4 Ways to Insure Your Office Space Remains VACANT!

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Occasionally, I transact office deals although my specialty is industrial - manufacturing and logistics warehouses. Differences between the two genres are minimal yet vast. Recently, a client requirement thrust me into the world of office leasing. You see, we fulfilled a need with a long term agreement on a new warehouse building. An amazing space was procured with all of the modern amenities - except for one - enough office space to house the employees. We encountered an owner unwilling to construct more. Why? Because the dollars needed to build wouldn’t yield an adequate return. Plus, once our guy vacates - the next occupant won’t find value. Solution? Find a suite of offices close by. Easy. Hmmm. Not so fast.
 
My expectation? We would find acute motivation and many viable choices. We’d just experienced a year of pandemic lockdowns, working virtually, and throttled demand for office space.
 
As we ventured into the market, I was amazed buy the voracious pursuit of our tenancy. Wow! Compared to skimpy industrial avails and colleagues who don’t return calls - office space alternatives abound. Akin to an episode of The Batchelor, we suddenly had ten proposals and five more warming in the pen. A red rose was the only thing missing! But, as we toured the options, each had its negatives. The good news is I believe a couple of the spots could work. However, the ones that didn’t provide great column fodder. So here goes. The FOUR ways to insure your space remains VACANT.
 
As is. “Just take the space as it sits and we will discount the rent.” Good in theory - bad in reality. Moving a staff into a new location carries infinite variables, time constraints, and pitfalls. Layer in some construction and an occupant will vapor lock. If you lined up 100 office tenants - 1-2 would be willing to undertake a refurbishment. The savings rarely offset the aggravation. Spend some money. Put the suite in move-in condition.
 
Tuppence. One of the stops was a scene from Mary Poppins. As we entered, a flock of pigeons massed the doorway. Feed the birds, indeed! Two thoughts occurred to me. Man. This space has been empty a LONG time and how is the owner ever going to remove the months of guano? Yeah. Might want to visit the vacancies a bit more often - after all, it’s only tuppence!
 
Is Green Day performing? No kidding. At our first visit, I flashed back to a former address where I worked in the 1990s. Complete with burgundy and grey carpet squares, black aluminum door frames, parabolic light lenses and privates large enough for a Pentium processor and loads of paper files - I truly expected to be awakened as September ended. For those not scoring at home - that’s was a hit by the band Green Day - but I digress. However, the goods outweighed the bads here and this one emerged as the front runner. A quick coat of paint and eliminating the carpet in favor of a tripod with flooring choices would have cinched it.
 
Someone didn’t get the memo. If the tenant occupying the space you’re touring isn’t aware they are moving...yeah. That’s uncomfortable. Especially since no one met us at the building to explain the situation and buffer the stares. At least the layout there was decent.
 
So, if your desire is a vacancy - simply follow these four steps. Don’t spend any refurbishment money, never visit your suites, leave potential to imagination, and don’t require your representaive to attend tours. Guaranteed success!
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

When will the Crazy Pricing End?

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Never have we seen the staggering prices being paid these days. And, never is a long time! So, when will they end and return to normal? And what is normal? Bear with me as we dissect the topic.

Pricing. The metric from which returns on investment are achieved, business operating expenses derived, and rents determined. Think of prices as a conveyor belt or a motorized sidewalk - like the ones at giant airports. You hop on at a point and continue to ride. But, it’s a continuous loop. Those who entered early - say in 2010 - have seen massive appreciation in the value of their purchase. If you jumped into the fray last year - we shall see. But it all starts with pricing - the basis, or starting point of your buy.

Commercial real estate - regardless of genre - retail, office or industrial - carries with it a number. As brokers, we typically talk in terms of prices per square foot. Sure. Owners and occupants might also consider per square foot figures but frequently are concerned with the total. As an aside, early in my career I prepared for a tour of leasing alternatives. Carefully memorized were all the lease rates. Yep. Knew em all! Problem was - when asked by the client what amount monthly was to be paid - I sheepishly deferred to my HP 12-C calculator for the answer.

To add some context, 50,000 square foot industrial buildings were plentiful in 2010 for well under $5,000,000 ($100 per square foot for you brokers out there). Sure, in the bowels of SoCal, you might be thinking. Nope. In Anaheim, California. Just along the stretch of East La Palma between Kraemer and Imperial there were 12. Now? You’d be lucky to find one for under $15,000,000!

You might be wondering. What’s causing the astronomical rise? 
 
Certainly cheap money is a culprit. You see, when an occupant can borrow 90% of the purchase price from the Small Business Administration and have the first six months of payments forgiven, tremendous buying power is unleashed. Couple that with an obscenely low supply of buildings to buy and voila - the perfect storm of appreciation.
 
