Category Archives: Capital Markets

A Face For Radio

By Ken Ashley

January 18th, 2012 (ATLANTA)

It was an honor and an all around neat experience to participate in Michael Bull’s Commercial Real Estate Radio show last week (link is at the bottom of this post). Michael assembled a panel of David Tennery, principal of Regent Partners, John Davidson, principal of

WKRP?

Parmenter Realty Partners, and yours truly. Ryan Severino, senior economist for REIS, dialed in by phone from New York. While my fellow panelists are all knowledgeable real estate thought-leaders, the clear consensus was that the entire panel had faces built for radio.

The mechanics of radio broadcasting are fascinating. I’ve never been in a sound studio before, but all the gear was really cool. It looked vaguely like a NASA control panel. I started to do my best Tom Hanks impression from Apollo 13, but the producer looked like she meant business.

Michael Bull created the show over a year and half ago, and in that time, has developed into quite a pro. His lead-ins were flawless, and his elocution perfect. I have a new found admiration for both qualities, by the way. So what was Michael’s

See What I Mean About Radio Face?

cheery advice to his panelist? “This radio thing is so easy, because even though tens of thousands of people will hear you, you can’t see them.” Thanks Michael … I feel better already.

A few highlights from the show:

  • Ryan Severino said that the national office vacancy rate declined by 30 basis points compared to 2010. Asking rents year over year rose by 1.6%, which is the first such increase since 2008.
  • The panelists agreed that a modest recovery is under way in US office.
  • When asked why we weren’t recovering faster, I suggested that the FUD Factor of fear, uncertainty and doubt is holding back corporate America. This fear factor is causing reticence to expand. Lets hope this changes soon.
  • Industries that will produce the most demand for office space are healthcare, technology, energy and education.
  • The office of the future will encourage collaboration and help highly compensated knowledge workers innovate and generate higher revenue.
  • Owner incentives seem to be moderating from the high levels of 2009 and 2010.

I hope you will take some time to listen to the show. The “talk time” (there’s an industry term for you) is 38 minutes.

Here’s the link – http://www.commercialrealestateshow.com/usoffice11812.html

CFOs and Billy Joel

By Ken Ashley

January 12th, 2012 (ATLANTA)

In the early 80’s, I remember first hearing the haunting anthem to America’s manufacturing challenges in the song “Allentown” by Billy Joel.  In the ditty, Joel chronicles the demise of Bethlehem Steel (it went bankrupt in 2001 and is now a casino) and its impact on families in the Eastern Pennsylvania area around  Allentown.

Manufacturing Heating Up?

The song represented the concern many Americans had over manufacturing’s demise in our country. Good men and women, through no fault of their own, were thrown out of work based on apparent labor savings in foreign cities they had never heard of.

For nearly three decades, Americans have fretted about manufacturing jobs leaving our shores (“offshoring”) and headed to many foreign locales. China got many of these plants, but in fact, a lot of the jobs ended up in nations from Vietnam to India. This phenomenon, and the raw emotion surrounding it, caused everyone from politicians to ordinary Americans to worry that our great country was somehow in a slow downward demise.

There was certainly evidence to suggest that we, as a nation, were in trouble. According to CFO Magazine, the United States lost nearly 8 million manufacturing jobs since 1980. The segment still employees 12 million in this country and accounts for 12% of GDP and 9% of the workforce.

The Death of Manufacturing Exaggerated

However, there is good news in the past 6 months or so. Many publications are recounting a remarkable shift from the offshoring that caused the pain in the Billy Joel song.

One example: in the most recent CFO Magazine, Randy Myers writes of the resurgence of American manufacturing in an article entitled Gearing Up.  The article tells the story of Peerless Industries, a privately held maker of audio-video mounting systems. The company, which has $100 million in annual sales, decided to spend nearly $20 million to open a 300,000 square foot manufacturing facility in Aurora, Illinois. This facility will consolidate multiple locations in Illinois but also in China. The company is “poised and ready for any major upturn in business,” says vice president of finance John Logerquist.

Your Place or Mine?

