Monthly Archives: April 2010

A Game of A Thousand Cuts

A new report released by Cushman & Wakefield addresses the impact of the recession on different cities in North America. The downturn had varying degrees of impact on cities across the US.  Some highlights:

  • The report proclaims that the US economy is in recovery and that employment has “finally turned decisively upward” (related post – see Our Most Important Measure blog post on this site).  Also regarding employment; “Non-farm payroll employment has increased in three of the last five months jumping by 162,000 in March, the largest increase since March 2007.”
  • Federal government employment actually increased by 0.4% since the recession began which resulted in a strong market in Washington D.C. but not in LA. State and local government employment is down modestly.
  • Both manufacturing and construction industries were hit particularly hard in this downturn.
  • In a contrarian message, a number of cities that were expected to see large job losses due to large concentrations of financial services firms actually faired very well. “New York and Boston were among the best performing cities during the recession.”
  • In another bright spot the report suggests that 2009 new construction completions represented only 1.3% of inventory compared with a huge 3.2% in 2001. There is not as much slack in the rope this go around.

While the recession felt very different in Detroit than it did in Washington, D.C., United States real estate markets are in much better condition than one might expect given the severity of the recession and the largest decline in unemployment in seven decades.

Nationwide, this is clearly still a tenant’s market and it will be for sometime. The focus now for tenant side real estate executives who have lease expirations or expansions should be maximizing concessions before landlords take the notion of recovery seriously.

Landlord pricing rarely jumps precipitously. Instead, this is a game of a thousand cuts in which concessions are gradually reduced, annual escalations increased and finally asking rates raised. Tenants can be lulled to sleep by the notion that the market is so bad that they have plenty of time before needing to worry.

While we need to first do what is right of the business and not the real estate, we advise keeping a close eye on the real estate market fundamentals so tenants can strike while the proverbial iron is hot.

Ken Ashley

Density With Dignity

For over 10 years now professionals in the so-called “end user” community (directors of real estate and executives tasked with real estate issues) have debated ways to achieve a great number of workers in fewer square feet. The fact is having unused desks or large offices is tremendously expensive. When workers are on vacation, traveling or simply out for a doctor’s appointment the meter is still running on their office. Large offices and wasted spaces likewise can be huge costs for companies.

So the rather corporate name of “Alternative Workplace Strategies” surfaced as a euphemism for reducing the number of square feet per person. The 1990’s were all about squeezing the size of existing office configurations into ever-smaller footprints. Legions of consultants and brokers offered to help corporate America benchmark against competitor’s square footage and usage.

End users took the benchmarking studies to superiors as evidence of good real estate practices. Reducing cost was all the mantra and real estate leadership looked great by doing more with ever less.

Then about 5 years ago the new frontier of the “unassigned workspace” took hold. The idea is that the typical employee comes into work but doesn’t have a set office space. In effect, everyday employees reported to a kind of corporate Starbucks in which they could plug in their laptops and cell phones and go to work.

The Starbucks idea does work for some types of work styles and getting rid of wasted space is certainly a good practice. But we believe that the pendulum could be in the early phases of a swing towards the other direction.

This article in the Wall Street Journal (Goldman Sach’s New Palace Creates Princes, Serfs) published April 16th describes Goldman Sachs move to it’s new headquarters. The WSJ says “vice presidents, many of whom had offices before the move, now sit at open-space workbenches that in an earlier era would have been called a typing pool. They aren’t thrilled.”

As the economy recovers and labor become more competitive we wonder if some employers will use offices as a competitive weapon to recruit high value employees? Will highly compensated knowledge workers insist on more real estate as opposed to open-space or hoteling? In other words, we wonder if private offices will make a come back in certain industries for important rainmakers.

This will be an interesting trend to watch over the coming months. We will keep you up-to-date and report on contrarian users as we learn of them.

Ken Ashley

Scarcity of Supply

ATLANTA (April 8, 2010) Would you believe there’s not enough office product to satisfy demand from investors? In multiple conversations over the past 10 days, our team learned that some of the top real estate funds in the US are struggling to invest the big bags of money that have appeared in commercial real estate. This situation is developing before our very eyes and became even more pronounced over the past 6-8 weeks.

Here’s the sticky wicket; many well capitalized major funds want so called “core” product that is new, and greater than 90% leased in good submarkets. According to investors, the very few buildings on the market in this category are causing bidder to hyperventilate. They are bidding up prices and causing much lower cap rates for perceived safe plays.

As a result, we see prices going higher and higher for core assets thus ultimately increasing risk. We thought we would make it till at least 2011 before talk of “bubbles” came back on the commercial real estate scene.

Well, what about the rest of the real estate universe, you may ask? Investors would love to look at buildings in the middle between distressed and core assets but most of those owners are not selling now. As one major landlord put it “only a fool or a desperate owner would sell in this market.” Prices will need to rise a good bit for these assets to come available.

Much has been written about distressed assets in the past 6 months, but relatively little about the rest of the market. We think it is interesting to pay attention to investor behavior because their actions have a direct impact on the best way to negotiate tenant deals. An owner who is riding high and 90% or greater leased is clearly less likely to be interested in bloody concessions in this market. The buildings in the middle that aren’t struggling are more likely to want to “take their medicine” now through increased free rent and higher tenant improvement allowances. Distressed assets are very risky and require lots of time and attention, but can deliver lots of free rent with relatively smaller amounts of cash for tenants.

Our advice, know the ownership and try to determine not only their position today, but their hope and dreams for the property. Also, like any good deal hunter, keep attuned to the way the wind is blowing in the marketplace. This information will help you as you bag a great lease deal for your next user group need.

Ken Ashley

Dirt Talk

ATLANTA (March 31, 2010) While this blog is nationally focused, the Atlanta based land team at Cushman & Wakefield produces a city newsletter that is truly a microcosm of land prices across the country.

 Some key points from their newsletter which can be found in full here:

  • Deals are getting done. They may be taking longer, generating less money for all parties, and making everyone feel like they’re at war during the process, but they are getting done. 
  • Sellers mostly come in a few different forms: lenders disposing of non-performing notes, lenders selling foreclosed properties, or borrowers working with their lenders to agree to a short sale. 
  • Today’s list of true buyers consist of national builders, local investors, and dealmakers placing money out of New York, Chicago, Texas oil fields, or from overseas. 
  • Of note, they  have seen very few quality commercial sites come up for foreclosure, and expect it to take time before commercial land values reset, as residential sites seem to have done. 
  • Raw land remains difficult to move due to high return requirements from equity sources, rising vacancy rates, declining rental rates, and little to no job growth.  While no one is certain we have hit the bottom, most land experts agree this is one of the best times ever to be buying land. 
  • Going forward, they foresee a continued rise in residential permits, with some commercial land trading toward the end of 2010. 

Why do tenants care about land? Because so goes land, so goes the development pipeline. And when developers are developing, there is new product available which has the side benefit of maintaining pressure on rents.

Conversely, the entire system has been mucked up for the past 18 months so very little new product of any flavor has kicked off.

The Dirt Talk report is one more sign that we are emerging from the doldrums and into a more normal time in the real estate industry. See, you never knew that good news could come from talking dirt!

Ken Ashley

Source: Pierce Owings, C&W Atlanta/Dirt Talk Newsletter