Tag Archives: Commercial Real Estate

Automatic For The People

By Ken Ashley

(ATLANTA) February 29th, 2012

Early in the spring of 1991, I was in college, and I was hungry. The University of Georgia in Athens, Georgia is the home to a number of fine establishments catering to the college masses, of course, but I ventured off the beaten path

Five Stars!

towards the Pottery Town neighborhood for some good “Q.” I had heard about a great establishment with a unique feel. The restaurant, which is still there today, is known as Weaver D’s Delicious Fine Foods. It’s a down-home cafe at 1016 East Broad Street in Athens.

The restaurant occupies a 1950s commercial building with a false front parapet. The neighborhood around the building originally served as the mill village for the workers of a local pottery factory.

I walked down the long hill to get to the restaurant. What I didn’t know is that I’d get a lot more than a great meal that beautiful day. I got an unexpected life lesson from proprietor Dexter Weaver (AKA “Weaver D.”).

You see, Weaver has a large signboard outside of his cafe that reads “Delicious Fine Foods – Automatic for the People.” As I ordered my food from the now famous Weaver D, I asked him what “Automatic For The People” meant. He

And Now World Famous!

smiled a really big smile and crossed his arms thoughtfully. With a very serious, but friendly tone he said “Young man, that’s how I deliver my customer service. It’s fast and right; heck it’s just about automatic.”

“And it’s always for my customers,” he continued, “the people who spend their hard earned money for my food. I listen hard and we make them happy – quick.”

I thought a lot about Weaver’s seemingly simple comments. I was, and am impressed that a then small time purveyor of pork could think about his business in

The Wise Man Himself

this way. He’s not focused on his food, he’s focused on his customer and taking care of their needs as best he can.

His approach has made him world famous (thanks to REM, as described below). Weaver has spent his life in the service of others, but I think he’s making a fair

return. All these years later he has a book deal, and he’s become quite a celebrity in Athens, GA with his own Facebook Fan Page. Oh, and the food is terrific as well.

REM is Automatic for the People

It is this very same slogan that a little Athens act named REM chose for their 1992 album. The album went four times platinum (16 million copies sold worldwide)

One Of The Great Albums of the '90s

and was one of their most successful releases ever. It is still one of my favorites, and I am in fact listening to the music as I write this.

Automatic For Your People

Weaver D would have been a fine landlord. He understands the focus on customer through delivery of both a great product and service. Do your landlords across the portfolio have the same understanding?

Whether you are signing a lease for 5,000 feet for the sales office in Des Moines (nice town, by the way) or 1 million square feet for your jumbo new headquarters, how the asset will be managed is important. I have seen even tenured real estate executives forget to ask about property management. Many simply assume that landlords will take care of things. Besides, it’s in the lease, correct?

Weaver D would shake a finger at us for making that assumption. If you are performing the real estate function for your company, many are counting on you to deliver the right office space. Part of that equation is the service after the sale, also known as property management.

So what can you do to make the new pad Automatic For Your People?

1)           Determine who will be managing the property on a day-to-day basis. Taking them to lunch is usually a great investment of time.

2)           Is the manager on site or at another location? If they are at another building, how are day-to-day issues handled?

3)           What is the tenure on property of the manager? How many buildings do they handle?

4)           How many engineers are assigned? What is their experience and are they union or not?

5)           Is the management company in-house with building ownership or is the function outsourced to a third party provider? Both can be great resources, but it’s good to understand where the paycheck comes from.

6)           How does your user group interact with management? When problems occur how are they reported and managed? Most firms today will have a technology solution (webpages that feed engineers with smart phones), but ask lots of questions about how the process really works.

7)           Ask to see the capital improvement plan for the property. If you get a blank stare, beware.

8)           Does the interaction seem to be reactive (we’ll respond when the light bulb burns out) or proactive (let’s meet quarterly to make sure your needs are being met)?

9)           Ask if you can conduct tenant interviews with other major users in the building. You will learn a lot about the asset and have someone in your database if you have issues.

10)        Tour the physical plant. Can you “eat off the floor” or is it a mess? It should look as clean as a navy submarine, if you ask me.

