Throughout the country, office rents continue to inch up as space tightens. But what's driving rents up as much as demand are still-rising construction, energy, and insurance costs that landlords would like to pass along to tenants. Since the beginning of this year, national construction costs are up about 25 percent, while heating and electrical costs have climbed about 20 percent. In this environment, landlords feel justified in trying to recoup their losses and limit tenant improvement allowances and other concessions.
In response, it is important that tenants protect their interests by negotiating aggressively with vendors and landlords. They should also consider the counsel of project managers who perform "value engineering" to maximize tenant improvement allowances. Project mangers have particular significance for technology companies that are building out or renovating their offices.
Savvy firms are also looking at contingency planning in the wake of disasters that have spiked construction and energy costs. When natural disasters strike, corporations are often not prepared. Such was the case when New England was socked by the Blizzard of '78, and such was the case one year ago with Hurricane Katrina, the ripple effects of which continue as the Gulf Coast rebuilds. Before Katrina, natural disasters such as Hurricane Andrew's August 1992 assault on Florida made all of us acutely aware of our vulnerabilities to disaster. Catastrophes of this magnitude are rare, but still very real.
Higher Costs and Shortages
One result of last year's hurricanes is construction costs that are running much higher than usual. The full effect of these repercussions is still being realized as insurance claims are settled and construction in that region accelerates.
A related problem is a shortage of equipment. As expected, inventory at lumberyards is down for plywood and drywall products. More unusual, mechanical systems such as generators, roofing, and HVAC are also in short supply, as are roofing, carpets, insulation, asphalt, gypsum, cement, and plastic byproducts. While corporations can't expedite the delivery of these key supplies, they can avoid further project delays and even higher prices if they order supplies in advance. Once a widespread disaster strikes, the price of raw materials increases and advance buying power evaporates.
Another shortage involves the labor market. To fill the need for extra manpower in the Gulf Coast, trade professionals - carpenters, laborers, plumbers, and electricians - have been siphoned from local areas. This coincides with construction contracts awarded for the rebuilding, and a consequence is a reduction of the labor pool in these industries.
Loss Recovery and Insurance
The first priority in any disaster is human safety. Saving assets is never worth endangering the lives of employees. In a major event, the fire department, civil defense authorities, or other professionals may restrict access to the building until it can be fully evaluated. Once safety concerns are met, the next consideration will be records and equipment crucial to the operation of the business, such as personnel records, inventories, and other vital business files.
Some companies are diligent enough to be prepared in the aftermath of a disaster; others are not. It is important to accurately measure the loss by forming a business continuity plan (BCP) and a loss measurement team ahead of time. Insurance companies may require you to divide the damaged assets into certain categories before claims can be finalized. Maintaining good records on inventory, assets under construction, furniture, fixtures and equipment, and technology is vital to financially surviving a disaster event. Additionally, when construction projects are halted due to a natural disaster, have a team ready to mobilize and quantify the damages, including loss of schedule and remobilization costs, trailers, or other unexpected rental expenses that may be required to restart and complete those projects.
Planning for Contingencies
Moving past the hurricane season, what about the prospect of future blizzards, tornadoes, wildfires, and other disasters? What happens when an oil truck along your major access road can't make it up a hill to refuel? To avoid such situations and resulting work stoppage, companies should consider arranging for the delivery of alternate sources of fuel, such as a second diesel generator or natural gas.
In addition to responding to natural disasters, corporate real estate executives and facilities managers are advised to form a BCP that deals with potential terrorist attacks and pandemics. To plan ahead, companies should identify risks, set priorities for protecting people, products, and plant, and formulate a strategy for implementation and recovery. A prudent first step is to list geographic and climatic hazards and other risks that could jeopardize the buildings.
Contingency plans may involve shifting employees away from a facility that temporarily shuts down. By setting up remote warehouses that would allow for quick hookups of vital systems, companies won't lose critical time and production. This is particularly a concern for companies that operate 24/7 and have call centers.
Finally, in anticipation of higher energy costs associated with disasters, companies should assess their energy efficiency systems and review plans for optimal office insulation. This is particularly important for high-tech and telecommunications companies with elaborate wiring needs.
Questions to Ask
Look carefully at your building and site, and check the surrounding terrain.
• Is the building located on a slope?
• Is the basement above flood level?
• Are there trees near the building?
• Is there a history of leaks or other building and structural problems?
Within the building, check on fire protection systems, electrical systems, plumbing, and environmental systems.
• Are there enough fire extinguishers, and are they regularly inspected?
• Does the building have well-maintained fire alarms and a fire-suppression system?
• Are there any problems with the climate-control system?
planning may require hundreds of thousands of dollars, a tough nut for
companies on tight budgets. On the other hand, this kind of investment
pales compared to the devastating consequences of not planning ahead.
It is easier to form the right response team before an event happens
than during the aftermath of one.
Companies need to assemble the
right team of professionals, both in house and outsourced, to create
and implement disaster strategy. It is important to involve experts who
can present the best options for disaster planning. This involves
knowing the kinds of investments to make - and avoid.
effect of disasters is that they raise corporate awareness and force
critical analysis. Whether companies are looking to relocate or renew
their leases, they need to understand the implications of their actions
- or lack thereof.
Patten is director of project management at CRESA Partners in Boston,
New England's largest corporate real estate advisory firm specializing
in tenant representation and corporate services. Worldwide, the firm
provides services in 35 countries, including 44 North American CRESA
Partners locations. He can be reached at (617) 758-6000. Visit the
company's website at www.cresapartners.com.