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.

Steve Jobs and….Workplace Design

By Ken Ashley

January 3rd, 2012 (ATLANTA)

As 2012 begins, I finally got a chance to read the biography of one of 2011’s most high profile leaders; Steve Jobs. The 600 page best seller is a very good read and chock full of interesting anecdotes about Jobs. The fact that it took so many words to tell his life story is striking and certainly indicates that he lived a full, fast-paced and amazingly successful business life. The cover art shows Jobs famous “stare” the captivated investors and partners and terrified lesser beings in meetings.

That Famous Stare - You'll Blink First

As it turns out, the denizen of all things computing, the visionary that created digital worldwide communications was a big fan of… in person meetings.  In the authorized biography, author Walter Isaascon describes Jobs innovation and genius as the principle architect of the Pixar headquarters. In this interesting vignette Isaacson tells the story of Steve Jobs and his take on workplace design. The original Pixar build-to-suit delivered in 2000 (a new $64 million, 150,000 square foot Pixar building is under construction nearby).

Given that Jobs used many of the same principles in the creation of the new Apple “Space Ship” Headquarters (profiled here by my friend Coy Davidson) still under construction in Cupertino, Jobs liked the results at Pixar. As you might know, and as is recounted in the book, Jobs had very strong ideas was not to be trifled with in terms of design and function.

The new Apple iteration will be a four-story, three million-square foot building set to hold 3,000 employees. This design philosophy will impact many at the worlds most valuable company. However, many of the formative design ideas come from the original Pixar office building.

“Interaction = Innovation”

Jobs knew that innovation and creativity don’t happen in cubes or though email.

Pixar designer and Academy Award-winning director (The Incredibles and Ratatouille) Brad Bird does a good job of describing the Pixar building that Jobs created:

“If you walk around downstairs in the animation area, you’ll see that it is unhinged. People are allowed to create whatever front to their office they want. One guy might build a front that’s like a Western town. Someone else might do something that looks like Hawaii…John [Lasseter – Pixar’s Chief Creative Officer] believes that if you have a loose, free kind of atmosphere, it helps creativity.”

“Then there’s our building. In the center, he created this big atrium area, which seems initially like a waste of space. The reason he did it was that everybody goes

Sketch of The Atrium Exterior

off and works in their individual areas. People who work on software code are here, people who animate are there, and people who do designs are over there. Steve put the mailboxes, the meetings rooms, the cafeteria, and, most insidiously and brilliantly, the bathrooms in the center—which initially drove us crazy—so that you run into everybody during the course of a day. [Jobs] realized that when people run into each other, when they make eye contact, things happen. So he made it impossible for you not to run into the rest of the company.”

The Master of Design Creates Office Buildings Too

It’s fascinating to follow the thoughts of one of the world’s great innovators.

In an interview with Jobs towards the end of his life, Isaacson quotes the Pixar leader: “There’s a temptation in our networked age to think that ideas can be developed by email and iChat. That’s crazy. Creativity comes from spontaneous meetings, from random discussions. You run into someone, you ask what they’re doing, you say ‘Wow,” and soon you’re cooking up all sorts of ideas.”

Jobs and his team selected a site then tore down an old Del Monte fruit cannery in Emeryville, California, which is between Berkley and Oakland just across the Bay Bridge.  Typically into the smallest details  “Jobs obsessed over every aspect of the new building” says Isaacson. Not only did Jobs pick the steel for the beams, but instructed the steel workers on how to make the product to his specifications.

“The Right Kind Of Building Can Do Great Things For Culture”

Ed Catmull, who was then Pixar’s president, said “the Pixar building was Steve’s own movie.”  “ Steve had this belief that the right kind of building can do great things for a culture,” continued Catmull.

When planning for the new Pixar building, leadership originally wanted something similar to a standard Hollywood studio with a number of separate

iMeeting Nirvana

buildings. However, the Disney artists at Pixar said multiple buildings made them feel isolated. Not only did Jobs agree, but he ordered one building with a large atrium in the center that would encourage “random encounters.”

And so it was; the building was designed so that people could meet and talk in the central atrium. John Lasseter, Pixar’s Chief Creative Officer said “I kept running into people that I hadn’t seen for months. I’ve never seen a building that promoted collaboration and creativity as well as this one.

The Love Lounge

Sometimes great architectural attributes are accidental. A Pixar animator found a small access door in the back of his new office and managed (of course) to explore the opening. He found that after a short crawl, he got to a mechanical room that provided access to the air conditioning. Isaacson recounts:

“He and his colleagues commandeered the secret room, festooned it with Christmas lights….and bar equipment. A video camera installed in the corridor

Accidental Coolness

allowed occupants to monitor who might be approaching. Pixar design lead Lasseter and Steve Jobs himself brought important visitor there and had them sign the wall. The signatures include Michael Eisner, Roy Disney, Tim Allen, and Randy Newman.”

