Tenant Advisor Newsletter DEC 2010

The Tenant AdvisorDecember 2010Inside this issue:How to Minimize the Cost of Office SpaceHouston: A Tale of Two Office MarketsThe Way People Work is ChangingThe Market Dynamics for Large Office SpaceUsers Could Turn QuicklyElements of a High Performance Office SpacePlus: Office Relocation ChecklistThe Tenant Advisor is on the web @www.coydavidson.com

Contents If You Only Do Three Things How to Minimize the Cost of Office Space Houston: A Tale of Two Office Markets The Flight to Quality The Way People Work is Changing The Need for Collaboration is Client Success Story: The Methodist Hospital Methodist West Houston Hospital Campus Set to Open The Market Dynamic for Large Office Space Users Could Turn Quickly Office Vacancies are at Cyclical Highs, but Shortages Loom Elements of High Performance Office Space 5 Building Selection Criteria for a High Performance Team Office Relocation Checklist A Step-by-Step GuideAll articles contained herein are the opinion of the author and not those of either Colliers Appelt Womack Inc. or Colliers International (collectively, "Colliers"). Colliers neitherendorses, sponsors nor necessary shares the opinions of the author, regardless of whether any article is posted by any employee, officer, agent, or representative ofColliers. Colliers has not authorized or verified any statement of fact made in a article, and any such statement does not constitute a statement of fact by Colliers. Colliers isnot responsible for the monitoring or filtering of this newsletter, nor does Colliers claim ownership or control over any the newsletter content

Its been over two years since the Credit Crisis and nearly three years since the start of The Great Recession. Although the recession officially ended in June 2009, most markets around the country are still waiting for some signs of life as theCoy Davidson economy continues to struggle with job creation, the required prescription for ailingSenior Vice President commercial real estate market.Office Services GroupDirect: 713.830.2128 As 2011 approaches, another challenging year is behind us, and while thecoy.davidson@colliers.com economy is improving albeit slowly, many companies are taking a closer look atwww.coy.davidson.com their real estate as a means to not only control costs but also to increase productivity and be more competitive in this new economy. Understanding where we are in the real estate market cycle and the specific nuances of the current market phase will play an important role in developing an effective real estate strategy for your workplace going forward. For example, we are seeing recurring evidence of a bifurcated market where the trend of a “flight to quality” is tightening up specific markets and real estate asset classes. The recent economic climate has offered a tremendous opportunities for office tenants to trade up to higher quality buildings and secure attractive leasing terms at a perceived value. As a result the availability of large blocks of Class A office space is beginning to diminish Texas is leading the way in new job creation, and while Houston has lagged Dallas, and Austin in that regard, the recession’s impact was not as severe on the office market. The current state of Houston’s office market fundamentals would suggest the window of opportunity for office tenants still very much exists but could close sooner than many parts of the country. I am pleased to provide you with this issue of the of my newsletter, which is tailored for the corporate office space user and addresses these topics. You can view all these articles and other related topics on my blog “The Tenant Advisor” at www.coydavidson.com. I hope you find the content informative. Coy Davidson Coy Davidson Senior Vice President Colliers International | Houston

The Tenant AdvisorI f Yo u O n l y D o T h r e e T h i n g sHow to Minimize the Cost of Office SpaceUnderstanding the 3 L’s Three Things You Must Do leverage in lease negotiations requires theEvery office tenant wants Location: Requirement proper timing andthe highest quality office number one is to get into approach.space available that fits the marketplace andwithin their operating conduct a credible market Layout: Requirementbudget. The ability to search to identify viable number three is to maintainachieve this objective and cost effective business cost control over the designrequires an understanding locations, even if you and construction process. consider it likely you will The efficiency of your officeof what drives costs and renew your lease. Location space and the cost to buildhow to manage them. The drives costs for both labor it out is the third majorprobability of success will and rental costs and the contributor to yourbe increased by utilizing Landlord strives to lease occupancy costs. Today,professional expertise space at the maximum many companies arethroughout the leasing current market conditions increasingly focusingprocess. will bear. These values can on space utilization with the vary significantly among objective of doing more “The ability to minimize market areas or a particular with less. Securing the occupancy costs building owners situation. requires and proper volume of office understanding of what Selecting the right space via efficient design, drive costs and how to location requires a space standards manage them.” comprehensive evaluation and construction of the marketplace which management can yield may uncover hidden significant cost savings. opportunities. A credible Who You Need on Your market search creates Team competition for your tenancy, which is beneficial You need threeThere are three factors that for requirement number professionals disciplines toimpact the cost of your two. identify, negotiate, designoffice space: and build-out the office Leasing: Requirement1. The Location you space that best serves your number two is to structure a choose financial and operational transaction that objectives. They include:2. The Lease Structure compliments your and Negotiations objectives and negotiate  Broker/Tenant Rep favorable financial terms3. The Layout of your based on current market  Architect/Space Planner Space conditions. Great deals are  Construction ManagerUnderstanding these not just simply found, but are structured with an In addition you willfactors and the close effective negotiation n e e d l e g a linterplay among each is strategy. In today’s market, counsel experienced in realcritical in getting the most Landlords are offering more estate to assist with thevalue out of your office flexible terms and lease contract. Hiring aspace. If a tenant fails in aggressive concession team of experiencedthis regard it is typically packages to retain and professionals who workbecause they did not attract tenants. Taking full hand-in-hand will insure theproperly address one of advantage of market best possible occupancythese factors. conditions and creating solution at the best value.