Peerless is just one example of many manufacturers moving operations back to the US.  Inboundlogistics.com’s Lisa Harrington reports on the resurgence to “onshoring or reshoring” in “Is U.S. Manufacturing coming back?” “U.S. consumers could see more products labeled ‘Made in the USA’

Yes We Can!

on store shelves in the near future,” reports Harrington. “As labor rates in China soar and manufacturers discover unforeseen complications at overseas production facilities, many businesses are revisiting the advantages of keeping operations close to home.”

Labor is critical because of the high cost of transportation, taxes and other costs that are incurred when products are manufactured in other countries. Harrington goes on to say “Because wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in…areas of China will be only 10 to 15 percent cheaper than in the United States—even before inventory and shipping costs are considered.” When the labor advantage goes away, the business case for foreign manufacturing drops into the single digits or evaporates completely.

Labor cost is only part of the picture. Accenture recently conducted a study of nearly 300 manufacturers and produced a report on the current state of manufacturing in the US. “Getting closer to the customer allows for improved flexibility to respond to uncertain demand and unknown customer requests in an agile way with fast delivery times, while maintaining high quality and optimized costs,” write study author John Ferreira, executive director of Accenture’s North American Manufacturing practice.

“In the first part of the rush to China, engineering and manufacturing leaders made outsourcing decisions based only on production and labor costs,” notes David Morgan, CEO of D.W. Morgan Company, a global transportation and logistics provider based in Pleasanton, Calif. “Logistics wasn’t invited to the party. Companies thought they would save 50 percent, but ended up saving only 10 percent once they factored in all the supply chain variables” said Morgan in the inboundlogistics.com report.

Rightshoring

The reshoring phenomenon is gathering steam and could result in 2-3 million jobs in the United States, according to Boston Consulting Group’s senior partner Harold Sirkin in a report (summarized here) that his consultancy released.

Of course, plants located in foreign lands won’t necesarrily be shut down.  The location of manufacturing in the future has a lot to do with the total cost of getting goods to the customer. “It depends on what goods they’re making and what markets they’re serving” says Sirkin in CFO Magazine. “We don’t expect plants to be closing in China” based on local needs. “When companies make a new plant decision, they may put it in the U.S. and repurpose the plant in China to produce goods for the Chinese market.”

CFO’s and real estate directors can reach out to site selectors and logisticians that can help calculate the total cost of options including labor cost and skill, real estate costs and available incentives. The team can then fold these costs into a model that accounts for customer and logistics issues to spit out which locations work best for the project.

Allentown

Business leaders have to make the right call for their own organizations, of course. The United States may or may not be the best location for a plant,  but the fact that the trend is getting more press coverage is encouraging as the much hoped for recovery gains steam.

Back in Allentown, unemployment is as high as it’s been since 1986, according the the US Bureau of Labor Statistics. The community, and many like it across

Soon to Sing A New Song?

America, hope that all the consultants are correct; they could use some jobs for a few good men and women in the cold winter of 2012.

When the resurgence comes, maybe Billy Joel can finally write a new and happier song about America’s manufacturing might.

What Would Warren Do?

By Ken Ashley

(ATLANTA) October 21st, 2011
As reported in this recent WSJ article, even Warren Buffet
is buying back his own company’s stock. The Journal reports that Berkshire
Hathaway has a stunning amount of cash totaling nearly $50 billion dollars
on hand. In the first 6 months of this year, the company generated $9.7

Mr. REALLY Big Money

billion in cash or nearly $54 million per day.

Mr. Buffet is in good
company. According to Deallogic, $347. 5 billion has been squirreled away by corporate America, which is the most since 2008. We read similar stories about Apple, GE, and
many life insurance companies, among others.

In early October, the Journal ran another article “Companies’ $2 Trillion
Conundrum”
which again referenced the “massive cash hoards” being built up
now. The article went on to suggest that a  “vicious cycle of
underinvestment” may be upon us as corporate America (a) can’t find suitable
investments and (b) continues to worry about the future economic outlook.

Not every company is so fortunate, of course. Many are dealing with cash
flow issues, but this is true in every economy. What is amazing is that
corporations are sitting on such a huge volume of cash combined with
relatively low debt. Even the guru of all financial gurus Mr. Buffet is
spending money on his own stock as opposed to sopping up more companies.
That fact indicates that building huge piles of cash will be trendy for
sometime to come in the executive suite.

