Shapiro: Let s start by talking about the new open and collaborative workspace and what challenges it creates for the asset manager of the property?

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1 Event: Bisnow Chicago Property Management Panel 2014 On Thursday, August 28th, Bisnow Chicago hosted its Property Management & Office of the Future event at the Trump International Hotel & Tower in Chicago. The all-star panels discussed the challenges, opportunities, efficiencies, and sustainability efforts within the property management industry. Below are highlights discussed by the Property Management Panel, including: Bob Assoian - Managing Director, Management Services, NAI Hiffman Betsy Traczek - Principal & Head of Management, John Buck Company Randy Waites - Senior Managing Director, Midwest Region, Cushman & Wakefield Kirsten (Helma) Bowersox COO, SVN Crossroads Property Management Don Shapiro - President & CEO, Foresite Realty Partners Shapiro: Let s start by talking about the new open and collaborative workspace and what challenges it creates for the asset manager of the property? Traczek: As we re putting more people into the same amount of space, it creates a lot of wear and tear on the building. There are concerns with shared drop-down work spaces and the increases in sickness in the workplace and there is the down and dirty of making sure the space is usable, clean, and functioning. In existing buildings, there is restraint of the physical nature of the building. When you put more people in, you will have issues with elevators and stairwells buildings are designed for a certain capacity. Assoian: One of the biggest challenges we see in suburban office with the collaborative space trend is parking. At many suburban office buildings there is 3.3, 3.5, maybe 4 per 1,000 square feet on the higher end, and most proposals we are seeing want 5 per 1,000. We are seeing some tenants that are trying to attract the downtown crowd and there are programs through Metra and van-pools where you get a ride to and from the train station. It s not an easy commute but it is one solution to some of the parking challenges. Waites: At the end of the day it boils down to density, density, density. The more people you have in a building, the more taxing management is. There are issues with increased sickness, productivity, HVAC, and how you manage these open spaces. There are some HVAC systems that are ideal for open spaces but now there s another cost to get these systems in line, who absorbs those costs? The list goes on and on. There are privacy issues; we have buildings where people go to other floors to make phone calls and hangout in common corridors. There are access issues on how to tighten that up all these issues have a cost and an intense management requirement. Management is critical to the tenant retention process, satisfaction, and bottom line.

2 Bowersox: I see a big issue with the maintenance in these buildings. With plumbing, you ve got bathrooms that have a certain capacity and certain number of stalls; you can t necessarily change the framework of the building. Shapiro: Longer hours, more people, and increased density: talk about a property manager s standpoint and what the effects are when you re looking at your maintenance supervisor/chief engineer and the number of hours they can be at the building and the access they need to have to the building online? Traczek: We need people there to help make sure the technology works and that the systems are working. The biggest thing that I ve seen when working on new developments is people are no longer saying, I want my HVAC and building operation hours to be 8-6. They want 6-10 during the week and 8-3 on weekends, so again, how do you factor that in to your staffing and costs to make sure you re competitive? There is a change; you have to have more tech-savvy chief engineers. Additionally, you re looking at day cleaning vs. night cleaning, if people are leaving at 10 pm, does cleaning start at 10 pm instead of 5:30 pm? In some cases, you need to go tenant by tenant and make sure everyone is accommodated. Shapiro: We have different types of tenants in each of our office buildings. It s not all governmental or call centers, it s a mixture, some higher density than others. Do you have to bifurcate the costs if one tenant decides their hours are 4 or 5 in the morning until 10 or 12 at night in a Class B building where you can t separate the systems, you have to run the entire chillers the entire time? When another tenant leaves at 5:30 pm, do their operating costs stay the same? Assoian: We are seeing more tenants with longer/flexible hours and we are having more requests for longer guard hours to meet that demand. We have some assets where we ve put in high-end Starbucks-type kiosks with packaged food and tenants can get something with a barcode on an honor system that goes to their credit card so it doesn t need to be manned, but you can put in a camera there, there s minimal theft. In my experience I have not seen the whole building moving the HVAC hours to 10 at night, what I have seen is a lot of pressure negotiating the overtime charge from tenants. You want to really dig in to the calculations. There is clearly an issue with the traditional tenants that don t want their operating expenses to go from $7 to $8 because Google move into the building and works until midnight that has to be somehow directly billed back to Google. Waites: In larger buildings, you have a mix of leases and you face challenges where you may be moving a fitness center into an area that was an office space how do you recover those costs? We are getting pressure from some tenants now on overtime HVAC but we also find that we re able to push back a little bit. You really have to look closely at what you re investing, you have to do