The Tenant AdvisorH o u s t o n : A Ta l e o f Tw o O ff i c e M a r k e t sThe Flight to Quality landlords of top tier assets High Quality Landlords core office in gateway based on completed have a Distinct Advantage cities, as this is perceived transactions and an in this Economic Climate as the next market segment increased deal flow, that an to improve substantially. The flight to quality also improving economy, albeit Cities most often applies to the quality of the slowly is pushing many mentioned included New building ownership. What I tenants past the stage of York, Washington DC, term as a high-quality indecision and into action. Boston, San Francisco, Los Landlord relates to a One of the more Angeles, and (to a lesser healthy financial position for encouraging signs that we extent) Dallas and Houston. the building owner, as well are seeing with our clients The recent report that as superior property is the move to quality Brookfield Office Properties management. The benefit assets and ownership. The is under contract to of having a quality landlord concept of “flight to quality” purchase the 1.2 million is important, as they have whereby tenants with lease square foot Heritage Plaza the adequate capital to expirations in a challenging in downtown Houston, at a wea ther t he curre nt economic climate are able price of $285 per square economic cycle, maintain to leverage deflating asking foot is evidence of this in the building properly, asHouston has proven to be rents and liberal leasing our own backyard. well as fund the tenantone of the more resilient incentives into more improvement obligations ofoffice markets in the United premium office space under lease transactions.States and the pain inflicted a cost structure equivalentby the “Great Recession” to what they were Credit is Kinghas been much less severe previously paying. In Houston, the downwardthan many major market The evidence of the flight to pressure on Class A rentalaround the country. That quality is two-fold, as we rates while noticeable hasbeing said, Houston has are seeing move from not been severe. We arenot been immune to the Class B projects to Class A, seeing more liberalimpact of the most recent as well as tenants who concession packages and arecessionary economic were previously in older more creative deal makingcycle. Class A project move to the perspective from most lAt the end of the third newer Class A projects andlords, especially forquarter, year-over-year coming on-line, or that have credit-worthy tenants. ThisClass A Rental asking been completed in the last is seen in longer term In Houston, the CBD,rental rates dropped 2.0 couple of years. leases with healthy tenant Galleria, Greenway Plazapercent in the CBD to finish allowances, abated and the Energy Corridor Bifurcated Market$35.16 psf, while while parking charges and a are generally consideredsuburban Class A space This trend of flight to quality tenant motivated to lease “core submarkets”.decreased a minimal 0.2 creates somewhat of a space that provides a high I believe the Houstonpercent to $27.30 per bifurcated market forcing quality work environment market will continue tosquare foot. Year-to-date, landlords of the lower for their employees. soften somewhat until moreHouston city-wide, has quality space to slash their “Flight to Quality” Extends robust job growth returns,recorded negative 311,225 asking rents significantly to the Investment Market bu t th e wind o w ofsquare feet of net absorp- and offering substantial opportunity to “trade up” totion, after recording 1.1 periods free rent in a The general perception that higher quality office assetsmillion square feet of nega- scramble for tenants. With, the higher quality assets at a perceived value will betive absorption in 2009. positive net absorption yet are performing better t h e f i r s t t o to appear, it is simply a extends to sales activity asDespite slow leasing close, particularly for larger case of musical chairs in an well. Nationally, we areactivity overall, there is a tenants. How soon, is the attempt to increase seeing investment capitalpositive attitude from ultimate question. occupancy levels. flow into Class A, urban