Don’t I At Least Get A Toaster With This Loan?

So, why do cash rich corporate tenants reach out to their landlords and ask
for even more money? It’s traditional in many real estate transactions for
building ownership to invest cash in the form of a “tenant improvement
allowance” (“TI”). The landlord then amortizes this cash into the lease rate
over the term of the commitment. Tenants use this money to carpet, paint and
build out their space. The thinking is “This is the landlord’s building and
I’m only here for the term of lease. Why would I dump my cash into someone
else’s asset?”

Peel back the onion, and you will see that the lender, I mean landlord, is
actually making a tidy sum on that investment in your new space.  You knew
this intuitively, but lease proposals are always silent on the
interest rate on TI money. It’s certainly a worthwhile exercise to take a
few minutes to check the math and solve for the imputed interest.  Regardless of the decision of your cash or the landlord’s, you can send your broker in to make the interest rate on the landlord’s cash a negotiable item in the deal.  I’ll bet in today’s environment you can improve on the first offer.

The length of your commitment will have to factor into this decision on
whose cash to use as well. If you are only committing to a space for three
or perhaps five years, it might be best to let the professional landlord
spend his money on the space. However, in longer term situations, a good
side-by-side analysis will help decide if your cash or theirs is the better
option.

Pass Go and Collect $200

Determining whose cash to put into the build-out is like any other investment decision in the real life Monopoly game we play in business every day.  If you invest dollars to pay for some or all of the TI, then you get the depreciation (check to see if bonus or accelerated depreciation will apply to your situation),

Thank you sir, may I have another?

and of course you get the benefit of the lower lease rate during the term.  You’ll abandon the improvements when you leave the building, but this is true even if the landlord builds out the space and amortizes the cost in your lease rate.

If you let the landlord invest his cash in your deal at your now negotiated
lower interest rate then you get to keep those dollars you otherwise would have spent. But remember, at the end of the term, when you are considering renewing the lease, you should deduct the amount of the TI amortization from the new lease rate. Otherwise, (depending on market rates) the landlord will be happy to leave that line item in your cost at 100% profit.

A big factor in the cash deployment decision has absolutely nothing to do with real estate. Only senior finance executives can see the full picture of a
company’s investment opportunities, including internal projects and M&A
options that may pop up.  Admittedly, in most economic cycles, investing in
sheetrock doesn’t even come close to the internal hurdle rate.  It’s only
the vast amount of cash lying around at very low interest rates that makes this even a consideration.

At the end of the day, most corporations will let the landlord pay for the
TI.  However, you will feel better having run the traps on the analysis and
negotiated this often hidden part of the real estate deal.

Before you finally decide who will write the check on your improvements, asking a few simple questions might significantly improve your deal either way. And
that’s an investment even Warren Buffet can get behind.

Ranch Dressing

By Ken Ashley

(ATLANTA) September 6th, 2011

Ah, the economic malaise continues. This New York Times article (Fed Divisions Led to a Compromise on Interest Rates) starts with a pulse quickening statement: “No one knows what to do to fix the economy.” With the certainty of uncertainty continuing to be a daily

Yummy

Yummy!

media subject, interest rates are trending near all time lows. Yes, one day, Ethel, it will be ok. The cycle will turn and joblessness will no longer be the headline de jour.

But with all the fun in the economy,  there’s an unintended consequence of this “condition” we are in: bad real estate deals still have life (perhaps it’s an after-life at this point). Low interest rates propped up many a real estate deal in the darkest days of ’09 and ’10.  And now, the low rate party continues right on into the 2011 college football season.

To put this another way, low interest rates cover up bad real estate like ranch dressing covers up a bad salad. Tenants need to be aware that over-leveraged assets supported by unnaturally low interest rates are ticking time bombs. You can certainly make some great deals these days as a credit tenant, but make sure you are doing business with a credit landlord, or else.

Can I Get A Witness?

