Weak Recovery Continues, with Market Activity Strong Only in Gateway Cities
April 18th, 2012
By Bill Goade, CEO
In our January 2012 North America Market Overview, Cresa noted that the prognosis for the commercial real estate markets in 2012 was somewhat brighter than it had been in 2011, but that active markets will be confined to a few “gateway cities” such as San Francisco, Boston, Seattle, New York, and Los Angeles, as well as energy-related markets such .as Houston, Denver, and Calgary, with most other markets still hampered by excess supply and slow job growth. Nothing has happened in the first quarter of 2012 to change our predictions for the year.
Employment rose by 243,000 in January, 227,000 in February, and 120,000 in March, but the unemployment rate remained relatively unchanged at 8.2 percent, as a similar number of people returned to the workforce. Employment rose in professional and businesses services, health care and social assistance, leisure and hospitality, manufacturing, and mining.
While business conditions have improved over the past year, the pace of the recovery has been quite slow. Over the past few months, it appears that spending, production, and job market activity have improved slightly; which should result in modest economic growth this year. However, with the unemployment rate still high at 8.3%, the labor market can’t be considered to be recovering as quickly or strongly as in previous economic cycles.
Other signs of a slowly improving economy are that manufacturing production has increased 15 percent since its lowest point during the recent recession, and capital spending by businesses has expanded substantially over the past two years, driven in part by the need to replace aging equipment and software. Credit availability is increasing, and is now available at historically low interest rates. Although many smaller businesses continue to find it difficult to obtain credit, credit conditions have begun to improve modestly for those firms as well.
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The project managers role as a strategic advisor or life before the project lives
April 11th, 2012
By Phillip Infelise, Chairman
Whatever that proverbial bear is doing with his business in the woods, we may not even care; but it begs a much broader question – if a project is never executed to completion has it ever been or is it still a project?
To the new day Project Manager, the answer is a resounding, yes!
With an expanded view of the Project Managers role as a strategic advisor/consultant the “project” may just be the planning of a potential project and, in a few cases, our best work will be recommending a no go or “killing” a project that simply would not be viable and may have been unproductive for our client.
The Project Manager is an advisor/consultant that brings to bear their knowledge and experience early in the project cycle. At the strategic project conception stage the Project Manager should be linked closely with the transaction, finance, capital markets and marketing teams as they conduct due diligence and test the viability of a project. Project Manager activities at this time may include, but are not limited to the following:
- Developing a mission statement or project charter that describes what the perfect outcome would be for the project concept the client has in mind;
- Further develop a perfect outcome statement that describes the best possible project to reflect that mission;
- Providing the client with potential project scenarios or project types that may meet the client’s need developed above;
- Providing concept budgets or straw man pro-forma to demonstrate the economic viability of each proposed outcome;
- Counseling the client on the trauma of change and various methods to avoid letting that trauma influence project decisions;
- Advising the client on a new world of workplace strategies and applications that could change radically the potential solutions to the intended outcome;
- Advising the client on potential project team approaches and partners to bring those dream projects to reality;
- Where applicable, interface between the client and real estate advisors/consultants on specific site selection;
- Meet with economic development entities to confirm planning and permitting assistance available;
- Meet with municipalities to determine planning and permitting opportunities, obstacles, and challenges that may impact project viability;
- Simply, advising the client on what not to do.
Clearly, once a proposed concept clears all “sniff-test” and due diligence and achieves client board or executive approvals, it may become a viable project and then our Project Managers shift gears into the execution mode including putting together the right project team, overseeing design/construction, coordinating procurement and vendors, relocation planning and management. Sixteen prior blog editions tell you what happens from there forward.
Of course there are times when our best work prevents us from having work in the future. Often our due diligence reveals that either (1) the project is not economically viable, (2) the intended building or concept is not a good fit for the client, (3) the best result would be to stay-put and do nothing, other than in site workplace modification which may or may not be handled with purely internal resources (in fact, on a prior project for the same client we may have effectively trained their staff to replace us on smaller internal moves, add, changes).
And sometimes, doing nothing, in that case, means “doing the right thing” for our client, for Cresa, and for the Project Manager.
