Suite Deal Read online

  Talking with Appraisers

  Occasionally, appraisers will contact you to obtain comps, typically in preparation for a potential sale in the market. Because appraisers are usually working on a specific project, you can take a more transactional approach to information (as opposed to your long-term relationship building with the brokerage community). So, prior to giving away information, feel free to ask appraisers if they will send a copy of the market report they prepare or if they will exchange one or two comps. If the appraiser declines, you have every right not to provide any information at all, or only to offer comps already in the public domain.

  Keeping Track of It All

  Whether you use a software program or go old school with a paper form, record information as you acquire it, even if it’s just a portion of the deal. Then, fill in the gaps over time. For example, if you know about prospective tenants in the marketplace (most likely because they’ve toured your property), write their names on the comp sheet. If prospects don’t sign a lease at your property, you can find out where they settled along with the transaction details, such as square footage, rent, term length, tenant improvements, and so on, later.

  Refer to Market Research Databases

  Professional Organizations

  In addition to brokerage firms, industry organizations also offer market information. While brokers provide the best deal-specific information, other groups have valuable demographic and industry statistics. Once again, organizations divide themselves between national entities with more generic market information and local entities that delve into the specifics of a market.

  Do Your Tenants Shop Prada or Target?

  The National Association of Realtors (www.nar.realtor) provides demographic, industry, and housing reports for many urban and suburban markets throughout the United States (click on the website’s “Research and Statistics” tab). Although neighborhood demographics exert less of an influence on commercial real estate than on the residential sector, they are still important because of their impact on workplace quality of life.3

  Access Subscription Databases

  In recent years, the real estate industry has been transformed by online market information, especially in the form of subscription-based services. Companies with online property databases publish and sell market data that can be sliced and diced in a myriad of ways. Behemoth firms dominate this knowledge industry, employing hundreds of researchers and infiltrating every major market. Other firms sell information they have amassed via crowdsourcing.

  In addition to listing comparables, some online subscription services offer detailed information regarding building ownership, stacking plans, square footage, and more. With the touch of a finger, real estate professionals can take a virtual walk through a suite. These electronic tools can accelerate your learning and provide a strong foundation to precede firsthand visits to properties.

  Still, any subscription service is only as good as its contributors. While database companies have large research staffs and professional photographers, they remain somewhat reliant on industry insiders to confirm information. Very few leases are publicly recorded, meaning that most are fully accessible only to the landlord’s real estate and legal departments, the tenant, and the broker, if involved. Many landlords hold information close to the vest, reluctant to lessen a potential competitive edge. Some report only portions of a deal without disclosing all of the details.

  There is an inherent tension between database companies and brokers, as the subscription services assist brokers with malleable information but also act as a competitor of sorts by publishing information previously held exclusively by industry insiders. Because so much of the value of brokers lies in their knowledge, they are reluctant to give up information that might compromise a competitive advantage, the most significant of which are deal comparables (the terms of signed lease deals). So while increasing numbers of real estate professionals subscribe to database services and the technology becomes more and more robust, many still consider the brokerage community’s word on the street to be the definitive source of real estate information.

  Newsies

  Buy a subscription to the local paper(s)—especially smaller publications—to frame the business and political landscape. You’ll learn which companies are growing, the stance on business, and juicy real estate scoop. Although newspapers can lag the marketplace by up to six months—an eternity in real estate—and can fail to report full deal details, they do provide another data point for your market information.

  Place the Market in Context

  After completing your local market research, step back to consider the market—and its timing—as a whole. This consideration allows you to place your property in context of the overall market. Because of real estate’s illiquidity, professionals need to weather markets, strong and weak. For example, leasing veterans who have been scarred with the memory of a bad market protect their downside by making deals that can stand the test of cyclical supply and demand. They maintain good relationships, pay close attention to lease clauses, and watch their wallets. For the long term, leasing professionals examine the lease from two angles: First, how does the deal look in today’s market? Second, will the deal remain solid if—and when—the market turns?

  Cycles can be both protracted and extreme, as real estate and construction link arms in a dance of supply and demand. The real estate market, like the stock market, tends to be buoyed during periods of economic growth and depressed when the economy contracts. In bull markets, growing companies create excess demand for space; in bear markets, businesses, along with demand for space, can shrink significantly. Wharton professors Richard Herring and Susan Wachter write, “real estate cycles may occur simply because of forecast errors and lags in the adjustment of the stock of commercial structures,” and they note the two to six years required for new construction.4 Another study predicts market fluctuations on a ten-year cycle.5 Regardless of the exact length of time, recognizing the cyclical nature of real estate markets can affect behavior as you recognize that deals—not to mention relationships and your capital reserves—have to stand the test of both tight and soft markets.