Several years ago, the presumption was that landlords had great credit. Heck, they own this beautiful building, and the leasing agents look like a million bucks. Now, we advise tenants to perform as much due diligence on the landlord as ownership performs on tenants. Both parties are making an investment in the other. The landlord gets rent; you get improvement dollars and space in which to make your fortune.

Don’t Call Me; I’ll Call You

Checking the asset’s “credit stack” is important at the beginning of the relationship, but every tenant needs to have strong protection during the  lease term as well. Work with your real estate broker and attorney to make sure that you have good language around the landlord’s responsibilities in the lease (it always bugs me that the tenant’s responsibility is many, many paragraphs long, but the landlord’s is two sentences).

Also, work on so-called “self-help” remedies that allow you as the tenant to perform certain landlord functions if ownership doesn’t live up to its end of the bargain. If things go bad during your lease term, you can always sue, but what you really want is a high functioning facility in which to conduct business. While there are very real limitations on what you can and should do as a tenant (as opposed to being an owner), keeping your space operating when the landlord doesn’t perform is vital.

I’m Outta Here

There are other legal devices you should ask your advisors about. One is the very technical sounding “subordination and non-disturbance agreement (“SNDA”).” To sum up an SNDA: you, as tenant, agree to recognize the landlord’s banker if the landlord defaults. The non-disturbance verbage means that the landlord/banker agree to let you keep your lease in force after a default on the building loan. SNDA’s are required by many lenders because if they take the building back, they need to know they can count on you, Mr. Tenant, to keep paying the rent. Just make sure that in return for agreeing to give protections to the lender, you are properly protected by the document.

Perhaps the most important legal issue is the ability to quit the lease if the landlord can’t or won’t do his/her job. Termination provisions for landlord non-performance are not the easiest to negotiate, but if you are a significant tenant

And one more thing, your......

with good credit, you never know what you might get in this market. Besides, it would be a great feeling to tell your non-performing, no good landlord “You’re Fired!” You and The Donald can be one.

So, we hope the Administration, the Fed and the Congress can jump start things, because this economy is simply getting boring. In the meantime, watch out for capital starved landlords, and maybe a little black pepper will help that salad out as well.

Back to School! – Top Eleven Things to put in your CRE backpack

By Ken Ashley

(ATLANTA) August 8th, 2011

So my wife made the annual Pilgrimage to check off the supply list and make sure we have our own personal office supply store at home (God bless her). The children had a great time with the whole process. I can remember the time as a kid myself; the combination of excitement and trepidation as you faced the

Roughly what our house looks like with the kid's supplies spread out.

new school year. You miss the long lazy summers, but there is something fun about a challenge and meeting new friends. I don’t think I realized it then, but every kid, just like every executive feels the same emotions at the start of the new season.

As I watched the kids carefully arrange all their things for the new school year, I couldn’t resist thinking about packing a “real estate backpack” for the upcoming year. What are the things you, Mr. or Ms. Business Leader, need to succeed this semester and fly through finals?  I’m sure you are all excellent students – at the front of your class – but it’s a new school year, so lets recalibrate on your gear and how you will use it.

  1. Calculator – Have your staff double-check the rent bill and operating expense escalation at all your locations.  Even if your leases are relatively new, follow the advice of Ronald Reagan, “Trust But Verify.” Also, if you have internal billing, make sure that move/add changes/ are correct in the system and that all the departments are getting a charge for their ratable share. If you catch a good error, maybe the teacher will give you an apple.
  2. Ruler – Look at how you are using your space. Can you do more with less? Maybe a new furniture configuration is cheaper than leasing more space? Spend a few bucks and repaint the accent walls to pep things up. Have some fresh eyes take a look at things and ask “what if.” Sometimes you can get a stunningly great but simple idea, and it was right in front of you the whole time.
  3. Yellow Highlighters –  To help the troops focus on what is really important. There is much going on and it is easy to get distracted! Where is that plan again? What should be doing this week? What about right now? If there was ever a time in our careers to turn the news off for a minute and thing about what is important but not urgent its now. You can be the voice of calm and reason and help your folks work the plan, not fret about what is on CNN.com.
  4. Composition Book  (er, iPad; see number 10 below) – To list carefully to what the sales-guys, division level leadership and even front line folks forecast for the future. The more time you have to do your homework and adjust for future plans the better off you will be.
  5. Red Ball Point Pens – You can so easily cross out what doesn’t make sense in the business plan as it relates to real estate. Also, dreaming in class by your employees will get what we used to call a “Christmas Miracle” of red. Plus red is such a nice power color from a senior executive!
  6. Pencils and Erasers– Order pizza and pull the team together for some planning. Do you need to adjust course in the fourth