Just because the architect didn’t design it doesn’t mean that cool features can’t happen organically in buildings.

CRE Lessons

Jobs was especially elegant when discussing his legacy toward the end of the book: “What drove me? I think most creative people want to express appreciation for …taking advantage… of work that has been done by others before us.” “I didn’t invent the language of mathematics I use.” “ Everything I do depends on other member of our species and the shoulders that we stand on.” “We use the talents that we have….to add something to that flow.” “That’s what has driven me.”

The master of innovation Steve Jobs created six industries (personal computers, animated movies, iTunes music, iPhones, tablet computing and digital publishing). Isaacson tells of Jobs many failures in the book, but Jobs was not afraid of risks including in the office environment. The fact that he designed three major office buildings merits close observation to see how his approach can work in the broader corporate America.

In commercial real estate some look at the standard build out as acceptable and safe. New design ideas can be dismissed quickly because we get outside of our comfort zone.  I’ve personally attended many design meetings where the team seems to be worried about “industry standards,” which translates to what is everyone else doing. It’s certainly OK to be aware of where the industry is headed, but I bet Jobs would tell us to not be constrained by it.

Then there is the budget issue, which is the great limiter of design. Of course we must count the beans, but not loose site of innovation that drives productivity, which is really the Holy Grail of office space creation.

Finally, focus on big game changing ideas and know that your instinct, combined with the guidance of a trusted architect is usually correct. Of course, few are as talented as Jobs at design, but you know your business best. When selecting an architect, find someone who can work with you to create an environment suitable to your culture instead of creating magazine cover shots with your new office.

Perhaps we can infuse more passion into the corporate office creation process – and take a few risks. The results of a design that works can dramatically impact an organization and its productivity. Steve Jobs affected the lives of millions but even he would certainly have agreed: you have to lead as well as challenge conventional wisdom. Be resolute in your convictions however, because innovation is not for wimps. When you succeed, Walter Isaacson is looking for his next biography subject.

Let The Store Come to the People — iMilk?

By Ken Ashley

The following blog originally appeared in the Atlanta Business Chronicle on November 28th, 2011.

CoreNet Global held its semi-annual summit in Atlanta recently.

Thousands of corporate real estate executives, service providers and economic developers traveled to our city to learn the latest trends in corporate real estate. While normally a confab to learn and discuss ideas in the office world, the event also featured an interesting retail story in one of the keynote talks.

Realcomm CEO Jim Young told an amazing story about a South Korean grocery store operator that significantly increased sales without adding one square foot of additional space (sorry, retail developers). UK based grocery giant Tesco – which later changed its name in the local market to HomePlus – now allows the store to truly come to the people in South Korea.

The marketing team created virtual stores that replicate their product on subway walls with sharp and lifelike pictures. The advertising team leased entire vertical spaces on the train platform. Now those spaces show pictures of food products that appear exactly as they would in the store. Busy, hardworking, and bored consumers can now shop by scanning the pictures with their smart phones. One can point the phone at a picture of milk, bread or hundreds of products. When you click, the product is added to the shoppers’ virtual basket. The the online purchase is completed and is delivered to consumers’ homes. Wouldn’t it be great if the staples showed up at your house in a similar fashion?

The shopping experience is sort of like Amazon.com on a public wall. By overcoming an apparent handicap of fewer stores than the leading competitor, HomePlus became the second best selling grocery store in the entire country. I’m impressed by their innovation and even more so by the results. The whole idea is profiled in a YouTube video the company cheerily produced to show off its success

What are the uses of this kind of technology for busy consumers in the United States? Where could you message your customers or employees when they have wait-time or downtime? I bet the walls at Hartsfield Jackson International Airport and MARTA will look very different in the coming years.

Static advertising suddenly seems so 2010. Come to think of it we need more milk at the house. Rats.

BYOT PYT: Dance of the iPhones at Work

By Ken Ashley

November 28th, 2011 (ATLANTA)

At the recent CoreNet Global Summit in Atlanta, one of the issues that came to the fore is not traditionally something in the real estate domain: technology and

One Glove. Easier to Hold an iPhone

One Glove. Easier to Hold an iPhone

the pace of its change. More specifically, in several sessions, discussion revolved around the fact that employees are increasingly bringing their own personal tech tools to the workplace.  Bringing Your Own Technology – Pretty Young Thing – (with apologies to the Gloved One) is and will continue to happen whether corporate America wants it or not. There are a whole host of interesting challenges but also opportunities surrounding this phenomenon.

