Category Archives: Economic Recovery

iCampus

By Ken Ashley

March 12th, 2012 (ATLANTA)

In an incredible announcement over the weekend, Apple has gone public with its plans to create a $304 million dollar campus for more than 3,600 people in Austin, Texas. This is on the heels of their $500 million dollar Cupertino, CA campus that is now under construction. Wow, hope they sell a gazillion iPad 3s.

The Cupertino building famously looks like a space ship. It will be interesting to see if Austin gets in on the “space” program as well. (Has the Eagle landed in Austin?).

Dan Whisenhunt, Apple’s Director of Real Estate and Facilities, must be the busiest real estate professional in America.  I imagine Dan in his weekly meeting telling his staff, “Ok, we’re going to keep the existing global portfolio growing, build this building in

Austin, We Have A Problem - Too Many People!

Cupertino on time and on budget. Oh, by the way, we’re also going to build another campus in Austin at the same time.”  “Hey, let’s FOCUS people.” “Pass me another protein bar and a Mountain Dew, please.”

The combined $800 million in construction projects makes Apple the most active company in the world in the construction of new real estate facilities. Dan is indeed the man in corporate real estate these days. At least he can look at the plans in amazing clarity on his new iPad.

It’s Not Just Apple

Our team is currently representing two clients in the creation of three ground up construction opportunities.  The insurer Primerica is building a 345,000 square foot campus just outside of

Term Headquarters

Atlanta. They were able to create huge efficiencies by going from 10 separate buildings to one campus.  This facility will deliver in the Spring of 2013 and among other fabulous features, will have a state of the art facility for Primerica sales people to learn about the culture of the company and its products.

Porsche Cars North America is creating an approximately 175,000 s.f. corporate headquarters, training facility, and customer experience center adjacent to the world’s busiest airport in Atlanta. Customers will be able to come from all over the world and experience a little “every day magic” on the Porsche handling

Come to work and ZOOM!

circuit. This project will deliver at the end of 2013 and be a huge boost for Atlanta’s international reputation.

In addition to the Atlanta facility, Porsche announced at the 2011 Los Angeles Auto Show that it will break ground in the spring of 2012 on a second US Porsche Experience Center in Carson, California. The centerpiece track  (like Atlanta) will include encounters with rain and man-made snow, as well as an off-road course.

If tooling around a winding track in Southern California in a seventh-generation Porsche 911 isn’t your idea of ecstasy, there will also be a “Porsche Human Performance

Paging Jerry Seinfeld

Center,” with a sports-science laboratory to “maximize personal fitness, wellness and athletic performance.” As my Southern Grandmother would say, “oh my, that’s better than a blueberry pie.”

But There is so Much Vacancy….

Why would anyone build now? How can senior leadership justify spending capital on creating new product when the national office vacancy rate is at nearly 17%?  Ahhh, no matter the real estate cycle, projects like these can and will happen.

Here are 8 reasons why major user might consider “campus consumption” as a way to solve their real estate challenges in 2012.

1)            Talent Cost and Availability

Yes, I know that the headlines still consistently discuss the masses of unemployed Americans. The reality is many companies are struggling with retaining talent in top executive positions and highly technical positions. Apple is creating talent diversity in its expansion to Austin. The labor market for techies is tough in Austin, but nothing compared to Cupertino and the Silicon Valley.

2)            Cash or Credit

With the spring thaw in real estate finance in motion, more corporations can get funds, if needed, to build campuses. Both lenders and equity investors have a growing appetite to do deals again (finally!). The reality is that many companies have huge troves of cash and some of them will invest this cash in dirt and buildings. Besides, you can always get the cash back out vis-a-vis a sales leaseback, should that become necessary.

3)            Space Efficiencies

In the recent great recession, companies would do anything to cut cost. Real estate is usually the second largest item in the budget after payroll, so “densification” of employees became a major initiative for many real estate departments. What many large users are finding now is that expansion is difficult to accommodate. In addition, rethinking the architectural program can yield significant space efficiencies. Also, like Primerica, some users find themselves in multiple buildings with the requisite inefficiencies.

4)             Point of Friction

Sometimes companies simply get too big to fit into existing product. While many major metro areas still have large holes and lots of space, mega requirement of 250,000 square feet and greater have a difficult time making existing buildings work. The “friction” that results can hatch a new campus.

5)            Incentives

Communities in the Southeast and Southwest United States are getting increasingly aggressive with inducements. The electorate is telling politicians with one voice – we want jobs! The politicians are tossing around cash, free land, tax breaks and all manner of incentives to land the next big one. Economic development organizations in many communities are becoming very sophisticated in their marketing efforts, and as a result, they are scoring some big wins for constituents.

6)            Building Cost

Commodity prices seem to be fluctuating all over the place, but the cost of construction is still a bargain principally because of labor cost. General contractors are reporting increased activity, but the sub trades are still willing to make great deals to get work. So are architects, environments experts and many other consultants.