    I knew it! Thats the formula for success. If only I could read it.

    quarter? Times, they are a changin’, so ask early and often for revised input into needs for space growth or disposition. And don’t even get us started on the plentiful M&A opportunities on the horizon. Jack and Jill will need to be nimble in the coming months.

  7. Box of Kleenex and Hand Sanitizer – Well, you know flu season is coming. And you need to be strong and healthy to keep your grades up. As mom would say, wash you hands and take your vitamins. Take care of your body and it will take care of you. You get the idea. I’ll tell your mom you’re a great kid.
  8. New Glasses – Cause you gotta be able to see clearly to predict the future. Plus you need to be able to read the chalkboard, or is it the report card you need to focus on?
  9. Student Planner – Write it down so you can get your homework turned in on time, every time, or at least before Christmas. Let’s hope neither one of us knows what after school detention is like in corporate America. I know I don’t want to find out.
  10. A New Computer – Use all the tools you can to stay at the head of the class. You don’t need to be an early adopter, but a smart adopter of technology that helps you see things more clearly, communicate more succinctly and automate manual processes of any kind. Then you’ll have more time for football games, movies and living your life. Plan that hot date!
  11. Lunch Money – No, not to fend off the bully; that’s what your buddies are for. If you can keep extra money tucked in your budget you will surely feel better. With the coming volatility, you never know when you get a chance to have the cash for an unknown need and get a gold star!

Extra Credit – Put all your gear in a “Shiny New Backpack” (with a flash drive or a cool new cloud back up) to take your show on the road to all your locations and

Mason's the Super Hero here!

even your investors or board of directors. Feel free to pick out a super cool bag with your favorite superhero on the back for extra, extra credit. Then set the morning alarm, firm the resolve, and focus on the positives in the months ahead. I know you can do it!

Have a great year, class!

Everywhere a Sign

By Ken Ashley

(ATLANTA) July 18th, 2011

It was a different time. In the early 1970’s the hippy movement was in full swing, and an unemployed 25 year old singer in a rock band in Ottawa, Canada sat down one day, mad at the world. The results of his youthful anger – the song “Signs” —

Oh wow - those pants rock, Dude!

would become a powerful anthem for those who were changing our culture from a strict para-military rules following people to a new generation of free expression.

The song debuted as the “B” side of  an unsuccessful single record in 1970, but without warning, Signs became a huge hit for The Five Man Electric Band. Lead singer and writer Les Emmerson, still living in Ottawa today, now makes a healthy living in large part from the 2006 hit “Don’t Let The Man Get You Down” by the hip-hop (later version of hippy?) artist Fat Boy Slim. Mr. Slim sampled Signs, and therefore Les gets good mailbox income. Maybe signs aren’t such a bad thing after all – if you sing about them.

What’s Your Sign?

Before you warm up  GarageBand on your Mac and start penning your own ode to the hippy generation, maybe you can become more successful by

Thanks Officer!

working on signs for your hip new offices.

One of the big reasons companies invest millions in their digs is to make an impression on customers and prospects.  Occasionally, businesses want to keep a lower profile because, for example, they are in industries related to defense or conduct research that is deemed secret. However, the vast majority of corporations are interested in getting their name out there.

Over the years, we’ve worked with a number of companies interested in maximizing their marketing dollar by obtaining prominent signage. We’ve encountered those who desire top-of-building exposure with relatively small office space requirements, all the way to big name companies  who look not only for building signage, but campus level branding. And of course, we’ve worked with those who have smaller office requirement but simply want to maximize their exposure package. We’ve seen many approaches to using someone else’s real estate as a billboard. There is no doubt about it, a major top of building deal can be worth millions in advertising dollars and can message consumers every day.

