The Flight to Quality & The Changing Definition of "Quality"



At the recent BOMA International conference in Kansas City, one of the most common topics discussed by panelists was the “flight to quality” happening across property types.

The challenge, according to the panelists, is that the definition of “quality” has changed significantly in the last two years.

Up until about 5 years ago, quality meant a lobby renovation, a new coat of paint, or just location in dense urban centers.

And then, with the combined adoption of technology and the pandemic, quality meant a digital experience for tenants, whether paying rent online, amenity apps, or a maintenance ticketing portal.

Now, the definition of quality includes the previously invisible “back-of-house.”

Operations are in the spotlight like never before. No longer just a cost center, the property management and operational workflows, as well as how the building itself performs are significant factors in leasing decisions.

These generally fell into three broad categories: ESG reporting, building efficiency and health/wellness for occupants.

We’re going to explore what these mean in practice.

ESG Reporting

The new pressures to report on carbon emissions has changed the landlord-tenant relationship in a number of ways.

The power dynamics of this change generally comes down to who pays the utility bills and, therefore, controls the data.

In triple net assets, tenants pay the utility bills and landlords are finding themselves in the unenviable position of consistently requesting data from their tenants. Even when there is a green lease in place, it doesn’t necessarily solve the problem.

In gross lease assets, landlords have no problem with reporting their whole building emissions, but are struggling to support tenants’ needs. Ironically delivering a sub-par tenant experience after spending so much time and money on amenity apps.

In either scenario, the new definition of quality means that landlords should take on the responsibility of automating reporting, both for themselves and their tenants.

For triple net assets, shadow metering not only enables landlords to report on whole building emissions without pestering tenants, it unlocks value add services like automating reporting to Energy Star for Tenants on the tenant’s behalf. It also can be used to provide real-time analytics, enabling tenants to reduce overall consumption (and justifying cost sharing of meter installations).

For gross leases, a hard look at submetering should be made. If submeters are not installed, they can often be deployed at a lower cost and complexity than usually believed. If they are installed, the billing process should be evaluated.

Too many commercial tenants are forced to compile scanned PDFs of submeter bills from legacy providers. Instead, they should be able to download their data directly from a tenant portal.

The ease of getting data is already considered a leasing factor in a number of markets. Quality means that utility data is easily accessible to both parties, and that reporting is automated to the extent possible.

That way, tenants can become part of what really matters… driving efficiency.

Building Efficiency

93% of drivers say they are safer than average. 94% of professors say they are better-than-average teachers. Even 96% of cancer patients claim to be in better health than the average cancer patient.

The truth is that when building performance is closely scrutinized, it’s clear that reality and perception are two different things.

The only question is by how much.

This applies to basic industrial warehouses, complex office towers, multifamily assets and everything in between.

This is not new. What is new is that the definition of quality real estate now includes an empirical assessment of how efficient the building is.

Commercial tenants are developing rules that exclude assets below a certain Energy Star score. Even renters are using basic efficiency information to guide which apartments to lease.

The solution here is straightforward. Quality means that the building is operating at peak performance. The best way to do this is to continuously monitor the drivers of consumption, including specific pieces of equipment as well as tenant spaces.

Of course, monitoring is the first step. Monitoring combined with machine learning and AI analytics identify insights on how to fine tune operations.

Doing so consistently will ensure that consumption is minimized, every dollar saved is a dollar not spent on solar, renewable energy procurement, or carbon offsets.

Health and Wellness

The pandemic is over, but there are lasting trends. One of these is that today, many buildings are still running with medical-grade ventilation (100% outside air).

There is nothing wrong with this, except that it’s like using a hammer to perform surgery.

It may turn out that tenants do indeed want extremely high levels of ventilation and medical grade filtration; however, it’s important to understand the costs.

Just as a building that pursues energy efficiency blindly would be uncomfortable to occupy. A building that pursues indoor air quality blindly would be expensive to run.

The goal is to be more surgical with how you’re running the building.

Along with monitoring critical equipment and tenant spaces, monitoring indoor air quality will allow for this precision balancing between two competing initiatives.

Quality today doesn’t just mean blindly using 100% outdoor air and MERV 14 filters. It means being transparent with tenants about the indoor air quality in the building in real time, while also maintaining efficiency.

Conclusion

Until recently, the benefits of building performance would be calculated solely in operating expense savings.

While the ROI has been proven in that domain alone, the truth is that upgrading the back-of-house now has a direct impact on rental revenue, making the ROI equation significantly better.

This was stressed by the executives on stage at BOMA International.

The only warning they stressed was that if you don’t go all in, it’s going to be hard to play catchup.

Want to learn more? Download Driving Action: The ESG 2.0 Playbook



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Mike McNamara

Mike McNamara

A Las Vegas Realtor since 2008. Mike has a wide range of knowledge around all things Las Vegas.

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