7)            Taxes

It’s not new news that taxes are high in the gateway cities of San Francisco, LA and New York. These areas are simply very expensive places to do business. When companies layer in the significantly reduced tax burden in other places, the campus concept can get a major boost.

8)            Branding

As we experienced ourselves with Porsche and Primerica, iconic brands sometimes need iconic campus environments in order to market themselves both internally and externally. I’m sure Apple is creating great excitement internally for their employees. The Apple marketing guys are going to have a field day when Cupertino and Austin deliver. They will get millions of dollars in “free” PR for their company through the announcement and completion of these facilities. Sometimes the real estate math is just one small part of the evaluation model.

Build it and they will Brand

Campuses don’t work for many. Heck, they don’t work for most. I once had a senior telecom executive tell me that their industry changes too fast to even consider the campus option. He pointed out that there are many former telecom campuses around the United States. He’s certainly correct that the ultimate “exit” out of a campus can be difficult. Long after the ribbon cutting, selling or repositioning campus facilities can be a tremendous challenge.

However, as the economy improves, you will see more announcements of big, shiny new campus projects. Apple may be the biggest in this game, but they are certainly not the only player. As the economy two-steps into a recovery – Austin and elsewhere, more and more companies will evaluate campus solutions. If you check the right boxes and carefully analyze the alternatives, you might be surprised what a brand statement wrapped in real estate can do for your company.

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.

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.

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.

Shiny Happy People

By Ken Ashley

ATLANTA (May 7th, 2011)

In a rousing opening session to the CoreNet Global Summit in Chicago’s Navy

Angela and Lee Address the Attendees

Pier, CEO Angela Cain and Chairman Lee Utke (Global Real Estate Head for Whirlpool) played the theme from the ‘80s sitcom The Jeffersons entitled

Opening Session at Navy Pier

“Movin on Up.” The ditty signaled real estate’s increasingly important role in Corporate America. And it certainly makes sense given the many millions in savings that real estate directors have delivered over the past several years.

The Summit is held twice annually in the United States and is considered the confab for corporate real estate service providers, economic developers and so called “end users” who control tens of millions of square feet of America’s corporate office space. A combination of networking, trend swapping, and education dominate the conversations and panel discussions.

As for the Chicago Summit, another old song comes to mind describing the mood: “Shiny Happy People” by REM. It is clear that the world is looking up in commercial real estate based on the number of attendees (greater than 2,000) and their disposition (lots of smiles). We noticed a significant reduction in “Sharpie Name Tags” which occurs when someone is in transition and simply takes a Sharpie to their old company’s name. Plus there were lots of new faces from every corner of Corporate America eager to learn the craft of commercial real estate.

So what are some of the trends we heard?

Social Media

Traditional news media were certainly present, but more than ever we saw many real-time postings and tweets documenting snippets of panels and social

Don't Just Stand There, Tweet!

conversations around the Summit. It was interesting to see trends immediately documented and witness a virtual play-by-play of some of the events. We met well respected CRE bloggers Bob Cook and Duke Long in person (they really exist; who knew). CoreNet Global itself is working hard to facilitate social media and did a good job of providing tools and support for Tweeters and Bloggers of all types.




Concern About On-Going Value Add

Multiple commercial real estate (CRE) leaders responsible for large portfolios expressed concern that their CFO’s expect ongoing savings.  The CRE’s said they feel good about meeting plan in 2011 and even 2012, but are worried beyond that time for two reasons. First, the market is “clearly recovering” in terms of economic costs of office space. Secondly, many are adding headcount, which requires margin for growth in portfolios. Increasingly, CRE’s are turning to workplace strategy to deliver value to CFO’s. In the end, this means more employees in less space.

Tug of War

Speaking of growth, CRE’s feel like they are negotiating with business unit

Standing Room Only At a Panel

leaders, who insist they are growing at a rapid clip  – 10% or more was a common refrain – and the mandate to keep cost in check. The CRE doesn’t want to miss plan because of false expectations of growth. They are taking the posture of “trust but verify” in terms of real proof of need from the business units.

4th Place

We will write more about this in another post, but there is some serious debate about the so called 4th place. Home, then business, then Starbucks are 1, 2 and 3. The thought has been to create a secure environment similar to Starbucks. This new ideas  has evolved into the so called 4th place. But one significant CRE leader told us they are dismantling the approach at his company due to under-use. It seems that employees like to stay in proximity to their work groups and friends, so they are not using these touch down centers are frequently as envisioned.  So much for Generation Y’s much vaunted desire for free-range office.

Cash is King

One panel discussed the still “dynamic tension” between cash and accounting (FASB and GAAP) in terms of commercial real estate decisions. The panel concluded that decisions should be made on the financial and business impact, as opposed to accounting impact.  “FAS will change again, but you should tie portfolio decisions to business strategy and in ways that best support the company. “They went on to say that short lease terms, which allow flexibility and seem to be in vogue, could bring great “asset intensity.” This means they soak up a lot of corporate cash. The message is clear; “Don’t put your cash in the walls, put it in your business” even if the lease term needs to be longer to amortize landlord dollars.