As you think about signage needs for your business units  – and they certainly don’t have to be just headquarters locations  – we advise you first consider the type of signage package you want.  Then determine how all the operational considerations will work to keep your really cool sign bright and beautiful.

Levels of Signage

Lobby and Suite  

– Signage in the lobby and on the premises. While this is fairly standard,

45 MPH, huh?

think about the use of your company logo on the entrance to your suite. Determine up front how the signage can be changed if your name changes, and determine in advance if you want Principles or Partners names to be posted on the sign in the lobby.

Exterior Monument – Confirm what position will you be on the monument, and get landlord agreement that you will have that level throughout the term and any renewals. Also, be aware that some properties have more than one monument at different street entrances. Make sure you have the same rights on all monuments.

On Building – Signage that is on the side of the building, but may not always be at the top. Some properties offer street level fascia signage that is very valuable, especially in dense urban settings. Of course, the ultimate physical location on the building is important.  You may not get exclusivity on the building. but you should be able to negotiate restrictions on competitors’ signage.

Top of Building  – Same considerations as On Building, but you have a much stronger case for exclusivity. In some jurisdictions, only one sign can be at the top

Please!

of the building (this helps the fire department, for sure), but confirm that you have the only top of building sign. In both On Building and Top of Building cases, you will want to put up your sign as soon as possible. You should take responsibility for its maintenance because the landlord is not in the sign business. You care about your sign more than anyone else, so take care of it.

Campus A campus package likely includes all of the above. As the major or dominant tenant, you can get other goodies, such as the right to name roads interior to the campus or display your product on the property, if applicable. Think Disney in the office environment.

Other Considerations

Exclusivity  – Mentioned earlier, but this is a major issue. For example, can others put signs up (including on the side of the parking deck) in the office park?

Who’s Tab?– Who pays to put the sign up and when can it be installed? Can the sign be paid for out of a tenant improvement allowance?

As far as maintenance, with the hot sun and hail damage, there will always be a need to baby your sign. Negotiate in advance for wide permission for your sign crews to change electronics or signage material. Make sure you have permission to get up on the roof in the event a major replacement is needed.

Party Over – Who pays to take it down? When your lease is up, you will likely have a restorative obligation. Make sure to address the particulars of what you need to restore. If you are patching a few holes, that’s likely OK, but be careful that you don’t have to replace an entire roof or part of the building siding. Also, in the event that another tenant is going to install a replacement sign, perhaps you can mitigate your requirements to actual repairs after the new sign is installed.

Lighting– You paid all that money for your lease and the beautiful sign. Don’t give up 12 hours a day of exposure. Negotiate sign lighting in the lease agreement.

Civil Disobedience

Additional Considerations – What happens if you shrink? What happens if you sublease space? How long can you keep the sign? You’ll have the most leverage during the initial lease negotiations, so address flexibility upfront.

Also, who runs the traps on government approvals? You and the landlord should jointly discuss approvals with the municipality. Don’t be afraid to retain a good lawyer who is an expert in this area. It can make a huge difference in terms of your time and the ultimate approval of your project.

So, peace, love, happiness, flowers and children have been good to Les Emmerson. Get your dream sign installed correctly, and they’ll be writing songs about you. Dude.

Git-R-Done; Time To Move Those Deals Forward

By Ken Ashley

ATLANTA (July 5th, 2011)

Disney’s acclaimed Pixar unit recently released Cars 2 with “co-stars” race-car Lightning McQueen (voiced by Owen Wilson) and tow-truck Mater (voiced by Larry the Cable Guy). In the movie, the characters head to Europe and Japan to compete in the World Grand Prix, but of course get side tracked with all manner of problems, including international espionage.

While the new movie is a hit, we like the original Cars movie better as it’s seemingly innocent humor is classic and truly funny. Our favorite character, Mater, resembles an International Harvester mining “boom-truck” from the 1950’s. The vehicle that is the inspiration for his appearance sits at a diner in the former lead mining town of Galena, Kansas – population of 3,287, which is down from nearly 80,000 in the late 1800’s. The town, appropriately for the original Cars movie setting,  is on the eastern end of the famous Route 66 (You can also take a spin in the 1951 vehicle, the owners proclaim; it still runs!). Back at the diner, you can purchase sandwiches, clay models of Mater, and learn about the plans for a bed and breakfast (we’ll see about that).