3 some of this stuff up front, to figure out if it s manageable, if it s designed to be managed right, balancing and maintaining space in an open environment that may have come from a traditional office space is more challenging and that puts real pressure on the property manager. Bowersox: The building engineer use to walk around with a belt with tools and now he s walking around with a laptop or an ipad and that s a completely different skillset and there s costs associated with that. In most buildings now, the HVAC systems are all computerized so we don t need someone in the building 24/7 but we need someone that knows how to operate it. Shapiro: Let s talk about designing a new building today as a developer. In the past, we hired a design architect to come up with an idealistic building and then after we designed it, we coordinated it, then we d go here Mr. Property Manager, go figure out how to run it. How much say and voice do the property managers have today with higher density space? Traczek: In the experience that I ve had, the property management team is actually involved from day one. We sit down and look at the systems and work through them from how the HVAC is designed, the security system, even up to as proposals, we want to make sure we can operate it when it s turned over to us. As a property manager, we aim higher, we want the Mercedes. As a developer, they want to give us a Ford because it s a cost to them. Having that say up front really does help you accept a building that you know will work for the tenants. Looking back, you see what had to have been done like adding amenities, but now I look at the design of one of these buildings and we probably have 3 to 4 times more public space that s incorporated into the design from outside space to the collaborative space, and again, it really does make you think as you re budgeting and preparing the operating expenses, how much staff will I need, how much will it cost to run? Bowersox: The people who work in the building and will be dealing with it on a day-to-day basis need to have their input. Little things like should a traffic bump go here or there are things that developers aren t geared toward thinking about. Shapiro: 30 years ago when you hired a property manager, they had a certain skillset. Today, a property manager is not just a property manager but they are an asset manager. How has the position of a property manager or assistant property manager changed in the last 20 years and what are the specific education requirements? Assoian: When you re trying to take care of the institutional client demands that are the bulk of our clients, most of those clients are out of a top 10 business school with an MBA. Today we have a very high-level financial skillset and I think 20 years ago the managers had more of an operational background. Today, I think the successful managers could talk the asset management game and

4 understand the higher level. Someone on the management team has to know the back of the house and the building systems. But as a senior manager on a larger asset, I think you have to be the quasi asset manager support for your client and really be able to get involved not just with the expenses, but help them understand the revenue, support the leasing efforts, and how to enhance building value. We re always looking for someone who can cross the line from operational to financial to leasing, and if I had to ease up on one of those, it would be operational. Owners are looking at the numbers and value a manager who teams up with the leasing agent to solve the occupancy issues if there is one. Another change, 25 years ago, if you had a 200,000-square-foot building in the suburbs, you would assign one manager, one property assistant, and two engineers, and they stayed there all day long to work on that one building. You will never win an assignment today with that staffing. That same manager is doing 3 to 4 times the amount of work, spread out on multiple properties. Waites For a senior manager in a building, it s a requirement that they can think like an asset manager, that they can talk with the asset manager and be in alignment with their goals. They need to have a heavy financial skillset so they can understand the implications of NOI, what s happening in the market, and the implications of the lease terms. Shapiro: There are a number of you out there who are used to hearing the words provide service like a hotel. Office buildings have almost become like hotels because of convenience and service and we have more people in less rentable square footage with more common areas. What types of responses are you getting from tenants on if they really want to pay for common spaces to meet demand of millennials? And how does a property/asset manager explain that cost to a tenant? There s less space, but more common areas in the building. If there are going to be shorter term leases, how does property management balance that out? Assoian: I think the challenge is that we still have pressure where people want to modernize their space and get new furniture and systems, it s not uncommon for a renewal tenant to want $40 a foot, even in the suburbs, to redo their space, and I don t know how you do that on a 3 year deal, you just can t. That s clearly a challenge. Traczek: I think there is a struggle now and I think it s heavily negotiated in the operating expense clause of many leases about how the common area and amenity space is treated. It puts a lot of pressure on the landlords, property managers, and asset managers to be creative as to how can you account for this potentially in the operating expenses or how can you structure it so that it can be another revenue source where it s still an amenity to the building but also, if it s a conference center, you can have outsiders come in and help offset some of your losses.