A Walk Down Memory Lane

Back in ancient history, say a year ago, companies could still control access to the Internet via their networks. They provided merely adequate hardware tools that knowledge workers were required to use in order to complete their tasks. Now, thanks to Steve Jobs and many others, machines are getting more personal and far more powerful. I tell friends that my iPhone isn’t necessarily the best business handheld, but it is by far the best all around life machine. It goes with me most everywhere and I bet I’m not alone in this regard.

And oh my, the power is incredible. For comparison,  consider the Apollo Guidance Computer in the 1960’s had a 2048 word (!) erasable memory.  How that

Desktop Computing in 1965

machine took a man to the moon is still a miracle and a testament to the fortitude, smarts and courage of those early NASA engineers and astronauts.

Today’s generation of iPhones are incredibly advanced from even a few years ago. On memory alone, I carry 64 gigabits around in my pocket. What would have happened to Apollo 13 with a dual-core Apple processor on board (iApollo)? My iPhone is nearly 11 million times more powerful than that Apollo unit, and in the memory alone can hold between 3 and 6 million books. Simply amazing! It’s fun to think that, based on sheer computing power, you or I could fly a mission to outer space on the power of the smart phone on which you might be reading this very blog.

I Want My Network

But that’s kind of the point in corporate America. Gen Y  – and increasingly all generations  – are showing up to work with the latest and most powerful devices that slip into any pocket. Whether you use brand Apple, Droid, or any other personal machine, these devices continue to become far more important in the lives of Gen X but are required for life itself in Gen Y.

Now, with the advent of cheap portable Wi-Fi networks and hotspots, employees can download previously banned sites like ESPN, Facebook, and YouTube. The Berlin Wall IT tried to put up, for perfectly good reasons, has fallen. Put another way, knowledge workers have seen the light and will not turn back to technological darkness.

This access and power brings with it challenges, but also great opportunity.  On the challenge side, corporate IT departments are currently going crazy worried about the safety of company data and work product. They are issuing proclamations that suggest they are still in control and begging employees to keep data on the companies’ networks and in their cloud. IT claims to have the ability to inspect any machine that employees bring on campus. In many cases, legal agrees, but this is an emerging area of the law. Besides, many employees simply say “Good luck with inspecting my private device; you can pry my iPhone from my cold dead fingers.” Don’t forget that the best knowledge workers have job portability despite the economy.

On the opportunity side, we anticipate great new ideas and collaboration facilitated by amazing leaps forward in technology. The new platforms enable people to communicate, think, and work in ways that are constantly changing. Besides, the hardware is simply a vehicle for amazing software, including social media platforms, that are both changing rapidly. For example, in my own company, we are experimenting with the social networking platform Yammer to share best practices. Emerging technology in its best usage can affect the Holy Grail; increase employee productivity, and that’s something every executive should be interested in.

Hey Kid, Over Here

We certainly understand the angst that IT, Legal, HR and all the leadership have with technology “gone wild”. There are serious issues that companies need to think about in terms of protection of data from competitive snooping, lawsuits and the like.

But before we put up big chain link fences and tell employees what they absolutely positively can’t do, we should keep in mind iPhones, Droids, and other similar devices will keep coming, and our whole society is adopting them into both work and life. No matter how many memos we send, people will keep using these tools.  Our challenge is to figure out how to embrace this change and work through the security questions, instead of the other way around.

What About The Sticks and Bricks?

So, since this is a real estate space, we will ask what does the personal technology invasion mean for those charged with delivering the space – that envelope in which we conduct business? As Jim Young, CEO of Realcomm suggested at the recent CoreNet Summit, a closer alignment with IT, HR and Legal is in order. This issue will not go away, and all of us in corporate real estate must be prepared to address changing technology issues. Besides, you will certainly be appreciated internally if you are a leader in this area as opposed to a follower.

If you are the real estate executive, call your sister departments and host a lunch.

Don't Forget the Whiteboard!

Invite the CFO if it is appropriate as well. If you are CEO, CFO or in the C-suite, so much the better. Bet folks will accept your lunch invitation either way.

May we suggest that the first topic be how to improve productivity on both an individual and a corporate level with the use of these machines. Appoint an “apps czar” and schedule lunch and learns. Your own employees will likely be happy to lead these, but you have to ask. Ask internal innovators to tell you what they are doing with their machines and apps (see this article on Reverse Mentoring from today’s Wall Street Journal). Challenge the team to work with you, and you might be shocked at the outcome. The machines are, of course, only the on-ramp for this new collaboration.