11)        Inquire about “life safety.”  A manager must have a well documented and prepared emergency response plan for fire, storm, wind, etc.  Ask the manager to share his or her plan.  If no such plan exists, then this is a clear red flag.

12)        On the same subject, how does property management handle building security? What are the staffing levels? What technology does the property use? Have their been incidents, and if so, how is this information shared with tenants?

If you take the time to do some basic due diligence and note your findings to the file, you will have something to lean on when problems arise. Weaver D would be proud that you thought about your customers and went the extra mile. Automatic.

Thanks to “Automatic” Mike Mire, Regional Lead of Property Management at C&W, for his sage advice on this blog post.

DeTERMination

By Ken Ashley

(ATLANTA) March 7th, 2011

No matter what market conditions are, we frequently get questions about what is “fair” for a term or length of lease commitment. If corporate users

"Like sands through the hourglass, so are the days of our lives."

could get landlords to commit to a scenario where they could unilaterally terminate every year, every month or even every day, then that would be just dandy. Wouldn’t that flexibility make the corporate real estate game easy? This would be the equivalent of writing in pencil; you could erase your mistakes and start over.

As a corporate officer or real estate director, you know well that the more flexibility a company can gain in its real estate portfolio, the better. It’s hard enough to forecast the future without having to worry about a super long-term lease (witness the Middle East unrest of recent weeks).

So what are the major reasons that landlords insist on such long term commitments from their tenants – AKA customers? We see situations where corporate users have never had to think like a landlord. They don’t understand the risk, the capital, return metrics or the vagaries of the financing markets for holders of real assets. Real estate is a great mystery that goes unsolved and uninvestigated.

Many tenants simply assume that a landlord is out to get them. While this certainly could be the case, many if not most landlords are fair capitalists like you and me. They allocate capital, take market risk and hope for a market return.

I know we can all agree that profit is a good thing. However, looking at this from the tenant’s perspective, it’s like that piece of cake at a friend’s birthday party: it must be kept reasonable and proportionate.

Walk a Mile in My Shoes

One of the basic principles of negotiation is to understand the concerns and motivations of your opponent. If you can “think like a landlord” and look at your tenancy as he or she would, you will be able to not only plan your approach, but swat away bogus arguments like a pro. Fundamentally, your tenancy, and the resulting cash flow, is an asset that provides value. In order to win the prize, the landlord must have a building (think of this like a factory), then pay to put raw materials into that physical plant in order to make deals happen. In sum, they are running a business, but the decision making approach is driven by, among other things, the form of ownership and capital structure.

For example, an asset manager for a life insurance company is likely looking for long term value appreciation and is not overly worried about short term cash flow. In many cases, life insurance companies pay all cash for even the largest asset. The decision makers are salaried and usually long tenured professionals. They take a careful and deeply analytical look at deals. They are risk averse on the credit front and will wait for a company that fits their profile of perceived strength before they will commit.

Publicly traded real estate investment trusts (REIT’s) are driven by Funds from Operations (FFO) which is a figure used by to define the cash flow from their operations. It is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis. In other words, they are effectively focused on net profit on a per share basis.

A Man in Full

Perhaps the most stereotypical landlord is the one describe in the famous Tom Wolfe book A Man in Full. This landlord is a merchant builder and a gun slinger. He (yes, usually a man, at least up to now) will take massive risk, borrow horrid amounts of money, and in general do anything legal to make a real estate deal work out.

I respect individuals like this and some of them become very, very wealthy. I also treat them with great caution because their risk tolerance would have most people crying out in pain like little babies. The focus for entrepreneurial, highly leveraged landlords is cash flow early and cash flow often. They will say what it takes to get you to agree to a deal. As Ronald Reagan used to say, “Trust, but verify.”

What Would You Like in Your Margarita?

While we are primarily discussing term of commitment in this post (we will cover tenant improvement dollars in another post), a tenant real estate transaction is a recipe that is run through a financial blender with an answer spit out on the other side. Once again the answer depends on what kind of company you are negotiating with – IRR, Cash Flow or impact on Asset Value are a few metrics that landlords use to evaluate your transaction.

