Location Size and Potential Uses

As with all real estate, the location of office and industrial space is a key consideration in both market and feasibility analysis. However, size can be deceptive. Many landlords will report a building as being physically larger than it actually is. The net rentable area is the reported size of the area available to the tenant; the gross square footage is traditionally the actual physical size of the entire building. Originally, when a landlord rented an office space, he would lease only the tenant space (the car-petable area), but also calculated a charge for the rest of the buildings (shared bathrooms, common areas, lobbies, stairways, and elevators, for example). Over time, some landlords discovered that it was advantageous to resize the building and claim that it was bigger than actual measurement. Tenants and their brokers became wise to this strategy, so that negotiations often involve not only rent levels, but also how to calculate the size of the space.

The analyst should try to confirm reported size independently and calculate actual size by reviewing floor plans, land maps, and other available tools. The analyst may even notice that two tenants on different floors occupy identical amounts of space but have different reported square footage.



FIGURE 7.3 Ten Largest Industrial Markets, 2004 Source: Society of Office and Industrial Realtors.

Office space size classifications are quite varied, given the differences between high-rise buildings and stand-alone projects. However, even when larger buildings are involved, a second size consideration should be given a lot of attention, especially when an owner will be reviewing feasibility with tenants in mind: that of each floor's size. In a high-rise building, each floor may vary between 15,000 and 35,000 square feet, whereas smaller office buildings may have collectively larger space but more limited overall cash flow potential. If the floor area is too large, then distance from windows (thus, light source) and the building's core will be too great. If the floor area is too small, the space cannot be utilized efficiently. So the floor area may be critical to the specific use.

Location is another important feature for analysis. If an industrial space is in a relatively isolated location and is proposed for use with a lot of delivery and pick-up requirements, the analyst would have to factor in the added time and cost involved. If a similar space were located near a major freeway exchange, port, or railway terminal, it would be a considerable advantage. Clearly, these two properties would not be comparable because of the permanent differences in the cost of operation.

While the rules for judging feasibility, that is, reviews of cash flow projections, follow the same general guidelines no matter what sizes are involved, the analyst will need to review a project specifically by comparing square footage (overall and by floor) to perceived tenant mix, lease terms, and the flexibility in planning of space.

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