Tune in for the next edition when we explore varied approaches to resolving project team issues as partners before they become conflicts.
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The Industrial Recovery: A Closer Look
April 4th, 2012
By Rob Wheeler, Vice President
In the last couple of months, I have read articles and heard first hand observations from real estate professionals in the industrial sector that the market is back. Some have even stated that we are at pre-recession levels, and everything is looking up. While the level of recovery is still up for debate, there is no doubt that the market has turned for the better. There has definitely been a pickup in industrial leasing activity across the board in 2011 and the beginning of 2012.
One of the interesting things about the positive absorption that is taking place is the type of space that has been in high demand. The largest demand has been for the “big box” space—warehouse spaces in excess of 500,000 square feet. This demand has primarily been driven by large multi-national corporations. Retailers have looked to streamline their e-commerce platform within their existing supply chain. Other large organizations have started executing plans to consolidate into larger facilities to lower operating costs. Because warehouses of this size were red hot during 2011, especially ones in port areas and densely populated markets, markets are tightening when looking at absorption from a square foot perspective. For example, the Inland Empire in California has an industrial vacancy rate in the seven percent range. At vacancy rates this low, speculative building of “big box” space cannot be far behind.
One thing I suggest you consider when you read about all of the positive absorption numbers is that not all tenants are “big box” tenants. While the number of “big box” spaces available is dwindling, there are still ample smaller spaces on the market. A quick survey of my home market, Chicago, shows these facts. While the entire Chicago market shows only 19 existing class A and B industrial spaces over 500,000 square feet, there are over 300 choices at 100,000 square feet. If you were just listening to the landlord side of the equation, you would hear that space is becoming scarce, and rents are going up. If you need 500,000 square feet that may be the case, but for the smaller user it probably isn’t.
Tags: corporate real estate, industrial, landlord, tenant
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What It Takes To Be a Successful Facilities Manager
March 28th, 2012
By Jim Ricker, Senior Vice President
Someone may have told you that Facilities Management is a solid career choice—an opportunity to earn a good living in the commercial real estate world. That is certainly a fair statement. But what do you need to know to succeed in this field?
How about these qualities:
-the ability to think creatively;
-the ability to think critically;
-the ability to effectively communicate verbally and in writing;
-the ability to lead others;
-the ability to develop and manage operating budgets;
-the ability to develop and manage capital plans;
-the ability to understand and interact with the businesses you support;
-knowledge of buildings and systems;
-agility with information systems;
-a sense of humor;
-a thick skin (the hide of an armadillo); and, most importantly,
-a positive attitude.
If you’re still interested, I’ll take a closer look at the above success list. Prior to the 1980s, a successful Facilities Manager was usually a technical expert who had risen through the ranks. Some had college degrees, but most learned the business through experience in the technical trades. And the positions were universally filled by males. Since the 1980s, Facilities Managers have been asked to be more than caretakers of physical plants. And with each decade, the demands have grown. Today, a successful Facilities Manager generally has a college degree and years of experience in general business management. In fact, success is more dependent upon the ability to think clearly and critically, to evaluate information, to analyze and creatively solve problems, to communicate effectively, and to be a knowledgeable business partner to one’s customers.
As the list illustrates, being a technical expert is less critical than in the past. Technical information is readily available through key technical employees and contractors and through various web sites. It’s what you do with this information that matters — you need to understand it, to evaluate it, to wrap it into a plan, and to communicate it effectively to those impacted. Based on this description, a well-rounded, intelligent liberal arts graduate has a great opportunity to succeed as a Facilities Manager.
However, this does not mean that advancement in the profession is closed to the technical experts who may have learned the business through experience or graduating from one of the many fine technical schools. Fortunately, some of those schools teach the generalist skills as well as the technical ones. For those technical experts that did not receive a broad education, there are many on-line and evening/weekend programs that teach finance, communications, information technology, leadership, etc.