  Moreover, extreme highs and lows characterize the industry. Not all markets are created equal; traditionally, the office market sector has been the most volatile, followed by the retail and the industrial sectors, respectively.6 Further, submarkets experience varying levels of magnitude. Temperature aside, Phoenix may be hot while Denver wants for tenants. The takeaway: real estate requires a strong stomach and careful attention to deals that can stand the tests of time and market volatility.

  Beyond the obvious fact that more concessions—mainly rent—will be given in a soft market and fewer concessions in a tight market, grizzled real estate veterans enjoy a tremendous advantage because of their long-term mindsets. It is one thing to intellectualize changing markets and quite another to endure the painful reality of a “see-through” building, empty of tenants. Over time, these cycles sear reality onto our collective leasing memories.

  Hot marketplaces can obliterate long-term memory. As an example of shortsightedness, when my firm announced a large lease in a newspaper ad, our marketing director, giddy with her new title, opined that we did not “owe” the broker gratitude by listing his name. She felt that paying the broker his commission was sufficient. I lobbied hard to name the brokerage company because I knew that when the market turned, we would rely on strong brokerage relationships to bring us tenants. Why not reinforce connections when we have the luxury of doing so? Consider the example of Jack Welch, the former CEO of General Electric. He took pains to thank employees on plant tours and facility visits in order to strengthen the company culture.7 Gratitude reinforces relationships that serve companies well, especially in tough economic times.

  Set Boots on the Ground

  With your new perspective, of both the local marketplace and the industry cycle, you are ready to study th
e market more on a firsthand basis.

  Identify Competing Properties

  Your local market competitors are the properties of like quality and location that will offer space to prospective tenants. In terms of location, there’s not a set circumference for a competitive boundary; it’s more often a neighborhood, such as a financial district or an area with sprawling office parks. Real estate brokers define a neighborhood with their own, sometimes seemingly arbitrary, criteria. While it may not make sense to a market outsider, factors such as freeways, traffic flow, square-footage concentration, businesses, amenities, and cultural differences all play roles in shaping real estate brokers’ definition of a neighborhood. By speaking with local brokers, you’ll come to understand how one neighborhood varies from another, with corresponding differences in rent and desirability.

  For businesses, transportation in all its incarnations (freeway access, public transportation, surface streets, and parking) can delineate a neighborhood. It is therefore important to examine the freeways, bus routes, the metro/rail system, and topography to gain an understanding of a neighborhood’s access.

  Next, try to learn which types of industries dominate the marketplace. For instance, a city with a large refinery will differ greatly from a town hovering in the shadow of an insurance giant. The type of businesses and employees an area attracts will drive its local commercial real estate markets.

  Further, survey the community for its amenities. Public and private businesses enjoy proximity to amenities that enrich the lives of their employees. Is there a local athletic club? What types of restaurants and stores line the streets? By understanding the local amenities, you will gain an appreciation of the types of businesses that enjoy a neighborly relationship.

  When the San Francisco Law Library moved its offices from one downtown building to another, law firms followed suit. Later, as technology allowed for the electronic storage of reference materials, the need for a physical library diminished. When it did, so did the demand for proximate office space. The moral of the story? Amenities can create demand for office space.8

  Next, examine the quality of construction and the types of amenities of nearby properties to determine which buildings will act as competition in your neighborhood. By listening to brokers speak about buildings, reading marketing materials, and driving (or walking) around the neighborhood, you can fairly easily determine if a building is similar enough to your own to qualify as a competitor.

  Do You Know These Details About Your Competition?

  Building name, address, and owner

  Current space availability, including the size and quality of the spaces

  Advertised rent

  Leasing company

  Parking

  Square footage

  Major tenants

  Amenities, including special features of the building

  Management company

  Lease comparables

  Visit Local Buildings

  For a real education on your local marketplace, nothing compares to firsthand visits to competing buildings. For instance, while glossy brochures may highlight a beautiful garden rooftop, a tour might unearth the building’s lack of parking—something marketers won’t advertise. You can drive or walk a neighborhood (especially a suburban one) on a Sunday and skip the traffic jams. You may not be able to gain lobby access, but it’s an expedient way to get a sense of the market prior to a more thorough study. Do, though, make sure to revisit the property during the week, to get a sense of its operations during business hours. By standing in the tenant’s shoes, you gain an understanding of a property’s attributes, good and bad.

