PKA tailors properties for tenants to end office sector stagnation

Working with a firm of architects specializing in conversions, Danish pension fund PKA is out to attract new tenants by tailoring the office properties it has on offer. The redesigns will pay for themselves in terms of extra rental income, the portfolio manager explains. Lundrens — another firm — has had good experiences with the business model as a tenant, one of the firm’s partners says. 
Tuborg boulevard 12 was previously home of Microsoft Denmark. The premises are now being rebuilt for multiple users with a shared cafeteria and reception on the ground floor. | Photo: PR
Tuborg boulevard 12 was previously home of Microsoft Denmark. The premises are now being rebuilt for multiple users with a shared cafeteria and reception on the ground floor. | Photo: PR

Pension fund PKA is working to end the stagnation in its office property portfolio. In collaboration with architecture firm Over Byen, PKA is working to attract tenants by offering tailored premises.

Peter Gravesen, portfolio manager of real estate at PKA, says that the reasoning behind the new efforts is that the current stagnation in the office property market still means that the market belongs to the renters, so owners must make a special effort to get hold of them.

"We have experienced that, when in dialogue with potential renters with Over Byen, the talks often gravitate towards viewing at the premises as a framework for the companies' opportunities to attract employees and grow. When we then prove that we want to invest in a framework based on their needs and can visualize it quickly, it makes an impression and a breeding ground for constructive negotiations," Peter Gravesen says to EjendomsWatch, an AMWatch sister site.

"That is the basis for a good rental agreement and good cooperation with our renters going forward. By letting the architect who acted as consultant in the negotiation process be in charge of the rebuilding and further dialogue, the renter is reassured that the product we sold is the product they get," he says.

The rebuilding is always set within a fixed financial framework and with a long-term view to possible future uses and increase in value, the portfolio manager emphasizes.

"It's a matter of having a keen sense of the property’s spaces if it is to be separated for use by several renters, and having an overview of ways to merge in the future. We make sure to use high quality materials that can be re-used so we are not forced to start over from scratch if we re-let the premises later. Renters also work in terms of growth plans and ambitions to increase, and we want to be able to meet their demands in the future. We are trying to accommodate that from the beginning," says Peter Gravesen.

PKA’s office property portfolio is, according to the pension fund, worth DKK 6.8 billion, covering 340,000sqm on 90 different properties. The stagnation for PKA’s commercial properties was 16 percent in 2015. As of July 2017, it has decreased to 7.8 percent.

Rental contract pays for the investment

Of course, the rebuilding must be paid for. According to Peter Gravesen, the intention is that the investment is paid by the rental over the duration of the contract, which is typically five years for 1,000sqm. The financial model does usually not require much convincing for the renter to agree.

"Because we have Over Byen as a representative and they can react swiftly to our renters' needs with suggestions and visualizations, we get a better dialogue in our contract negotiations with more focus on spatial arrangement than finances and contract length. Over Byen knows our financial capabilities and how to approach a rebuilding project without tying us down for 10 years in order to recoup the investment costs," he says.

He emphasizes that the constructions are made flexibly with quality materials that will not look outdated after a few years. Because the renovations are so extensive, the contract can't be signed until there is total consensus about the plan. This requires some coordination across spheres of interest, says Christian Lund, architect and partner at Over Byen.

"In accordance with the renter's wishes, we quickly set up the financial framework, and PKA decides how much the renter pays. That dialogue is between the two parties, and we help adjust the budget if any cuts are necessary," he says.

Over Byen Arkitekter is owned by three partners and has existed for five years. In addition to PKA, the firm works with a number of real estate companies and asset managers, including ATP Real Estate, Freja Real Estate and Aberdeen Asset Management.

In the latest financial statements from 2016, the company made DKK 721,000 pre-tax out of a gross profit of about DKK 7.4 million.

Showing lamps and floor samples

The work to bring in new office renters begins with realtors, who find the potential renters. Over Byen is part of the process from the first showing of the premises – and so is PKA if the renter is on the heavier end of the scale.

A potential renter is typically represented by an executive, who has the final say, and a committee that is present at the showing in order to help choose an office in the company's best interest. The representatives must be convinced that the premises fit their needs.

"Material samples, visualizations, and models are great tools. When PKA's rental premises are empty yet, we can use the space to show things like lamps and floor samples, and we make as much of that opportunity as we can in order to give the renter a realistic picture of what we can do," says Christian Lund from Over Byen.

He explains that before the showings, there is a lot of footwork in clearing a building permit and license with authorities so that any wish the renter may have can be considered immediately.

From one big to several smaller renters

One of the office properties that PKA and Over Byen are working on is Tuborg Boulevard 12 in Hellerup north of Copenhagen. Microsoft Danmark previously resided in the whole of the premises, which are now being rebuilt into a headquarters for four separate companies – a so-called multi-user property.

One of these companies is law firm Lundgrens, which is looking to take in new partners, which means that the firm needed space for 10 employees in addition to the current 105. Lundgrens has previously rented space from PKA at the nearby Tuborg Havnevej 19, which was sold to anchor tenant Novo Holdings because the investment company behind Novo Nordisk and Novozymes, among others, plans on using the full capacity of the premises in the future.

That is why, according to Niels Gram-Hanssen, lawyer and partner at Lundgrens, the firm contacted PKA to find a new office space. With his experience with real estate -  and PKA as a former client – Niels Gram-Hanssen was the obvious choice for head of the firm's moving committee, and he liked the opportunities for influence that PKA presented.

"We want to stay in Tuborg Havn because it is a good location and logistically close to Copenhagen. We were going for something designed specially for us where we could influence the process from the beginning. PKA didn't hesitate to agree to stripping down an entire floor to concrete and ceiling," Niels Gram-Hanssen says to EjendomsWatch.

A feeling of everything under control

Before the move, new cubicle offices will be set up in the peripheral parts of the building and towards the center with a lot of transparency and a new climate system. Lundgren has committed to "arm's-length terms" on 4,000sqm with the right to lease the rest of the premises.

"PKA knows our moving costs and knows that we are not going anywhere for at least the next 10 years. Our employees are hard workers, so it is very important that our residence is high quality. That goes for both functionality and appearances. It's a matter of fact that law firms depend a lot on that when attracting clients from home and abroad. It needs to convey a feeling of everything under control, even though everyone in the business is renting space," says Niels Gram-Hanssen.

English Edit: Marie Honoré

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