It’s a great profession. Each day brings new challenges—no matter how solid a business plan and prevention programs exist. You will interact with your customers, employees, executive management, regulatory agencies, attorneys, and many others. And as the senior executives and their BOD’s recognize that their real estate portfolios represent somewhere between 25% and 35% of their assets, your importance to the organization increases – resulting in visibility, growth opportunities, and movement up the compensation scale for real estate professionals.
And best of all, the field is wide open to all.
Tags: corporate real estate, FM
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The Evolving Project Manager’s Role in the Real Estate Transaction
February 23rd, 2012
By Phillip Infelise, Chairman
As our world turns more toward an integrated real estate and project execution process, the role of Project Manager in strategic and workplace planning and the real estate transaction process grows exponentially. Today, we will examine the specific role of the Project Manager in the real estate transaction process.
In the past—and to this day in some organizations—many assumed the Project Manager’s work began once a real estate transaction was finalized and the client was ready to move into the design/construction phase. This is not so today, at least not in an integrated real estate organization like ours. To be optimally effective in an integrated process, the PM begins work at the outset of the transaction process alongside our real estate advisors so that planning, cost and schedule impacts, and building evaluation criteria are known, studied, and leveraged up front. The earlier the PM is involved in the process, the more value they bring to it; the earlier they start work, the most savings or effective deployment of capital are captured.
A quick summary of the PM activities during the transaction process include, but are not limited to, the following:
-Develop or participate in the development of the Preliminary Programming document defining SF and space characteristics
-Discuss workplace innovations, trends, option with the client before they begin kicking tires in the market place
-Develop a Site Selection Matrix to objectively and subjectively evaluate various site or building options
-Create a Design Narrative that describes the potential space that can be shared to provide direction to prospective architects, as well as the landlord’s space planners
-Set early budget and schedule goals and develop conceptual budget and concept schedules against each best and final site or property
-Develop comparative budgets for build-to-suit, tenant in-fill, or adaptive reuse of existing tenant spaces
-Conduct walk-through(s) of any proposed sites/properties, check zoning as needed
-Evaluate current build-out state and establish a value for it if any can be reused for the client build-out or the core/shell specification exceed a typical building
-Evaluate the proposed Tenant Work Letter, determine value thereof and detail shortfall or overages against the proposed client build-out
-Compare landlord core/shell build-out and Work Letter and determine an overall value against other proposed properties
-Review the proposed design/construction methodology described in the lease document to determine if it meets the client’s best interest
-Review and comment on necessary changes to initial Test-Fits to better accommodate client requirements
-If and as required, conduct a selection process for architects, interior architects, and/or engineers to refine or further develop test-fits that may have been designed by landlord team
Now it is time to start what everyone else believes to be the typical Design and Construction process management where many other Project Managers begin their work.
It quickly becomes obvious that there is a ton of work to be done by the Project Manager, working hand-in-hand with the real estate advisor, if the client is to be provided the best of both worlds. When the team integrates these efforts it assures that the best site is selected, a favorable lease document is developed, the client understands all of the cost and schedule impacts prior to lease execution, and the entire team (both internal and external) is better prepared to commence the design and construction effort leading to a new, optimally design workplace.
The future may totally blend the real estate and project execution process into one seamless activity (and we hope that it does), in which case it may be hard to tell the transaction folks from the project folks. In an integrated approach world, it’s a team thing.
Tags: corporate real estate, PM, process management, project manager, tenant
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What size is the right size?
February 15th, 2012
By Rob Wheeler, Vice President
When considering warehousing, what size is the right size?
One of the questions I’m continually asked by customers and colleagues alike is: what are the trends in warehousing as it relates to network design? That is, are things trending toward fewer larger warehouses in a distribution network or toward having small regional warehouses? My answer to this question is….it depends.
To understand how networks are designed you need to understand the business of the company that’s designing it. The major expense of any supply chain network is always transportation, but next in line is inventory. So, how expensive each piece of inventory is will drive how the network is designed. The general rule is, the more warehouses you have the more inventory you will carry.
Here are a couple of examples to illustrate this fact.
