Monthly Archives: March 2010

Change of Seasons?

ATLANTA (March 23, 2010) In what may be a sign of things to come in corporate America,  Atlanta Business Chronicle reports IBM is preparing a major consolidation of the company’s Atlanta office space. The article says  IBM has 1.7 million square feet which it might shrink to as little as 400,000 s.f.

This news come on the heals of a Cushman & Wakefield report on office space conditions globally suggesting rents worldwide dropped more than 10% at the end of last year. Of course, in certain product types and in certain geographies, rents fell much more. While it is no surprise rents are falling through the end of 2009, the percentage drop is certainly significant on a global basis.

My Team is aware of multiple large companies that have consolidation plans similar to the IBM announcement. This phenomenon is caused in part by the large drop in employment in knowledge-based industries and a fundamental change in work habits by US employees. We will write more about the latest in so called Alternative Workplace Strategies in an upcoming post.

What will be interesting to watch is how corporate America adds workers back and in what type of facilities. As we enter into economic recovery, older facilities – especially those created in the “curvy 80’s” that have inefficient floor plates –  are out of favor.

Also, corporate users seem to be changing what they do in the space they occupy. The trend to move away from private offices has been in place for 10 years or more, but it is currently accelerating. It feels as if many tenants want to create one big corporate Starbucks.

What is in favor are buildings with rectilinear floor plates that are much more efficient. Also, buildings that are green (not necessarily LEED certified, but the designation does help) are more competitive on operating cost  and therefore, will have an advantage. Finally, buildings which are located on or near public transit get to check an important box in corporate site selection searches. To put it succinctly, large companies seem to be trying to achieve “density with dignity.”

So, there may be a change of seasons coming for office buildings. It’s easy to see that buildings developed in the 70’s and before are passe’. But now, much of the product developed in the 80’s and even the early 90’s may no longer fit the appetite of corporate decision makers.

Keep this in mind when you read of huge vacancy rates across the United States which address all classes of office buildings. While most real estate data does break out research by so-called class of building, these definitions are loose. Most media reports tend to talk about the vacancy in all classes within a certain type of real estate such as office.

Smart landlords will seek out product that fits with today’s corporate sensibilities and work on marketing campaigns similar to luxury car makers. They will try to make you feel that their product is far superior, and in some cases they might be right. They may also eventually be able to command more for their product.

On the tenant side, large corporate users are voting with their feet, as evidenced by IBM’s apparent Atlanta consolidation. The majority of IBM’s Atlanta presence is in buildings which were built-to-suit in the early ’80s. Big companies tend to set the trends and certainly have the ear of large scale property owners.

When your company is in the market for office space, keep in mind where the trend is headed. This will allow you to make smart space decisions and pick buildings that will support your enterprise in the current environment.

That is, until the seasons change again.

Ken Ashley

Cautiously Optimistic

ATLANTA (March 12, 2010) In a meeting held yesterday in Philadelphia, a panel of experts echoed the cautious optimism that has been expressed in commercial real estate circles since the start of 2010 according to the online news outlet Globe Street.

A town hall style panel, was moderated by Rich Gottlieb, SVP of Operations and Development at Keystone Properties Group. Panelists included Matthew Pestronk at Ackman-Ziff Real Estate Group, James Mazzrelli at Liberty Property Trust, Brandywine Realty Trust’s Jeff DeVuono, Spencer Yablon at Marcus & Millichap, Anthony J. Hayden at Hayden Real Estate Investments and PNC Real Estate Finance’s Sean Costello. Most speakers were optimistic about the years ahead.

According to Yablon, “There are more retail shopping center deals north of $10 million now and life companies are stepping up more aggressively.” He also noted that cap rates are starting to normalize. “In the last 60 to 90 days, we have seen retail deals that have closed at a 7.5% to 8% cap rate, almost 150 basis points higher than where we were one year ago.” He noted that for multifamily cap rates are even south of 7%.

In a Q&A session, William Hankowsky, Chairman, President and CEO of Liberty Property Trust said his company is keeping development to a minimum. “We would only do build-to-suit now, which is more than we could say last year.” The company is currently in talks with 12 businesses about real estate transactions. And while the company had scaled back operations last year, it is “back to operating like things are normal,” said Hankowsky. A major area of interest right now is purchasing both stabilized or vacant assets. When asked about the wave–or lack thereof–of distressed assets, Hankowsky noted that “banks will eventually be able to take command once they build up their balance sheets, but distressed opportunities will ooze out; it won’t happen in a great wave.”

The Commercial Tenant Resource is glad to see developer restraint because that will allow the first few steps of the recovery in the commercial real estate sector. The fact of the matter is that even if developers – who are some of the most risk tolerant individuals in the US – were to want to build, they couldn’t easily get financing. Even build to suit transactions with signed leases by great credit tenants are have difficulty getting financing as we enter the Spring of 2010.

The other issue to note is that many in our economy are feeling optimistic but are looking for validation in multiple sectors of the US. The asset side of commercial real estate will not help very much with that validation exercise until sometime next year.

However, real estate is a lagging indicator of recovery, so keep an eye on the manufacturing indices, consumer spending and of course employment for a real pulse as to what is happening in our economy.

In our opinion based on conversations with our clients and many other middle market companies, recovery is well underway. It has started rather tentatively and is now beginning to gain steam. You can be sure that we will keep you up to date on our observations on this front.

Source: Globe Street coverage of Real Share meeting in Philadelphia March 12, 2010.

Ken Ashley

No Stops on the Elevator!

The upscale office market of Buckhead in Atlanta, GA is featured in an article published today by the Wall Street Journal.  The article focuses on major issues facing Landlord’s in newly constructed buildings, and the advantages of being a large Tenant in today’s market.  After you read the article, please answer our poll below.   

