Occupancy Strategies in Tertiary Markets
1 May, 2004
By: Shawn MobleyOccupancy Strategies in Tertiary Markets:
Creating Win-Win Public-Private Partnerships
Municipal governments traditionally have operated as third parties in contact center real estate transactions. They have served landlords and tenants as providers of public infrastructure, regulators of zoning and building code, and coffers of property and transaction tax dollars. When contact center tenants have needed roads widened or signage approved, municipalities have had the final say, and where appropriate, have provided capital and amended zoning statutes to attract the jobs that contact centers bring. While these responsibilities remain under their purview, a new function has emerged that has changed the relationship between government and contact center operator. Local governments are trying on a new hat: they are becoming the landlord.
Historically, contact centers were located near large cities, where operators could make use of concentrated labor and real estate markets. Yet these labor markets became saturated and costly as competition intensified for qualified, inexpensive workers. In response, contact center operators began to focus on smaller cities where they could take advantage of less expensive labor pools.
From a human resource standpoint, certain Tier III locations offered a demographic composition too good for a contact center operator to pass up. Some cities had a plethora of local colleges and universities, others offered proximity to a military base, and still others were deemed ideal due to a strong residential, middle-income demographic. Those communities with modest or nonexistent local contact center competition, high unemployment levels, low turnover rates and attractive wages were considered excellent choices. Some local municipalities even offered economic incentives to sweeten the value proposition.
In these markets, operators were forced to contend with smaller eligible workforces and shortages of adequately sized existing real estate. In those instances where a contact center operator was committed to a particular small-market location from a human resources perspective, but restricted by a lack of suitable existing properties, operators were forced to sign long-term build-to-suit leases with developers or go elsewhere.
Yet build-to-suit deals often proved an imperfect contact center model. While they adequately addressed the problem of opening a 60,000 square-foot contact center in a city of 60,000 people, the arrangements created other challenges, namely time and term. Whereas the contact center industry operates and evolves at a swift pace, build-to-suit developments require a lengthy construction timeline, thereby hindering an operator’s ability to commence business on short notice. Moreover, due to the high cost of new development relative to the cost of refitting an existing building, landlords require substantially longer lease terms and/or substantially higher rental rates.
Recently, an alternative model has emerged: the public-private partnership (PPP). A PPP is an arrangement between a public-sector entity and a private-sector corporation designed to share risks, rewards and resources. In traditional real estate PPPs, the government contracts out the design, construction or maintenance of a public building to a private firm. The contact center PPP represents a variation on the concept, with roles being reversed. Rather than merely providing infrastructure and assistance, the public-sector entity serves as landlord. Likewise, instead of building facilities or providing services for a municipality, the private corporation functions as tenant. The contact center PPP concept is one way in which these agreements are becoming more prevalent.
“Real estate PPPs are an exploding industry,” said John Stainback, Managing Partner of Stainback Public/Private Real Estate, a firm that helps government officials optimize revenue from underutilized real estate assets. “Public and private partners are becoming more comfortable with the approach, and the capital markets are becoming more confident. Additionally, cities and towns are developing legislation to facilitate these relationships.”
Public-private partnerships are in favor in the contact center arena because they have succeeded in solving one of the vexing problems of the facility placement game: the inverse relationship between labor market availability and the availability of suitable privately owned real estate. PPPs work particularly well in smaller communities that lack vacant big-box retail properties, but are home to underused or empty publicly owned real estate assets. Properties such as aged and vacated libraries, gymnasiums and community centers offer an excellent value proposition as would-be contact centers.
In the past, private landlords have been considered the only suitable option for the contact center business due to the speed and efficiency with which they could act and the fear of political entanglements involved with the use of public facilities. When a tight timeline existed for delivery of revenue-producing contact center seats, public debate over use of public facilities and public funds to upgrade facilities for private use introduced an unacceptable element of delivery risk. The solution has come through creative financing strategies that minimize the expenditure of public funds.
Working with a municipality may require an approach that differs from that taken with a private landlord due to governments’ unique needs and restrictions. Stainback points out that prospective tenants must exhibit measured delicacy in their dealings with the municipalities.
“To get these projects approved, it is important to make the local council feel at ease with the deal, often by providing them sufficient financial safeguards and approval rights,” he says.
Since the provision of public capital for private investment purposes is politically controversial, these parties have collectively devised creative methods to remove some of the usual obstacles to this course. Leases are typically structured without a tenant improvement allowance or any other outlay of public capital. In exchange for the tenant outfitting and improving the facility out of pocket, the cost of these improvements is netted out of the rental rate, or other incentives such as free rent periods are structured in the transaction.
Two Win-Wins
#1 - In one North American city with a favorable contact center profile, the only viable location option was a vacant publicly owned former library building in need of significant renovation. After unsuccessful efforts to arrange a sale of the public building to a private developer, a deal was structured to allow the tenant to renovate the building, the costs of which accumulated “rental credits” to be offset against an artificially lowered lease rate over time. The city proclaimed a threefold victory: a public asset would be improved by private investment, a privately occupied facility would guarantee future property and other tax revenues, and market rental rates would be earned upon exhaustion of the “rental credits.” The strategy was deemed a success: it avoided public expenditure, emphasized public payback in the form of job growth and satisfied the immediate needs of the tenant.
#2 - In another instance, contacts with governmental authorities led to the discovery of a vacant facility owned by a county economic development agency. The agency had purchased a former tire recycling facility after identifying the opportunity to convert it to a different use following an environmental clean-up. This “speculative building” strategy employed by a public entity was more akin to that of a private developer. The keen desire to attract valuable white-collar jobs to the area was reflected in an artificially low lease rate and favorable lease terms offered to the private tenant. In yet another win-win situation, an operator was able to locate in a city that offered attractive wage rates, an ample labor supply and limited competition. The operator’s time constraints were not a factor, as the fully fit-out call center was operational within 60 days of initial discovery of the opportunity.
In both cases, the public-private partnership was an advantageous arrangement. The contact center operators benefited by securing the right-sized building at the right price. With no adequate alternatives available in the market, the operator was able to find a real estate solution by outfitting the government property according to its specifications, and then promptly beginning operations.
When serving as landlord, governmental authorities are more likely to ensure that adequate telephony, energy and transportation infrastructure are provided expediently. Additionally, since government has more modest return requirements than a private developer, the tenant can usually secure especially favorable lease terms.
By leasing an underutilized asset to a contact center operator, the municipality benefits not only from accruing the associated rental stream, but also from improvements made to the property and additional jobs created for local residents, all at no cost to the city.
These mutually beneficial arrangements are not always apparent or obtainable, but are worth seeking out, particularly when more traditional real estate options are unavailable or unattractive. Companies interested in locating a contact center in such an area should consult the local Economic Development Council to determine whether the municipality owns space that is speculative, vacant or underutilized. Should the space match desired needs, and should the municipality have the appetite to play landlord, there is potential for a Public-Private Partnership.
