of them? They always go, they walk straight to the window. Ir they walk straight to the view. If they have an option, right?

Greg Inglin: And that's telling of what our instincts are. We want to go see what's outside. We want to see the view. We want to understand ... if I'm going to be working here, what am I going to be looking at all day? And that just, that just tells you what that human nature is desiring, right? Which is window line, which is light. So those are really the kind of the big factors I think, without getting in the weeds too deep on the office side.

Matt McGregor: That's great. Well these were awesome points, Greg. We want to thank you so much for this. We feel a little bit smarter.

Bill Condon: Yeah, a lot smarter.

Greg Inglin: Hey, we used the phrase intellectual capital. I don't know if that's the first time on this podcast, but it might be.

Bill Condon: I'm definitely using it on the next one. [crosstalk 00:15:31].

Greg Inglin: Feel free.

Bill Condon: Yeah, load factor. I got it all.

Greg Inglin: He got it all.

Bill Condon: No, that was great. Thank you, Greg.

Greg Inglin: Yeah, glad to be here.

Matt McGregor: Appreciate. Thanks for the listeners. As always, industrialadvisors.com, and you can find us on all your favorite podcast apps.

Matt McGregor: Thanks a lot.

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© 2018 by Matt McGregor and Bill Condon, Colliers International

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