Lauren Boulier

Capital Markets Update

Spring time in real estate?

Very interesting commentary from the capital markets group at Cushman & Wakefield. What this means for tenants is that the log jam of commercial real estate credit is beginning to break. When the lenders start lending, then more deals can get done. Put simply, this is another sign of the beginning of a recovery.

The report with detailed quotes is attached here. Below are a few summary comments:

Capital continues to flow into real estate, with lenders and equity investors reporting greater desire/capacity to put money to work. Talk of a “liquidity bubble” may be overdone, as capital providers are still very focused on strong sponsors and major markets, but liquidity is certainly having a strong impact on certain markets and assets. For instance, class A multi-family assets are now routinely trading at cap. rates in the low- to mid-6’s, and we are hearing of a few deals trading inside of 6%.

Mezzanine lending spreads are finally starting to improve after nearly 24 months of seeing subordinate debt quotes in the range of 16-22%. Several new funds have come into the market and are looking at providing leverage up to 80-85% LTV at target returns in the range of 10-14%. 

Spreads have come in nearly 25 basis points during the past two weeks, with 10-year, Super-senior AAA bonds tightening to 430 basis points over the Treasury. The nearly continuous rally in AAA spreads over the past 3 months is being reflected in the enthusiasm of lenders for conduit loan product. Look for the first large multi-sponsor securitization involving assets other than multi-family in the next 6-8 weeks. Every major bank is either formally back in the market underwriting deals or is in the process of hiring loan origination professionals. We expect the first pools to be “lumpy,” circa-$1B offerings featuring strong sponsors that allow bond investors to underwrite nearly every asset in the pool.

Source: C&W Capital Markets Group

Ken Ashley

You Would Think This Stuff Would be Simple

The "demised premises?"

When a tenant leases space from a landlord, how do you know exactly what you are getting in terms of square footage? After all, you have worked so hard to get the rate you pay per square foot down, but what prevents a landlord from fudging the square footage used as the basis for determining your rent?

In fact you may have heard the stories of landlords in New York and other cities leasing space far greater than the actual premises. When skyscrapers came onto the scene at the turn of the last century, owners each seemed to have their own standard for square footage measurement, and, even more concerning, there was no one to verify the measurement. Most business owners didn’t pull out a tape and measure the space, and even if they do, the landlord has many tools and definitions at his disposal that are distinctly foreign to tenants.

I Pay for the Bathroom?

When a tenant leases space in an office building with more than one floor, then the landlord will split the square footage of common lobbies, corridors and restrooms pro rata based on square footage occupied by all the tenants in the building. So you do pay for more than the actual space you lease (called the “demised premises”). There are many more exciting terms such as “loss factor,” “useable square footage,” and “gross or leasable square footage.”

After much complaining about scenarios like the New York measurement follies, a number of owners’ associations popped up. In 1907, many of these groups combined to form the Building Owners and Managers Association (BOMA International). In North America, this association’s membership represents more than 9 billion square feet of space.

The “BOMA Standard” is widely recognized in the commercial real estate industry as the method to calculate the square footage under lease. It accounts for the common areas and for many other items such as “vertical penetrations” through the space.

As to verifying that the square footage meets the BOMA Standard, a registered architect can certify the measurement. It’s better if the architect is retained by the tenant, but, at a minimum, we have a standard and a professional who has an ethical obligation to verify the measurement. As Ronald Reagan famously said, “Trust, but verify.”

A New Approach

The last version of the BOMA standard was published in 1996. Building construction standards evolve and there is a need for a new standard to account for changes. In response, BOMA release a new standard with the catchy title Office Buildings: Standard Methods of Measurement and Calculating Rentable Area (2010). The new publication has several key enhancements that add step-by-step measurement guidelines, clarify gray areas, and make it more user–friendly via a new interactive downloadable format.

“This standard will serve as an indispensible tool in the marketplace for property managers, architects, contractors, appraisers and other parties who measure space,” remarked BOMA International Chair James A. Peck. “The updates we have made to the standard reflect the needs of users in the field. We have also brought the standard into the digital age by including hyperlinks to definitions and full color illustrations in the PDF document, eliminating ambiguity and making it easier than ever to understand.”

Later this year, BOMA will release two more standards: one for use in multi-residential buildings and one for retail spaces.

The moral to the story is to check with your broker or architect during the space search process to make sure that you are getting what you are paying for. Ask them to explain to you in simple terms how the landlord is calculating the square footage in the lease and make sure you agree. Maybe one day a tenant association will form and come up with their own version of measurement, but for now, we use BOMA; and it’s new and improved!

Source: BOMA

Ken Ashley

Our Most Important Measure

In a report issued today by Cushman & Wakefield the Firm suggest that improvement is continuing to occur in US employment trends.  Of significance: “Employment in the key office-using industries (Financial, Professional Business Services and Information) increased for the third time in the past four months, adding 23,000 jobs. Since October, the national economy has added 131,000 office using jobs.”

Given that office using employment is by far the most important driver of recovery in the commercial real estate markets, these stats are indeed a positive sign. We at The Commercial Tenant Resource believe that that we are solidly on the bottom of the employment curve looking up. Once recovery begins in earnest, then activity will pick up as well. Landlords will be quick to interpret increased activity and larger leases getting done as a sign that they can ease off concessions.

While different markets in the United States will turn around at varying speeds, it seems clear now that consumers are spending, manufacturers are manufacturing and corporate America is in the beginning stages of inviting more back into the workforce. As the report states: “The stabilization of the national labor market is the most positive economic development in two years….It means we are in the process of turning the corner.”

This is good news for the economy as a whole but it would appear that we are approaching the time of maximum opportunity for tenants in the real estate marketplace.

Ken Ashley