Tenant improvement (TI) packages and allowances that include smart building solutions attract and retain tenants in a time of rising rents and vacancies across the U.S. office and commercial real estate markets. According to JLL Research's Q2 2017 U.S. Office Outlook, total vacancy increased for the third consecutive quarter in almost all asset classes, rising 10 basis points to 14.8%. The greatest vacancy growth was in Class A buildings, as rent growth and new supply outpace demand from more cost-conscious tenants who are looking to Class B buildings with attractive tenant improvement and concession packages (e.g., rent-free first month).
Commercial Real Estate Construction and Rents Are Booming
New construction costs remain high, but strategic capital planning and innovative TI packages are attractive to tenants seeking renovated office space in prime locations.
According to JLL Research, tenant allowances have risen by 10.5% since 2014, closely following the growth rate of rents. Since the beginning of the expansion in Q1 2010, there has been significant rent growth across all classes, led by commercial business district (CBD) Class A buildings at 35.7% growth.
A different story is told by the more gradual growth in Class B asset rent and unchanged total vacancy in Q2 2017, remaining at 12.3% and 16.7% for CBD Class B and suburban Class B, respectively. Tenants across industries see that they can get more value and customization opportunities in both CBD and suburban Class B buildings.
Smart Building Solutions and Tenant Improvements
In a prior blog post, we discussed uses for common area maintenance (CAM) funds and the fact that they may be used for capital expenditures that provide benefits to all tenants. When surplus CAM funds are available, it makes sense to invest in a smart building automation system (BAS) that reduces CAM charges and utility costs for the entire building. This is a capital investment that improves the building's value and infrastructure for the benefit of all tenants.
With 75F smart building solutions, total energy costs can be reduced by 30%, combining the savings from efficient HVAC, lighting and hydronic controls that are powered by Internet of Things (IoT) and predictive cloud computing technology. Additionally, you can enhance and extend the value of your existing HVAC infrastructure (across brands and types) by retrofitting 75F's quick-deployed wireless system which reduces installation costs by about 50%. The machine learning capabilities of such an advanced BAS provide a system that proactively improves and manages both energy efficiency and occupant comfort in your building.
Reduced energy costs provide the most-immediately realized financial reward of a fully integrated BAS. Though additional savings are delivered through the reduced maintenance, minimized equipment downtime and increased production capabilities and extended lifespan of your equipment as additional benefits from predictive technologies. Tenants are placing higher value on work environments that deliver comfortable temperatures and healthy indoor air quality, as well as sustainable eco-friendly attributes.
So, wouldn't it also make sense to include such an investment in a TI package? Property managers have the option to stagger investments in building automation technologies as new tenants move in and as surplus CAM becomes available.
Highlighting Benefits for Tenants and Property Managers
Tenants benefit from a BAS that can show them performance data in user-friendly dashboards, with user-defined and automation controls to hit both energy efficiency and comfort goals. Ultimately, occupants benefit from the combination of comfort (temperature and humidity), improved indoor air quality (optimizing outdoor air, CO2, CO and NO2 sensors), precise lighting controls (occupancy sensors and scheduling), all factors that can boost employee productivity. And, 75F offers a user app empowers occupants to personalize zone-specific temperatures and lighting.
Property managers benefit from tenants who are more engaged with the BAS and renew leases more often as they see gains from improved technology, proactive management, energy efficiency and increased productivity. Smarter and more efficient property services delivered due to visibility to issues and predictive maintenance with remote monitoring capabilities and alerts. The predictive analytics of the smart BAS system notifies you when equipment may need attention or replacement, which reduces maintenance costs, prolongs equipment life and boosts performance. Additional energy savings may be possible through peak shaving (reducing electricity consumption during peak demand hours) now that you have the data at your fingertips.
Combining all of these benefits increases net operating income (NOI), which can improve investor returns and create capital for investment in additional projects. According to JLL Research, tenant improvement packages range from $30 to $50 per square foot nationwide. At less than $5 per square foot, a smart BAS that optimizes the use of IoT, cloud computing and machine learning technologies can reduce costs and add value to your TI packages, while boosting returns for owners and tenants alike.