The Tenant AdvisorT h e Wa y P e o p l e Wo r k i s C h a n g i n gThe Need for Collaboration is time. The way people are collaboration via SocialChanging Office Design working is changing. Smart Media have emerged in the companies are providing workplace.In today’s competitive their employees with spaceenvironment, sharing The trend is toward a more that actually supports thisinformation and expertise open, flexible floor plan and new work style.can be critical in driving both while many companies stillindividual and organizational In the past, employees maintain a private offices u c c e s s . F r o m typically worked in silos environment for at leastforward-thinking business independent from co-workers some of their office space, “The agile office is one thatleaders to younger workers the majority of the time, but workstations are getting promotes collaboration and smaller and the dividers are innovation while still getting shorter as a result of observing employees needs workers need to collaborate for concentrated work time.’ more. Even the layout of workstations is changing to enhance space utilization and density. The Need for Flexibility For years tenant reps have been attempting to structure flexibility into our clients lease agreements through expansion, contraction, sublease and lease termination options. The Iwho have grown up in the now collaborate more in importance of these optionsWeb-based world, working groups. Collaboration is more for lease flexibility has notcollaboratively is now than weekly meetings in diminished. However todaybusiness as usual. conference rooms. Today, there is an increasing informal meeting areas, premium being placed onThe agile office is one that lounges, rolling tables, flexibility with the space itselfpromotes collaboration and benching, hoteling for offsite through office design to meeti n n o v a t i o n wh i l e s t i l l employees, video constantly changing spaceobserving employees needs conferencing and even needs.for concentrated workClient Success Story: The Methodist HospitalWest Houston Hospital Campus Set to Open Back in 2007, I represented The Methodist Hospital System in the acquisition of 86 acres at Barker Cypress and Interstate 10 for development of their West Houston Hospital Campus.This month the 478,500 square foot full service hospitaland adjacent 150,000 square foot medical office buildingopens for business. I am very excited to se this projectreach completion.

The Tenant AdvisorThe Market Dynamics for Large Office Space Users Could Turn QuicklyOffice Vacancies are at Cyclical Highs, But Shortages LoomBy: Ross Moore, ChiefEconomist, ColliersInternational USA.Despite The third quarternational office vacancy ratemoved marginally lowerduring the July - Septemberperiod, but at 16.3%,vacancies were still nearcyclical highs and at levelsexperienced following thetech bust of 2001-2002.Most observers wouldagree it is a tenants marketcharacterized by abundantsupply and depressedrents. Landlords aregenerally very flexible onterms and remainextremely aggressive bothin their efforts to attract newas well as retain existingtenants. One part of the several years, the space What does this mean for required. Landlords may bemarket, however, that could that is available today is Rents and Office able to move tenantsturn quickly into a landlords scattered across many Development? around to accommodatemarket is office buildings buildings and many floors, any large requirements in Economics 101 taught mostthat house large tenants as opposed to new the market but this just of us that when demandwhere office users often construction which is delays the inevitable. The exceeds supply, prices gooccupy 200,000 square feet almost always found in U.S. office market is about up. With such a scenarioor more. large blocks of contiguous to embark on a unique almost upon us, higher space. Furthermore, big period characterized byVery Few Large Blocks of rents are almost tenants cant rely on large economic expansion withOffice Space Currently guaranteed, perhaps not speculative developments no significant officeAvailable and Almost No imminently, but certainly that might provide relief in development other thanConstruction Underway within a few years. This will coming years due to the downtown Manhattan. This mark the beginning of theIf you look at current data dearth of downtown office will be an interesting time, next development cycle,on large blocks of available development underway. At and possibly a profitable usually with a limited num-office space in select the end of the third quarter time for landlords, but very ber of build-to-suits leadingdowntown markets. What just 10.7 million square feet challenging for certain the way. In the interim,can be observed is that was under construction, tenants. however, rents for thebeyond Manhattan, many however, nearly 25 percent Ross Moore is the Colliers limited number of largecities have just a handful of was 1 World Trade Center International’s Chief Economist blocks of space available tooptions available to large in downtown Manhattan, with a focus on providing lease can only go up.tenants. While this is not leaving very little for the b o t t o m- u p a n d t o p - d o w n Modest economic growth is analysis of commercial realcompletely unusual, what is balance of the 53 a prerequisite for the estate markets across the Uniteddifferent this time around is downtown markets tracked unfolding of such events States. In addition to his Northwith relatively little new by Colliers. America wide reports, Ross also but a key point is ansupply over the past authors all global research economic boom is not produced by Colliers.