Example 1 - A maintenance, repair, and operating distributor carries thousands of different products, mostly of low value. Their go-to-market strategy is that they will have the product you need in stock, and it will be delivered next day. Because it is a very inventory-intensive business model, spreading that inventory out over a broadly arrayed distribution network makes sense. Their model is to get the product from vendors and warehouses close to the customer so that they can deliver it next day with minimal cost. In fact, the company’s distribution network was designed by a parcel delivery service to cover the maximum amount of the population via overnight ground service.
Example 2 – A medical device company has very high-value products. Each piece of product can be worth thousands of dollars. Their key driver is to reduce inventory as much as possible while maintaining service. Because of the value of the product, reducing to a single centrally located warehouse makes sense. The reduction in inventory will offset the expense of shipping the product via overnight air. In this customer’s case, they located almost all of their product across the runway from an air parcel carrier’s main sort hub. This allowed them to eliminate as much inventory as possible by allowing them to extend the shipping window during the day as much as possible.
Both examples above have caveats attached. In Example 1 the company has a master distribution center that carries slow moving or high value goods, helping them eliminate this inventory from the regional warehouses. In Example 2 the company utilizes third party warehouses on both the east and west coast to hold limited inventory in case of emergency.
The bottom line is that there is a right solution for every company. But that solution depends on a number of factors. The Industrial Services team at Cresa can help you work through the different scenarios to find the right solution for your business.
Tags: corporate real estate, industrial, warehouse
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5 things every corporation should do to prepare for the upcoming lease accounting changes
January 25th, 2012
By Brant Bryan, Principal
In the near future the FASB and the IASB will jointly issue new guidelines for lease accounting. These new standards are substantially different from the current standards and will affect every corporation that issues public financial statements.
In the new standards all leases will be reflected as both an asset and a liability, thus “inflating” the size of corporate balance sheets. During the lease term, the asset and the liability will be expensed, but in different patterns than under current standards.
The new standards will likely become effective in about 2 years. What should corporations be doing now to prepare for this sea-change of lease accounting?
1) Update your lease database. The new accounting standards will require corporations to assign a value to every lease transaction. The value will be based on more information than most corporations now include in their lease database.
2) When entering into new leases evaluate them using both the current lease accounting implications and the new standards. All leases will be included in the new standards. There will be no “grandfathering”. Therefore, you need to know what impact each lease will have on your financial statements in both 2012 and in future years.
3) Examine the effect of lease length on your financial statements. Longer term leases will normally cause a greater increase in the size of the lease asset and liability. How will increased balance sheet size impact your performance ratios and metrics? Begin to establish a philosophy of what your company wants.
4) Talk with bankers, real estate consultants and rating agencies about how the changes will impact your credit capacity, rating and borrowing cost. Leased assets will be a separate category on the balance sheet and effectively is a source of financing for lessees. Most companies believe it should be “business as usual”, but understand what it means for you and your borrowing costs.
5) Look again at the options in your leases and how you structure those options. More than ever, lease options will be important. Some rent streams may shift onto or off of your balance sheet, depending on your objectives and the facts and circumstances. Also, the new standards may cause you to prefer your options to be structured differently than you have done so previously.
Tags: corporate real estate, FASB, IASB, lease accounting, lease structuring
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Tenant’s Guide, North American Markets
January 18th, 2012
Overview
As we begin a new year, U.S. and Canadian businesses will once again face a very challenging economic landscape with the twin worries of a still tepid economy here in North America, and the unknown effects of the ongoing European debt crisis. Global growth has already been scaled back as recession like conditions had become evident in a number of European countries at the tail end of 2011. This will almost certainly delay business leaders from pushing forward with any expansion plans until more is known about the breadth and depth of a European recession and any possible bank failures or credit difficulties.
The good news for tenants in the market for space this year is that leasing markets in North America will remain fairly benign with still significant discounted rents and an abundance of for lease space in all but a small number of submarkets. Canadian markets are certainly further along the real estate cycle, but for North America as a whole, leasing markets are at best treading water and are unlikely to tighten in any significant way in 2012 and quite possibly 2013.