So, lease term is a major factor in how “sweet” the deal is for several reasons. A longer commitment will give the landlord a bigger period of time to amortize cash put into the deal and therefore allows ownership to achieve its objectives while keeping the lease rate low. In addition, it allows the investors to take margin over a longer period of time instead of having to cram all the profit in a shorter period of time. Term also creates tremendous value, because investors – whether in real estate or on Wall Street – look at defined cash flow with great interest.

The deal can be analyzed by MBA’s with computer models and they can tell you what flavor your Margarita will be at the end of the term. Those MBA’s may say the same thing, but insurance company asset managers hear something different than The Man in Full developer with a big hat and more of a taste for Scotch.

Rules of Term

It sometimes helps to think of your company’s tenancy in terms of where you lay your head at night:

·     A hotel room at $350 for 31 days is $10,850

·     A corporate apartment might easily be 50% of this amount at $5,425 a month

·     Your 30 year mortgage might be 50% again or $2,712.5 a month

Flexibility cost money on a per day basis, but allows you to change plans quickly. Commitment can be expensive, but if you are in an environment where  your managers have the experience and maturity to make longer term forecast, then a longer lease term, like a 30 year mortgage, is the less expensive option.

Finally, we did not discuss here but are acutely aware of market pressure when setting all terms, from length of commitment to rate and cash in the deal. But start with the basic understanding of what the landlord is thinking. Look at it through the lens of the market, and layer in your own situation. Then we bet, with a good advisor, the situation will be come clear, or at least easier to swallow. Enjoy your drink and tip your waiters.

Our Most Important Measure

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

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

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

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

Ken Ashley

Signs of Sanity

Is there debt on this building?

Many in commercial real estate watched the massive bailouts of residential loans and other “strategic” US companies such as financial institutions and auto manufacturers with a sense of disbelief. Commercial real estate types have known for months that billions in debt in their industry are at risk as well. According to a Wall Street Journal report from October of last year banking regulators “are girding for a rerun of the housing-related losses now slamming thousands of banks that failed to set aside enough capital.”

Finally, last week a US Congressional Oversight Panel issued a 184 page report entitled Commercial Real Estate Losses and the Risk to Financial Stability.

It’s nice to know that Congress is at least paying attention.

Some insights from the report:

“A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of every American.” Also, “…disproportionate exposure to commercial real estate capital creates negative feedback loops that suppresses economic recovery.”

Perhaps most interesting to tenants in commercial space, who, after all, are paying for the party here:

“Fewer loans to small business hamper employment growth, which could prolong commercial real estate problems by contributing to higher vacancy and lower cash flows.”

Couldn’t have said it better myself.

This report is in part the result of public hearing held in Atlanta in late January with many leaders from the commercial real estate community in attendance. According to the National Real Estate Investor, Atlanta has seen property values fall by 50% from their peak in 2007. In many ways, Atlanta is the poster child for commercial real estate woes nationwide. Partially as a result of Atlanta’s problems, bank failures have happened at a stunning rate in the State of Georgia with more on the horizon.

It is refreshing to know that Congress is finally paying attention to commercial real estate, and in fact the Congressional report on the subject is the first sign of sanity in the industry for sometime.

However, as we’ve written in this blog before the key to solving the “real estate problem” long term is true job growth. In most cases, business can’t grow without financing and it feels as if businesses are being unfairly penalized in the commercial real estate financing world. We feel like small business financing has gotten caught in the lint filter of the economy. Essentially credit needed to finance business growth appears to be hamstrung by regulators dealing with commercial real estate problems.

So, when you as a commercial real estate expert on the tenant side explain the “problem” in our area, you might remind others that growing prospering US businesses solve problems. Let’s help the public and elected officials understand the issues. Anything Congress or regulators can do to help businesses grow is better than yet another bail out.

Ken Ashley

4Q2009 GLOBAL REPORT

Cushman & Wakefield Research is delighted to present fourth quarter 2009 Global MarketBeat reports. The link below walks you through a brief flash introduction followed by a global map where you can download the latest MarketBeat reports from markets around the globe.