The Tenant Advisor E l e m e n t s o f a H i g h P e r f o r m a n c e O ff i c e S p a c e 5 Building Selection Criteria for a High Performance Team There is no question that access is a key issue in productive staff. Also projected occupancy costs making the proper building important is natural light. are a primary factor in selection. The reality is, at Selecting a building that is building selection for office the end of the day people well designed and allows tenants. Companies will are time poor and the ability for a space plan that only select buildings that fit for your employees to get maximizes natural light has within their projected to your building as quickly shown to improve operating budget and have and as efficiently as productivity according to the required volume of possible is an important numerous studies. In fact, office space to meet their productivity factor. the California Energy needs. However, today Choosing a location is Commission issued a companies are paying primarily a workforce and report on the relationship closer attention to how customer demographic between windows and office space and real estate driven decision, but office worker performance impacts the performance selecting a particular that concludes that basic and productivity of their building with good access design choices such as workforce. As a result, to freeways and public more natural light, more companies are placing an transportation, as well as a windows and better increasing emphasis on convenient parking garage ventilation can dramaticallyToday, in order to insure ahigh performance additional factors beyond is important for a productive effect worker alertness,workplace it is critical that the economics and the workforce. productivity andbuilding selection is aligned availability of space when performance. Retail Amenitieswith Human Resource selecting an office building. Going Greenstrategies Today office tenants are Image placing a higher priority on The corporate space user The choice of building is being close to retail is increasing their focus on increasingly important for amenities whether they are sustainability as a means to staff considerations. The actually located in the reduce occupancy and quality of your building and building, complex or very operational costs as well as office space is an important nearby. This includes both their commitment to be factor for both recruitment restaurants and service good stewards of the and retaining quality retail such as banking and environment. There is a employees. Today, in order postal services. The ability growing desire among to insure a high to access these amenities corporate leaders to performance workplace it is without getting in your car achieve environmental critical that building is considered a significant sustainability through selection is aligned with boost to productivity. LEEDS certified design Human Resource principles, effective energy Building Systems and Design strategies. The building and management and building your office space portrays The more comfortable efficiency. We are the image that reflects your people are in their increasingly hear our organization both to your workspace, the more clients tell us they only employees and your productive they will be. The want to consider buildings customers. When a number one complaint most that are LEED certified as customer enters your tenants have regarding sustainability moves from premises, your office space their office space is related niche to normal. Today, a is the first impression they to temperature issues. green design is a key factor have of the culture of your Selecting a new or in recruiting talented organization. renovated building with the employees particularly proper HVAC systems, and Millenials, and GenX-ers Access the ability to maintain a Whether you choose a comfortable workspace CBD or Suburban location, makes for a more

The Tenant AdvisorO F F I C E R E L O C AT I O N C H E C K L I S TPRELIMINARY Notify present landlord of termination date Advise staff of date and location of move Solicit RFPs, interview and engage moving company Create a master change-of-address listPRE-MOVE: GENERAL Reserve elevators and loading docks for moving day Bid and award moving contract Bid and award telephone and computer cabling Inventory existing furniture Code furniture and equipment on a color-coded floor plan Audit keys Order any new office furniture and equipment Order new stationery File change-of-address forms with post office and forward mail Check your insurance coverage for the move Obtain the Certificate of Occupancy and any other required permits or licenses Advise suppliers (telephone, bottled water, coffee service) of new address Mail moving notices Banks and financial institutions Photocopiers Clients and customers Professional organizations Credit accounts and credit cards Insurance companies Accounts receivable and payable Newspaper and magazine subscriptions Telephone company and internet service provider Prospects and special services Hold a meeting at new premises three weeks prior to move. Bring in all parties involved (design/ construction / mover / cabling company / information technology specialist) to ensure all details are covered and all responsibilities clear Schedule public relations effort, including plans for news releases and an “office-warming” party Change locks / access codes on new premises as close to moving day as possible to secure access Decide on security procedures for the move Arrange for listing on lobby directory of new building Arrange for post-move cleaning

The Tenant AdvisorPRE-MOVE: INTERNAL Organize a “staff moving committee” if appropriate and delegate responsibilities Schedule and prepare agenda for your employee move orientation meeting Finalize new seating plan and identify each location Prepare labels for moving furniture and boxes to new locations Assign move supervisors in each department Develop a master relocation project schedule Schedule and implement a clean-up program (purge files, dispose of trash) Schedule staff for unpacking, including stocking supply cabinets, storerooms, file rooms, and removing tags from all furniture and equipment to ensure your company will be operational as rapidly as possible after move Arrange for off-site storage of old files Pack contents of all filing cabinets and desks, ensuring everything is properly labeled Arrange for staff to tour new premises a few weeks prior to move Schedule post-move training for security, fire, and life safety procedures at the new facility Distribute access cards and keys for new premisesMOVING DAY Arrange with the building manager to have the air conditioning on during the move Remove computer equipment (server) and phone system prior to arrival of movers and commence reinstallation at new site Draft an emergency contact list for vendors such as elevator maintenance, building management, utilities, telecommu- nications and moving companyPOST MOVE Install and test telephone system Distribute new phone list and map showing the locations of departments Install and test all computers Do a detailed walk-through of the premises and report any damage to moving company Transfer your insurance to the new location. Obtain Certificates of Insurance from your insurance company Confirm termination of old leases Collect parking passes, security cards and keys for the old facility. Confirm the return of any deposits held by the landlord for these items Audit final invoices against contracts Complete and file all warranty information for all new furniture and equipment Update fixed asset accounting system for any new furniture and equipment purchased Confirm the change-of-address corrections made Schedule press release and client announcement

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Tenant Advisor Newsletter DEC 2010

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