Barring the unexpected, business conditions in North America should be marginally better in 2012 than in 2011, but for many industries the economic landscape will seem as daunting as it has for the past three years. The worldwide trend towards lowering debt (a process referred to as deleveraging) by governments and individuals alike will be a contracting force impacting many countries. This is sure to act as a significant drag on economic growth, both here in North America and countries around the world. This will not escape the notice of business leaders and real estate decision makers and will again stifle leasing markets. Varied sources of instability are also making businesses more nervous about making long term commitments. While Cresa doesn’t have the inside edge on what surprises might be coming our way, what we can say with almost complete certainty is business leaders will again be confronted by a large array of “shocks to the system” whether they be domestic or foreign. As a result, most businesses are expected to stay largely cautious as they continue to be challenged by a very uncertain and volatile economic landscape. Add in the prolonged uncertainty and further erosion of confidence in the U.S. political system and it is not unreasonable to foresee a further delay in expansion and hiring that would ignite leasing markets and put a floor on lease rates. Decision makers will continue to err on the side of caution until there is a significant increase in job growth, most likely well into 2013.
Business Drivers
For business leaders the fragile nature of the U.S. economy will continue to be paramount. A reasonably strong finish to 2011 should lead to a relatively good start for 2012, but with consumers largely tapped out and governments at all levels making spending cuts it is highly unlikely the U.S. economy will grow by more than 2.0 percent – just marginally better than 2011. Themes that dominated in 2011 are again expected to be front and center in 2012. Relatively anemic job growth, high oil prices, deleveraging and a still shaky housing market are all expected to be stiff headwinds for much of the year. Monthly job gains are expected to mirror 2011 with approximately 150,000 workers added to payrolls per month leaving the unemployment rate stuck between 8.0 to 9.0 percent. Industries adding jobs include technology, social media, energy, healthcare, and education. One key source of weakness, however, will be finance which has shown little growth over the past few years and is unlikely to do so in 2012.
To read the complete North American Market overview, please visit our Tenant’s Guide page. There you will also find guides for individual markets, from Albany, NY to Washington, DC.
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ROI for Workforce & Location Planning Projects
January 11th, 2012
By Tim Myllykangas, Principal
I was recently honored to have presented a workshop at the 2011 CFO Rising West Conference and Expo, which focused on “The Top 10 Strategic Challenges for the CFO.” Our workshop—Stay or Go?: Corporate Location Planning”—was well-received, with those in attendance interested in the variables that drive corporate location. As expected, they wanted to learn about the savings that can be realized when workforce and other performance benchmarks of an existing portfolio are measured and aligned with the business.
To reiterate what Workforce & Location Planning (W&LP) is all about, it is the first step in the corporate real estate cycle since it starts with a clean-slate perspective—i.e., it looks at the broader picture beyond the current real estate portfolio. Addressing what the C-Suite is most interested in, it focuses on ideal corporate locations based on workforce recruitment, retention, labor market saturation, competition, turnover, and salary levels.
But how can we demonstrate the value proposition, or return on investment, regarding W&LP and incentive fees? Actually, it is easy to do so.
Money-Saving Measures
In general, workforce and location planning specialists save companies money because:
-Labor cost reductions of 20%-40% per year are regularly achieved and easily measured.
-Labor cost reductions are typically 6-12 times that of real estate cost reductions.
-Labor performance indicators typically increase by 15%–25%.
-Turnover typically declines by 25%–35%, eliminating significant re-training costs.
-Incentives from municipalities generate savings through grants, abatements, discounts, etc.
-W&LP specialists measure sector saturation (the competition for and degree of utilization of the workforce) in the company’s current location(s) as well as in alternative locations. Sector saturation is the most important, yet least understood, factor in determining optimal locations. Since saturation data does not reside in any database or web site, it requires real-time primary research.
-Underemployment data is one of the top three workforce analysis factors, but this also does not reside in any database or web site. And most cities do not calculate it due to its complexity. Identifying which city has higher underemployment is actually more critical than identifying one that has a higher population or sector presence, and this will identify the city with lower labor costs, lower turnover and higher labor quality. Unemployment, a common data point used by companies, is not only an inaccurate measure of workforce availability but in some cases is an inverse indicator of work ethic. High unemployment, while thought to be a positive factor, often signals a lower work ethic, while low unemployment often signals a strong work ethic with the local workforce less willing to file for unemployment insurance and more likely to take a job that is below their skill level. And this is reflected in higher underemployment.