  When you visit a property, treat it as if you work in the building every day. By driving and parking (or taking transit), examining the tenant directory, ordering something from the café, seeing how well bathrooms are maintained, and taking an elevator, you’ll get a sense of the quality of the building and its maintenance. Snap a photo of the building and take some notes. Because tours and the ensuing lease decisions are often predicated on a brief visit, your investigation will likely mirror a typical prospect’s experience. Your first impressions will inform you as to how your own property compares to competitor’s buildings.

  Start at the Top

  Consider starting at the top of the building and working your way down. That way, if security ushers you from the building, you have seen more of the property than had you started at the lower floors. Security concerns can restrict free access to office buildings in urban and governmental areas, so if you can’t access the entire building, at a minimum, visit the lobby and read the tenant directory.

  Chapter 2

  Position the Property

  “It takes a lot of unspectacular preparation to have spectacular results.”1

  —Roger Staubach, executive chairman, Jones Lang LaSalle

  Goal: Position the Property to Compete Successfully Against Other Buildings That Lease Space in the Local Market

  Once you have gathered information about your neighborhood, the competing buildings, and the local real estate market, you need to examine your own building(s) and rent terms to assess and position them for leasing success.

  Evaluate Your Property

  Consider Attributes and Amenities

  By considering the attributes and amenities of your property, you become uniquely positioned to advertise its strengths. Start by identifying the traditional assets such as location, nearby amenities, great views, and architecturally pleasing features. Beyond that, try to relate your building attributes to your particular market. For instance, in congested urban areas, freeway and public-transportation access may be critical. Because parking can be extremely limited in such areas, easy public-transportation access and walkability may prove more valuable than an overpriced, crowded parking structure. Conversely, in suburban areas, tenants might see more value in freeway proximity and the ability to take alternate routes during commute hours. A parking structure or lot in this instance would be invaluable. Understanding the particular demands of your prospective tenants and highlighting the attributes of your property that meet them will help you market vacant space.

  When you consider amenities, think large. They are often more than simply a great sushi restaurant or nearby fitness club. For example, when Visa Inc. searched for its national headquarters, the company settled on the San Francisco Peninsula.2 Why did Visa choose one of the most expensive areas of the country? Because of its proximity to the highly educated workforce available from nearby Stanford University and the University of California, Berkeley. From Visa’s perspective, local intellectual capital was a valuable asset that gave Foster City a sharp competitive edge.3 Visa also considered that Foster City ranked as one of Forbes magazine’s “Top Towns to Live Well,” which might encourage employees to put down roots.4 As you evaluate a property, always assess its surrounding features: an educated workforce, housing, entertainment, access, livability, and so on.

  Flaunt It If You’ve Got It

  Determine the top three attributes of your property and highlight these in your marketing materials and pitch. Public-transportation access? Excellent property management? The granddaddy of them all: location?

  Evaluate (and Add) Sustainability

  How green is your building? Sustainability has become a key feature in most office markets. Heightened concern for the environment, moreover, reflects the desires of many company leaders who hail from the so-called millennial generation, a generation said to desire concrete solutions to environmental challenges while working in a place “aligned with their values.”5 Contemporary company leaders tend to care deeply about environmental issues, and these values strongly influence their real estate decisions.

  Green practices improve space desirability, employee retention, and operating expenses, all of which affect a prospective tenant’s leasing decisions. Economically, green benefits th
at reduce operating expenses can give landlords a leasing edge over non-environmentally minded properties because savings may be passed back to tenants. For example, an open floor plenum can reduce heating and cooling expenses and yield operating-cost savings that can be passed on to the tenant. A leasing professional who can understand and communicate this aspect of value gained as a result of green building will enjoy a tremendous leasing edge, particularly in down markets.

  Industry research indicates that tenants feel happier in green environments. A study from the University of San Diego’s business school surveyed 154 buildings with approximately two thousand tenants and found that employees in green buildings enjoyed 2.88 fewer sick days per year and a 4.88 percent productivity increase. There’s also the real, if difficult to quantify, green effect that improves employee morale—simply, a sense that a green building is a nicer place to work and can translate into improved employee retention rates.6

  Increasingly, landlords are focusing on sustainability features to ensure they have a competitive place in the market. While individual landlords’ green practices may vary widely—from expensive heating, venting, and air conditioning (HVAC) implementations to basic paper-recycling programs—buildings without any green attributes now seem dated and compete at a disadvantage. Energy Star certified buildings—those that use less energy and emit less carbon dioxide than typical buildings—are now widely found in Los Angeles, Washington, DC, Dallas, Atlanta, and New York, and are becoming more commonplace throughout the United States.7 Commercial building owners can enjoy substantial tax credits in exchange for achieving measurable green building goals.8 In today’s leasing climate, a building’s sustainable attributes are important features when presenting a property to the market.