As to the legal and IT issues, rules are made to help people. These rules can evolve as appropriate, but you should first figure out how to harness the phenomenon of personal technology to help the enterprise. The dance of the iPhones is already happening in your workplace, like it or not.

Besides, if you cant beat ‘em, join ‘em. You and all the PYT’s.

Work is a Verb Not a Noun

November 15th, 2011

By Ken Ashley (ATLANTA)

The 2011 CoreNet Global Summit came to Atlanta, y’all. In meetings that focused on big demographic shifts, amazing changes in technology and increasing connectivity,

Make That Sweet Tea

thousands of real estate executives, service providers and economic developers

came to the Capital of the South. As became clear, grits, sweet tea and commercial real estate really do go together.

Not in Kansas or Oz

At the opening session, a “futurist researcher” shared his view that our society – and by extension our business – is “in the midst of a great realignment…that marks the end of one global era and the beginning of another.” Andrew Zolli continued that we are in transition in terms of communication (much more of it), power (decentralized) and change itself (it will be constant).

Zolli said “we are not quite in Kansas, but not quite in Oz; we are in the whirlwind.”

There is a “normalization of volatility”, Zolli continued. “We’ve gotten used to the fact that the world is a volatile place” and that change is simply part of life.

Work and Grammar

Speaking of change, Ernst & Young’s global real estate head Trex Morris shared his view that “work is a verb not a noun – work is what you do where you are, not

Hard To Tell The Difference

where you are located.” This emerging view will have profound implications for the ever expanding envelope in which workforces perform their daily tasks.

Along the same lines, Mark Gorman, Cienna’s real estate head said, “It’s not about the space any longer…If you want to succeed in commercial real estate, forget the extra space and enable workers with technology.” Allowing connectivity and productivity no matter where employees are located is critical to future success of CRE specifically, and the enterprise more generally. The advent of “cloud computing” will facilitate this rapid change, but we have to be willing to enable our workforces to plug in and sign on from almost any device, anywhere.

Hey Kid, Over Here

Tim Venable and Melissa Securda of CoreNet Global led a session of senior real estate leaders with a free flowing conversation about the future of the corporate work place. Everyone sat up when this comment was made:

“We are building the workplace of the future for kids who are now in junior high school.”

Signing ten  or certainly fifteen year leases guarantees that those pimply faced young wonders will end up in your workforce sooner than you’d like to think. They are amazingly ADD, gaming experts and social media champions in every way. How will corporate real estate directors provide the tools to maximize their productivity and maintain focus? How do you give award plaques to a workforce that has no walls on which to hang them?

Will we hear “I’m bored” retorts from these young hot shots? Maybe by then we start IV’s of Five Hour Energy drinks to keep them going at the normal frenetic pace.

On top of the young guns issue, because Baby Boomers are working longer and longer, more generations will be in the workplace than at anytime in modern history. So we can’t just Tweet and Facebook everything for everyone. The challenge of leading a CRE organization with so many different constituents will grow increasingly difficult.

I Love My CFO, and HR/IT You’re Cool Too

Realcomm CEO Jim Young led a panel of senior real estate leaders in the second general session entitled “The New ReallTy” (look for an upcoming post drilling deeper into this session). The group talked about “smaller and smarter” organizations. They pointed out that we’ve been talking about the workplace of the future for 15 years but technology has finally caught up.

One panelist opined, “People will increasingly bring their own technology to work…Work will serve as a portal.” We are challenged to accommodate not only different work styles but also many varied technology needs. “One sized technology doesn’t actually fit anyone” said Ken Meyer of Deloitte.

Then there is the collaboration challenge. While we were focused on square footage per person and cost reduction, the need to increase productivity is the true Holy Grail.

Jim Young challenged greater partnership with HR and IT to enable workers to have everything they need when they need it. He wondered aloud if leaders from those two other organizations should be coming to our trade show.

Young’s prescription is to take the CFO to lunch as soon as possible and ask how CRE can better help the organization achieve its overall objectives. Better yet, bring HR and IT with you for some serious shoptalk. Shared objectives in this fast changing environment help all to get ahead in their careers.

That’s A Wrap

As our incoming Chairman Matt Fanoe said “Social networks and technologies will change…how business is done as we approach 2020. The role of the ‘connected culture’ continues to grow on a global level…and it is vital for us as an industry to keep pace.”

Couldn’t agree more with Mr. Fanoe. Life is moving fast and we need to our heads up to keep pace and stay relevant.

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.