A key process for the CRE executive is overseeing the site selection process, particularly for major office, data center, or manufacturing sites. I’m going to focus on office site selection since this typically represents the most frequent type of leasing actions. In general, the CRE team will depend on their real estate advisors to conduct the site search, and report back with eligible site alternatives. The goal is to winnow the candidates down to at least two, then enter into negotiations with both to create competition and thus, obtain the best terms and rates.
So what are the key site selection criteria to be used by the real estate advisor?
· Target market: The first step in the site selection process is to agree on the target market. Assuming a relocation of an existing office site, the preference will be to relocate within the same area to minimize disruption in staff commuting patterns and customer access. For strategic reasons, the site may represent a major change such as a move from the central business district to the suburbs. But this is the exception. The CRE executive will want to know the real estate market outlook, from the standpoint of trends, rental rates, availabilities, absorption, etc.
· Proximity to transportation services: What transportation services are available to the site alternatives? What about parking?
· Safety and security: What are the crime statistics in the targeted market? How do the alternative sites rate in terms of physical security? Are there any recent incidents to suggest a safety risk?
· Space availability: What are the availabilities relative to usable and rentable space? What are the loss factors, i.e. what is the ratio of usable to rentable space? How is the space configured? And is the space contiguous or split between floors?
· What is the energy efficiency of the alternative sites? Has the building structure been designed and constructed with the latest in energy standards such as the LEED standard? What is the current electrical cost per kilowatt hour? Is electrical a separate expense or included in the expense stop?
· What are the key provisions in the standard building lease? Renewal options? Expansion options? Termination options? How does the asking rental rate compare to comparables in the local market? What are the terms relative to escalations? And how are escalations determined? Does the tenant have the right to audit annual expenses?
· What does the building owner provide relative to leasehold improvement allowances? Is there any rent abatement? Are they any other tenant incentives? Is the tenant allowed to use its own capital for improvements?
· Are there any restrictions or impediments that would reduce tenant flexibility or operation? For example limiting hours of operation? Using landlord contractors? Using landlord building services?
Conclusion: A major responsibility of the CRE executive is to oversee and direct the site selection process. The process will vary depending on the type of structure. For example, a major retail location will require extensive analysis of customer demographics, buying patterns, competitive outlets, zoning, etc. A data center requires yet another set of criteria particularly issues relating to electrical power availability, rates, and growth potential. The security issues such as fire, earthquake, and flooding represent priority considerations in a data center selection. Manufacturing sites take on another set of unique characteristics such as labor availability, logistics, proximity to suppliers, etc.
Perhaps the single most critical element in the site selection process is competition. The CRE executive will want to insure that the final two site alternatives are put through a competitive process, both in terms of pricing and terms. And that all the key site selection criteria are addressed in the process.