Executive Suites Attract REIT Investment, Consolidate

Executive suites find national backers.

April 1, 1999

Investors today are pouring money into the executive suites business, giving office space owners, managers, and leasing agents newfound respect for this once cottage industry.

Back in the 1960s, United Technologies acquired HQ Business Centers, a leading executive suite company.UT wanted to make the shared-service facilities the customer service "brain centers" of a concept it planned to develop called "smart buildings."

If the concept had worked, buildings throughout the country might have been designed with an executive suite to provide small space users with fully staffed, equipped, and furnished offices and also serve as a customer service and amenity center for the buildings' other tenants.

Instead, UT divested itself of HQ, which went on to become a successful franchise. Executive suites developed into a $2 billion business, with a mixed relationship with landlords.

Some landlords, unfamiliar with today's executive suites, don't want them in their buildings, says Arnold Widder, president of Reckson Executive Centers, part of Reckson Realty Associates, a Melville, N.Y.--based REIT. "They worry about heavy traffic and too much turnover, and they worry that they won't have a solid citizen on the lease; however, that's not the case with solid, professionally managed executive suite companies."

But now landlords are changing their attitudes. REITS like Reckson, Washington, D.C--based CarrAmerica, and New York executive suite company ALLIANCE National Inc. are investing hundreds of millions of dollars to consolidate the executive suites industry. The consolidation is creating national companies with appeal both to landlords and to prospective clients.

"The industry has long been dominated by small, mom-and-pop--type firms, but the best way for it to reach its full potential is for major companies to create national brands," says David Beale, president and CEO of ALLIANCE National, which has expanded from 14 locations largely in the Northeast to more than 90 nationwide. "The use of executive suites by corporations is a trend fueling the growth of the industry. But large organizations want the security, efficiency, and other advantages of one-stop shopping from a nationwide vendor. Landlords benefit from those trends because national companies attract top clients and are solid leaseholders to boot."

Reckson has gone further than anyone else in reviving the concept of smart buildings. With more than 20 million square feet in its portfolio, Reckson has developed an executive suite in 10 of its buildings or business campuses.

Here's how executive suites work: Small start-up tenants rent small space and use common support staff, facilities, and equipment rather than having to maintain their own. Larger tenants can purchase services on an a la carte basis. For example, if they want to use a conference room for the afternoon or need temporary secretarial support, they pay an hourly fee. "It's the customer service center," says Widder. These days the real estate business is about service as much as space.

Companies often start in an executive suite, then grow and need more space."If they like the building and landlord, they'll stay," says Widder. "It's like an incubator."

Practitioners also see executive suites as valuable resources for their regular tenants."Our tenants are happy to know they can get access to a bigger conference room or additional offices in the executive suite if they have an overflow," says Peter J. Occhi, an associate with Colliers ABR, which handles leasing for New York's historic Chanin Building. "Tenants have even used temporary staff from the executive suite to handle big projects."

Occhi has had a number of tenants who started with a few executive suite offices and then grew into taking direct space from them. "It's a springboard for people to grow into the building," he says.

The growing emphasis on service helps explain why the two REITs have committed themselves to the executive suite concept. In addition to the shared-office facilities in its own buildings, Reckson has invested directly in the industry by buying Interoffice Executive Suites, with 30 facilities in buildings owned by other landlords around the country.

CarrAmerica has made an even larger investment in the concept. The REIT has 280 buildings with 26 million square feet of office space in 15 markets. CarrAmerica purchased OmniOffices and a large number of HQ Business Center franchises. It has 130 executive suite facilities, chiefly in buildings owned by other landlords.

Executive suites are an important element in the REIT's marketing strategy. "We have our own inventory, we do build-to-suits, and we have e-suites, so we can offer corporate clients a continuum of services," explains Kent Gregory, managing director of national services for CarrAmerica. "At one extreme, we candesign a building to clients' specifications. On the other, we can rent them a 500-square-foot e-suite office or a dozen e-suite offices in different markets."

There are similar advantages for real estate practitioners. "We give brokers a very professional way to satisfy the small-space requirements of their customers with a minimum of work," says Alliance's David Beale. "All they have to do to earn a commission is to give us a call. It's not a lot of money, but it's easy money. Then when customers look for a larger, conventional space, they may go back to the broker that solved their problem before."

With several investors helping consolidate the industry, the future for executive suites looks very bright, says David Beale, who began the consolidation process by bringing substantial institutional financing to the business two years ago. "We hope CarrAmerica and Reckson are successful, because this industry isn't just about carving up the $2 billion that's out there but to grow it to its $8 billion potential. That requires healthy competition from well-capitalized investors."

Jim Cusimano is the PR counsel to the public relations committee of the Executive Suite Association. He can be reached at jimcus245@aol.com. An abridged version of this column runs in this month's print magazine REALTOR.

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