5 Bowersox: With shorter lease terms its very product specific. We manage and lease several medical suburban office buildings and doctors tend to stay in their spaces for a longer time and their build outs are of course extraordinarily expensive and common area space is less important to them. What s more important to them is property management to make sure that ingress and egress to the building is available. Shapiro: We have differences in how buildings run in the city versus what s going on in the suburbs. It s a tale of two places in terms of occupancy, vacancy, operating expenses, and rental rates. We can talk a little more about the differences in the type of personnel we would need, the type of services we re using, and the type of demand we re getting from tenants in the suburbs. I ve been doing this for 30 years and for every 5-7 years there is a mass movement into the city there is a mass movement back out of the city that changes the game a little bit. Assoian: I had the opportunity a few weeks ago to walk around with a perspective client touring a number of the major towers on Wacker Drive and there are a 4 to 5 of them that are putting a ton of money into redoing amenities. One building is putting in $5 million for amenities; they re taking the fitness center that was in the worst space and putting it up around the glass line to get a nice view of the river. Downtown offices are creating these enormous 8,000-squarefoot lounges and very high-end hotel type finishes, for millions of dollars. In the suburbs, we re still trying to get the old deli renovated and add some soft seating to create a Wi-Fi lounge but we have the challenge in the suburbs to spend that extra money. What we re doing in the suburbs has already been done downtown and is being replaced. I think that the suburbs are just trying to play catch up and there s a little bit of a lag but there is also a difference: downtown rents have been going up and suburban rents have been relatively flat. Generally, unless you re one of the monster complexes in the suburbs, you re not seeing the level of what they re doing downtown. Waites: I ve also said that part of the drive in tenancy between the two markets is the live, work, play phenomena we re seeing that s tech driven. Clearly the days of a grilled cheese sandwich as an option in the deli are gone and having two treadmills and calling it a fitness center are gone, but it s difficult to get the rents to go with that. I think the level of management intensity is one of the differentiators in the suburbs; it s very critical that those tenants love being there because they re making some sacrifices to be there. Audience Question: Do you see a point coming where we re going to start negotiating density? Where we say it s 125 square feet per person and anything beyond that there s going to be a certain cost associated with it? Without any checks and balances you can see why tenants are going to keep cramming more people into the space because it s more cost effective for them.

6 Waites: There are a lot of clauses we put in our leases about excessive use because it is difficult to quantify. The key, particularly in an existing building, is trying to go in and design these things upfront so you can maintain the cost at a competitive level going forward. Traczek: Now there s 1 person per 100 square feet where it used to be 1 person per 175 square feet. That means the day porters have to go up to the bathroom 6 times to restock versus going 2 times. I don t know if we ll ever get to that per body charge, but part of it is designing it to be flexible. With existing buildings there are physical constraints: there are not enough restrooms, the stairwells aren t wide enough, and the elevators won t run optimally, they weren t designed for that density. I think it ll be an ever-evolving issue to watch and see how the market reacts.