As the old property management saying goes: “Tenants aren’t part of the business. Tenants are the business.”

Until recently, a combination of competitive renewal rates and generous concessions was sufficient to effectively market commercial real estate office space and retain tenants. Today, with sagging effective rents and increasing office space availability, both direct and subleased, managers must either differentiate their property in the market or further discount their rental rates and join other landlords in a race to the bottom.

The numbers don’t lie. According to a January report by Steve Kerch on “CBS MarketWatch,” U.S. office landlords now get $26.07 per-square-foot annually for their CBD properties on average, down from $26.27 at third quarter 2002 close and $27.35 at the end of last year. The national suburban vacancy rate rose to 20.5 percent as of December 31, the worst showing since rates hit 22 percent in the early 1990s.

Hierarchy of Needs

Other than an attractive economic package, what do tenants want? How can you differentiate your property from the competition? Let’s begin with four levels of “The Tenant Hierarchy of Needs”:

1. Physical. These include the most basic and fundamental needs addressed through a commercial office lease—location, workspace, parking, HVAC and janitorial services, to name a few.

2. Security and Safety. In our post-9/11 world, all office buildings must have defined, dependable security protocols and services. Tenants also expect their leased office spaces to be environmentally healthy.

3. Social. These include office interaction, connectivity and multi-tenant property activities and offerings and a relationship with the property management team. Such services form the basis of traditional tenant retention programs.

The first three levels of need— physical, security and safety and social—are satisfied by most well-run office buildings. You are expected to provide for these needs, but there is no way to distinguish yourself from the competition unless you shift your focus to satisfying higher levels of tenant needs. This requires a new way of thinking about tenants and their relationships and use within office buildings.

4. Prestige. Tenants need to feel they are part of something special. There should be exclusive privileges and services available to tenants by virtue of their occupancy in your building.

This sense of cachet—creating a support for the tenant’s use and business needs—is not unlike the incubator environment offered at university, technology and research parks. These office properties offer a support environment for a broader base of business and growth firms.

As the concept of outsourcing has continued to evolve, various services and businesses can collaborate via a seamless network of strategy, process, people and technology. As a best practice, companies can focus on their core competencies and leverage relationships. By merging the strengths of external sources combined with their internal strengths, businesses become more effective overall and ultimately more profitable.

By working with building managers to coordinate emergency and evacuation planning, security protocols, procurement opportunities, electronic document management and printing, strategic occupancy planning and Web-based communication tools to create a building community, tenants benefit by enhancing their current operations as well as reducing some internal costs over and above their rent costs.

Expanded Service Menu

One way to distinguish your property from the competition is to provide an expanded menu of services for which tenants would otherwise have to pay extra. Small- and mid-sized tenants are likely to see improved business performance by offering extra services. By partnering with groups such as the Dallas-based human resources management company HRSeven (www.hrseven.com), property managers can differentiate their office buildings by incorporating a benefits and services package into their overall lease agreements. HRSeven’s IntegratedBusinessSuite™ includes guidelines covering human resources, marketing, finance, legal and systems integration, and the cost is an affordable (pennies per square foot) pass-through expense.

Using a package such as IntegratedBusinessSuite™, building tenants can reap benefits including in-building management advice and services; monthly on-site training in human resources, marketing, finance, legal and systems integration and business incubator-style support.

After implementing a benefits and services package for tenants, managers will likely generate ‘buzz’ about their building and increase tenant loyalty and property differentiation.

Technology as a Tool

During the past few years it has become increasingly clear technology, automation and the Internet all dramatically impact tenant retention. Although we are still in the early stages of a digital or paperless paradigm, more tenants are making managers aware of their electronic and wireless needs. For example, law firms using a Microsoft Table computer as opposed to a yellow legal pad have different requirements than traditional law firms taking up an entire building floor to store paper files.

Tenants requiring wireless solutions are not only technology companies. Insurance companies, law firms and accounting firms are all doing business in a different way. Such tenants expect and require new amenities from their office buildings. High-speed Internet access, wireless facilities, digital signage networks, Internet-based tenant/landlord/manager communications systems and sophisticated IP-based security systems are a few of the amenities necessary to attract and retain this new generation of tenants.

Building managers failing to understand and offer these technology amenities at their facilities are already at a competitive disadvantage. A landlord in San Diego is experimenting with the idea of providing bandwidth, free of charge, as a fourth utility. As a result, building occupancy is 15 percent higher than the market. Another landlord in Orange County , CA has created a new type of technology-assumed culture at his complex and is experiencing 100 percent occupancy, while the local market struggles at 80 percent. Case studies from around the nation support the theory that “digital buildings” achieve higher occupancy and retention, net higher rents, require lower operating costs and, in the end, result in increasing a building’s worth.

Building managers failing to understand and offer these technology amenities at their facilities are already at a competitive disadvantage. A landlord in San Diego is experimenting with the idea of providing bandwidth, free of charge, as a fourth utility. As a result, building occupancy is 15 percent higher than the market. Another landlord in Orange County , CA has created a new type of technology-assumed culture at his complex and is experiencing 100 percent occupancy, while the local market struggles at 80 percent. Case studies from around the nation support the theory that “digital buildings” achieve higher occupancy and retention, net higher rents, require lower operating costs and, in the end, result in increasing a building’s worth.

It is too early to state as fact all technology-friendly buildings are winning their local occupancy war. And while predicting the future is difficult and risky, it is easy to believe the new generation growing up on the Internet, communicating through instant messenger programs and sending e-mails through mobile phones might not want the same type of office space their fathers or grandfathers wanted.

Get on Board or Be Left Behind

Tenants want that extra something they can’t get just anywhere: A sound relationship with their building manager as well as service that can be differentiated as offering a value proposition to improve their business performance. Buildings providing special services and offering an enhanced operating platform for its occupants have a strategic advantage in attracting and retaining tenants. Always remember tenants aren’t just part of the business; tenants are the business. By focusing on providing services that work toward aligning the business and physical needs of its tenants, building management is supporting the businesses of its tenants in a more strategic way. A building positioned to help maximize its occupants’ business efficiencies and effectiveness has created a new type of tenant retention program for today’s market. l

Maureen Ehrenberg, CRE, (This email address is being protected from spambots. You need JavaScript enabled to view it.) is president of Grubb & Ellis Management Services, Inc., AMO®.