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Determining True Value

In a recent column dealing with the Internet industry’s office needs, I quoted a leading national real estate investment specialist as saying: “E-commerce is changing real estate’s maxim from ‘location, location, location’ to ‘location, price, service.'”

He’s right, but the trend extends far beyond the needs of e-commerce office tenants. When you think about it, those three determinants of value apply almost universally throughout today’s commercial real estate market.

Location, of course, continues to be the chief virtue in real estate. Few would argue that downtown San Diego and downtown Ramona compete for the same users or fetch the same leasing rates. But in today’s competitive real estate market, location can become an exaggerated value if price and service factors are ignored.

Office space shoppers need to broaden their concept of what constitutes real value in office space. The typical tenant prospect being hustled about by the building owner’s tour guide/leasing agent doesn’t have the means to assess true value. The tenant looks out the window and sees a city or bay view. He or she is shown the convenient underground parking garage and is impressed that the parking spots assigned to the space are close to the elevators. Ah, yes, the restrooms seem clean and tidy and the elevators are conveniently situated and appear to operate efficiently. Sure, there are a few maintenance problems that are immediately apparent, but, hey, the space is a little cheaper than what’s available down the block and the broker is quick to point out the great deli in the building lobby — and it’s downtown as well. Where do I sign?

This all-too-common approach is a good example of placing undue emphasis on location. Finding the best value in office space doesn’t come as a result of taking a quick tour of all the available office spaces. Determining real value takes professional insight into price and service factors — things that are not readily apparent if location is considered as the primary value. This is a good place to say it isn’t a matter of substituting the location factor for either price or service as singular alternatives. All three must always be included in any complete assessment of real estate value.

An example of a tenant looking for 5,000 square feet of office space can illustrate how location, price and service factors need to be equally considered.

Our tenant here has found two spaces, each the same size and within the same general location. One space is a nickel per square foot cheaper; however, additional research reveals that the building management does not have any reserve fund set up for deferred maintenance. The other space is in a building where such a fund is in place. The $250 per month premium for the “more-expensive” space could easily be the bargain if there is considerable maintenance required during the period of our tenant’s leasehold.

Now, let’s extend our tenant example to take into account the service factor. Location factors in our example are relatively the same, and even the leasing rate and reserve funds are equal. One of the buildings, however, doesn’t have a management staff that is adept at keeping common areas and equipment up to par. That will be important the next time one of the elevators breaks down due to poor maintenance and our tenant is stuck between floors.

I don’t want to leave this topic without talking more about location in the three-part equation. Location is often important in creating positive perceptions on the part of a tenant’s employees. I’ll use downtown San Diego as the baseline. For example, while Sorrento Mesa may have larger building footprints and therefore typically more efficient layouts for technology users, downtown San Diego has many cultural benefits — a great selection of fine restaurants, better access to public transportation, entertainment and the excitement of being in the bustle of a dynamic area. That creates strong value.

For some office users, to be able to walk up a downtown street to see an accountant, banker, attorney or other clients creates a positive synergy that the location factor solely provides. For others, proximity to areas of the county where many employees live is an important locational value. Downtown is far closer and more accessible to the bedroom communities in South and East counties than Sorrento Mesa and other northern locales.

The point is all three value factors need to be weighed and taken into account if tenants are to find true value in today’s commercial real estate market.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.

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