As a typical example of W&LP in action, consider our experience in identifying optimal labor markets for a 300-employee customer service center. The process resulted in higher labor quality and lower turnover, and over the five-year term of the lease, labor savings equaled $16 million, real estate savings was $3,200,000, and incentives added $500,000.
Labor Costs, Incentives, and Real Estate Cost
What if we were to extrapolate typical, minimum and average savings for a 500-employee, 60,000-square-foot facility? Consider the following projections:
Here are two ways to concisely summarize the numbers presented to the left:
-$1/SF/yr rent savings on 50,000 SF = $250,000 (5-year term)
-$1/hr labor savings on 250 jobs = $2,500,000 (5-year term, 50K SF)
Or…
-10% rent savings on 50,000 SF = $500,000 (5-year term, $20/SF rent)
-10% labor savings on 250 jobs = $6,250,000 (5-year term, $50K average salary, 50K SF)
Savings will vary according to individual circumstances, but the preceding examples give you an idea of what can be expected. It confirms that a properly planned workforce relocation, consolidation, and/or expansion can drive substantial savings in real estate and incentives, but the most significant savings is derived from reduced labor costs. As cost containment continues to be the mantra in the C-Suite, it makes sense to see how Workforce & Location Planning can improve the bottom line.
Tags: corporate real estate, cost savings, Site Selection
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Where did I put that lease? Finding your best real estate strategy
January 4th, 2012
By Ralph Benzakein, Vice President
Here’s the scenario: You just realized that your lease will be expiring in a few months and you start to think about what that will mean. For the most part, your current space works for you. You might need more open space or a couple of additional offices; the carpet is starting to show some wear; the walls have been marked up a bit. But, it’s close to home and you have a comfort level there (the car practically drives itself to the office). You also remember the nightmare of moving and the disruption to your business.
So…now what? You didn’t get into business to have to worry about this stuff, but now you need to. You decide there is plenty of time to address this and go about doing “more important” things.
At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office. You call one or two of them and discover that although there is a sign in front of the building, there isn’t necessarily any space that would suite your operation, but the broker representing the building would be happy to show you other buildings. It then occurs to you that those signs never really come down and that they are really just a lead generation system for the broker.
More time goes by and brokers are calling you every other day to pitch you new space or tell you how much free rent they can get you. Nobody has taken the time to evaluate what your business needs are and how they can be aligned with your real estate needs.
It all becomes a little overwhelming and with about 30 days left on your lease, you contact you current landlord and “ask” him if you can renew your lease. He says, “Sure, I’ll send you a renewal letter, just sign it and you’ll be good for the next five years.”
Wow, talk about the path of least resistance. You think to yourself, done deal. You read the lease renewal, notice the part about continued escalations (seems reasonable), sign it, and it goes back in the drawer for another four and a half years.
You, my friend, are a landlord’s dream come true!
You may have saved some time, but it came at a very high price. Here are just a few of the items that a tenant rep would have negotiated for you:
- Lower rent (those continued escalations in the renewal have committed you to rent that is well above the market)
- Rent abatement (free rent)
- Refurbishment allowance (new carpets, paint, move partition walls, etc.)
- New base year for real estate taxes
- Reduce or enlarge space, per your needs
- Lower escalations
Your rationale that your landlord would not want a broker involved is accurate. I’ve just shown you why. It’s not because he doesn’t want to pay a broker’s fee, though he probably doesn’t. It’s because many of the countless clauses you are not equipped to negotiate are his profit centers.
And by the way, some landlords are more than willing to pay a broker’s fee, even on the renewal. Some even insist on it to ensure that the broker is not motivated to move the tenant out of their current space.
Bottom line: give yourself plenty of time to determine the best real estate strategy for your business. That usually means at least one year, if not more, depending on the size of your space.
Tags: corporate real estate, cost savings, landlord, lease, tenant
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