Shoot! You're in Radiator Springs, the cutest little town in Carburetor County

Part of Mater’s charm is the personality of comedian Larry the Cable Guy (aka Daniel Whitney),  who speaks with a thick Redneck Southern accent. Larry’s character brings an often hilarious spin, explaining that his name is like “tuh-mater without the tuh,” telling the audience he’s “happier ‘n a tornado in a trailer park,” and proclaiming that

Shucks, you can call me Larry

he’s  the “world’s best backwards driver.” He attributes this skill to his rear-view mirrors and his own”guiding” philosophy: “Don’t need to know where I’m going, just need to know where I’ve been.”

“I knew it! I knowed I made a good choice!”

Mater’s philosophical musings may go a long way to describing the plight of those on the user side of commercial real estate these days. We certainly know where we have been – in one of the best markets for tenants in a generation. But if we keep our focus on the past, we too could end up being the world’s best backwards driver in terms of real estate deals.

As a very insightful article in the latest Real Estate Forum (@RealEstateForum)
entitled a Rebound By Chapters explains, the real estate recovery is happening at different paces in major metros. The piece, by John Jordan, quotes Cushman & Wakefield’s Ken McCarthy, stating that office leasing reached a six year high in the first quarter of 2011. CBRE Econometric Advisor’s Arthur Jones characterizes the current national office market as “weak but stabilized.” Dennis Friedrich of Brookfield, a publicly traded developer and owner with a portfolio of 78 million square feet, believes that the recovery is “sustainable and will lead to single and double digit rent growth in some US cities in the near future.”

Perhaps the biggest indicator of coming office recovery is the appetite that many major investors have. They are putting their money where their mouth is and now have an interest for office product once again. For example, Joe Oglesby of Wells Real Estate says in the article that his company is “planning to have a very active second half of 2011 in terms of buying buildings.” Pay attention when experts in a market start to acquire new assets.

“I tell you what, buddy; it just don’t get better than this.”

For nearly three years now, tenants have experienced a market in which they could take their time in decision making, and have their every demand met by landlords who were very desperate for their business. It’s been a very good time to be on the user side of things and many have deals have made corporate heros of executives who capitalized on depressed conditions.

We are certainly not suggesting that this environment will change immediately, but in certain cities and submarkets we are beginning to see the market tighten. Many make the mistake of thinking that markets have to actually be in recovery for real estate to cost to rise. What actually occurs is that an asset manager feels a sense of optimism (or feels less fearful as it were) based on what he or she perceives is happening. Then the order is issued to  the leasing brokers to be more conservative on the economics and offer lesser concession packages.

Our advice is to move ahead on projects on the board, and in the vernacular of the wise one, Mater, “Git-R-Done.” Lease early, lease often and with flexibility, and be prepared to accelerate the speed of decision making. If you decide to engage in a real estate project, a best practice is to get senior management or your board to approve a set of parameters and let you go get the deal teed up. If they want to look at it one more time before you sign the lease, so be it, but speed is your ally in a recovering real estate market.

The deal is more than the face rate, of course. Keep in mind that many real estate stats quote growth of “asking rental rates.” This is like suggesting a change in the automobile industry based on the sticker price on new vehicles. Clearly there are many factors to consider in a transaction as complicated as a major real estate deal. So while the rental rate may change upward, a good credit tenant that knows what it wants and is prepared to move ahead with reasonable speed can still make a very good deal in most every major market in the United States.

So, unlike our friendly character Mater, look forward not backwards and be aware of the perception as well as the reality of the real estate markets. It’ll make you look like a real estate hot rod!

Lightning McQueen: Will you stop that?
Mater: Stop what?
Lightning McQueen: That driving backwards. It’s creeping me out. You’re gonna wreck or something.
Mater: Wreck? Shoot! I’m the world’s best backwards driver! Just watch this right here, lover boy.