World Wide MarketBeat Now Available

Feel free to explore Cushman & Wakefield’s Knowledge Center — offering easy access to a wide range of Business Briefings, White Papers, Special Reports and more. You may register at :

www.cushmanwakefield.com/knowledge

USGBC Commercial Real Estate Update

Green Building and a Climate Regulated Future

The beginning of the new year marks the passing of a decade when significant attention has been paid to sustainability and the environment worldwide. As the United States continues to work with international leaders after the conclusion of the Copenhagen Climate Conference, it marks the latest in a flurry of environmental activity that took place in 2009. With the U.S. House of Representatives passage of the American Clean Energy and Security Act of 2009, passage of the Clean Energy Jobs and American Power Act of 2009 by the Senate Environment and Public Works Committee, and the Environmental Protection Agency’s (EPA) endangerment finding on emissions, which supports reductions in greenhouse gas (GHG) emissions, the debate around the environment, and in particular climate change, appears to be reaching a fever pitch. In tandem, talks of environmental technologies and movements have become ever more pervasive.

Companies from across the country and globe are stepping up to be part of the solution by voluntarily reducing their energy use and emissions. Recently, businesses have begun to form independent coalitions in favor of efforts to mitigate climate change. One group consisting of approximately 25 corporate members, including heavy emitters such as auto companies, as well as large firms like Siemens and General Electric, is US-CAP. By voluntarily changing business practices and shifting to a more environmentally sustainable business model, corporations are able to take more time in implementing changes and are learning how to operate in a sustainable manner today. There also continues to be ample opportunity for even greater economic returns – a recent McKinsey report found that an investment of $520 billion today in existing building energy retrofits could yield an energy savings of $1.2 trillion by the year 2020.

In uncertain times, green building continues to show itself as a versatile solution to many of our challenges, both financial and environmental. As the landscape in which businesses must operate rapidly evolves, green building and the LEED rating systems continue to offer an environmentally responsible means of building and operating high-end, healthy, and efficient buildings, guarding against erratic energy prices and the impacts of environmental legislation and regulation.

4Q09 Market Statistics

Below is a report issued by Cushman & Wakefield’s Atlanta Research Department:

Office: Atlanta’s office market reported 2.3 msf of negative overall absorption in 2009, as sublease vacancies increased 133.0% during the past year to nearly 3.5 msf.  Taken together with 1.9 msf of speculative construction completions, overall vacancy increased to 20.2%.  Overall average asking rents were relatively stable at $21.32 per square foot (psf); however, increased concession packages were prevalent.  During the year, just 1.3 msf traded for roughly $100.0 million.

It’s apparent that Atlanta’s economic recovery will lag the national recovery.  As its inventory of vacant office supply continues to grow, downward pressure on rents will intensify in 2010.  Investment activity will remain limited, though opportunistic investors may find increased opportunity.  Atlanta’s office market is expected to stabilize in the second half of 2010, with a sustained recovery in the market unlikely to take hold until early 2011.

View our full Office MarketBeat

Industrial:  Industrial space users sought operational cost savings through consolidation in 2009, as 2.8 msf of negative overall absorption marked the first year of negative absorption in Atlanta’s industrial market since 2002.  The impact of these losses on vacancy was mitigated by a relative lack of development activity during the year, as just less than 2.0 msf completed this year.  At year-end, 642,233 sf were under construction in two build-to-suit projects.  Overall vacancy increased 1.5% in 2009 to 10.6%, but remained well below peak rates reported during the previous recession.  Atlanta reported nearly 3.9 msf of investment sales, the vast majority of which traded as part of ProLogis’ 33.0-msf nationwide industrial offering.  

Continued expansion in the industrial indices will result in increased leasing activity in 2010, especially among distribution facilities attracting headquarters relocation activity. Speculative development will be limited, as developers remain focused on build-to-suit projects.  Though overall investment sales levels may decrease from 2009, individual sales transaction should increase particularly among long-term net-leased properties.

View our full Industrial MarketBeat