Blocking and Tackling is Still Important in CRE

There were a number of great panels on strategy covering workplace, sustainability, and everything in between. Those are always well received, but we observed a number of younger CRE’s with a thirst for learning tactics that advance skills and help improve service delivery. We were encouraged to see so many new faces in our industry and their desire to become excellent at their craft.

It’s a Wrap till Atlanta in the Fall

The commercial real estate industry, which was the subject of doomsday headlines as recently as six months ago, is without a doubt bouncing back.  We see this as a great early predictor and barometer of corporate growth. Companies are largely bullish on the future (as represented at Chicago, at least) and they have billions in cash just waiting for the right opportunity. They will be hiring, buying and spending on all fronts over the next year.

Of course there are naysayers, but based on what we heard and tweeted about in Chicago, if you stand in the way of growth, you’ll be singing Lynyrd Skynyrd’s “Give Me Three Steps”!

Nobody Loves Me But My Mother (And She Could Be Jiving Too)

By Ken Ashley

ATLANTA (April 4th, 2011)

This great BB King song must be emblematic of how some down on their luck developers feel at this point in the market. Tenants are demanding rent reduction

That Man has the Blues!

and more services; the tax man wants to be paid; the lender is holding on the other line and oh, by the way, you need to cash a check to feed the kids. Developers take big risks and sometimes those risks don’t pay off.

We empathize with some landlord friends who are currently losing at the real estate game. The economy is recovering, but life in ownership is still hard in very real and personal ways, and we know this economy can be humbling to even the biggest ego. Most landlords in 2011 would tell you that debt is like a chocolate cake: delicious in small slices, but really bad for you if you have too much.

We are becoming a whole generation of “recession babies” who view debt as anathema and important to eliminate as quickly as possible. Certainly millions of Americans are cutting up credit cards and paying with Ben Franklins instead.

Want at Toaster With That CMBS Loan?

But wait, the Wall Street Journal and other publications are suggesting that the debt markets are coming back. In this blog article in the Wall Street Journal

Want Some Bread?

 

 

(CMBS Industry Ready to Exhale) Eliot Brown suggests that softening  of requirements on banks will allow them to more quickly issue Commercial Mortgage Backed Securities again. I feel a collective eye roll as you say, “Here we go again.”

Of course, debt is a tool like any other, and it is really the oxygen that allows commercial real estate to move ahead. In this brilliant post from March 30th by Dr. Sam Chandan –  The Return of the Rise of CMBS –  which ran in the New York Post, Sam explains that “This marked (positive) shift in borrowers’ access to credit has facilitated a critical mass of trades, supporting a degree of price discovery that was absent just a year ago; it has also allowed mortgage rates to remain near their cyclical lows even as long-dated treasury prices have fallen and yields have risen.”

The lesson as I see it is simply “in all things, moderation.” Thanks again, Ben Franklin.

Don’t You Be A Loser at Leasing

While it has become a national sport to shake our heads and wag our fingers at those developers that foolishly took all that risk, there most certainly is a parallel in the tenant universe. Our friends in the technology community used to call it “leasing ahead of the curve.” Some would call it leasing on a credit card. We call it not smart.

Leasing significant space in a vague anticipation of future growth can be expensive, but oh so tempting. Other tenants in the building are expanding and you might get boxed out! We need a solid path for growth, the managers proclaim. And if we sell that order of the BR549’s to the Chinese, we will need to hire gaggles of people quickly!

The “get them while they are hot” philosophy should be treated with great care in an environment in which lease obligations are firm commitments for years to come. The sad fact is that real estate is likely your second largest cost. Your largest cost – payroll – can be reduced relatively quickly through terminations, although this is not pleasant. Real estate is a commitment with no easy exit as we discussed in this post from late last year.

Let’s Keep Mom Happy

So, no matter the promises of future sales, business is booming and you need to hire more folks. This nonsense of working 90 hour weeks can’t last. How do you not “overspend” or overcommit in real

Smiles All Around!

estate? Through a beautiful thing called an option. Our advice to many clients now is to “go long and option up.” Translation: lock in low rates that are prevalent in the market and preserve both your growth and contraction ability through options in the lease. Ask your real estate broker about this, and talk to the lawyers, but exploring a soft instead of a firm commitment for space can many times be a career saving approach.

Another way to handle this issue is to partner with an architecture firm and develop a firm understanding of your space usage. The document the architect produces is called a program, and it will be the basis for calculating how much space you really need in the future. When the sales guys show up with the signed order and a big smile, you can then feel good about expanding based on a detailed and empirical look at your space needs as opposed to guessing on butts in chairs. No jiving with a program.

Expansion, like debt, is certainly not in and of itself a bad thing. Just don’t eat too much chocolate cake or you will be singing the blues. Moderation makes Mom happy, you know.