Next, returns on capital are puny. Even though we’ve seen an uptick of 10 year treasury yields this week - 1.6% is still anemic. Wild stock market gyrations spook investors also. Commercial real estate becomes a safe haven. As these well heeled groups compete - once again - for skimpy availabilities, the upward march continues.
 
Companies who can’t or choose not to buy are forced to rent. A similar competition ensues for vacant lease alternatives - which are rare. As an example. If your goal is to lease a new 100,000 square foot spot in north Orange County - you have ONE choice - and construction is not complete.
 
In the past, when pricing got crazy - you could head east to the Inland Empire. Now, even the IE is no bargain. We represent a well qualified eCommerce outfit looking to buy 200,000 square feet. Recently, we pursued a site under construction. Our full price offer was countered with a higher number, an unwillingness to allow a financing contingency, and an enormous non-refundable deposit request. Next!
 
So, to the question. When will this insanity end? The answer is. When one or all of the above shift. We’d need something cataclysmic to occur to return to a normal 5-6% vacancy - such as a pandemic. Wait. We had one. Hmmmm.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

3 Transcendent Figures in Commercial Real Estate

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Last Wednesday I agreed to an early meeting - in person, no less. On the drive back, I tuned in to my favorite radio talk station - KABC 790. It was there I sadly learned of Rush Limbaugh’s passing. I must admit, rarely did I listen. As a matter of fact, I can’t recall the last time. But, his brand saved AM radio and created a whole genre of content - conservative talk. Many of the stalwarts in the industry today have Rush to thank - including the two gents - Armstrong and Getty - to whom I was listening. Rush Limbaugh transcended his craft. Meaning? Everyone knew him - even if you weren’t a fan. Michael Jordan, Arnold Palmer, Muhammad Ali, Vince Lombardi, Oprah Winfrey, Billy Graham, and Stephen Spielberg all shared a similar impact upon their professions. Even if you never watched golf or consumed a lemonade iced-tea - you recognize Arnold Palmer. Transcendent figures do that - become household names.
 
You may be wondering. What does this have to do with commercial real estate? Only this. Our trade has similar figures who’ve broken the shackles of normal and transformed our industry. Allow me to introduce you to a few. Wait. You probably already know them.
 
Roger Staubach. Founder, The Staubach Company. United Stated Naval Academy. Heisman Trophy winner. Multiple Super Bowl titles with the Dallas Cowboys. Thanks for that Roger! You made this young man - a life long Cowboy fan - very happy in the 1970s. However, when Roger retired from the NFL his focus turned to commercial real estate brokerage. Roger moonlighted in brokerage during the off-season with the Henry S. Miller company. While there, he observed a need. Corporate tenants were lacking representation. During those days, owners of commercial real estate engaged brokers to market their assets and locate occupants to fill their spaces. But, who was the tenant’s advocate? Generally, a hybrid agent who did landlord and lessee work. Roger’s company forged the Tenant Rep concept whereby his company’s only clients were the occupiers of office and industrial buildings. Contractors, space planners, architects, attorneys, project managers, and moving companies were all components of Staubach’s offering. When you hired Staubach to secure a location - all of those service providers were part of the deal - at no cost. Revolutionized was the way in which corporate occupants were represented. Staubach was sold to Jones Lang LaSalle in 2008 for $613 million. How’s that for timing?
 
Andrew C. Florance. Founder, Director, President and CEO of Costar Group, Inc. According to the CoStar website - “Andrew C. Florance founded CoStar Group, Inc. in 1987, fundamentally changing the way commercial real estate professionals access, use and share information. Through CoStar, Mr. Florance pioneered the concept of commercial real estate firms outsourcing research functions to a third-party information provider, combining the operational efficiencies of a computer-based information system with the more thorough, standardized and higher quality property information produced by the industry’s first independent research organization.”
 
From experience CoStar is best in class and we rely upon its data daily. Tasks such as sourcing available inventory, researching ownership, and reviewing market trends - CoStar is the gold standard.
 
Bill Lee. Founder, Lee & Associates Commercial Real Estate Services. Bill was a top producer at Grubb and Ellis in the 1970's. Bill's observation was that there was no intra office cooperation. An agent within the office had zero incentive to work with his fellow agent. Quite the contrary, in many cases the agent would "pocket" the information so that he could "double end" the deal with his own buyer. Bill wondered if there was a way to create intra office cooperation through a sharing of commissions and profit.
 
Bill Lee and four of his Grubb and Ellis friends started Lee and Associates in 1979. The theory was simple but revolutionary; create a system that would reward profitability and encourage cooperation. Each of the original "partners" was free to broker in any area, call upon any client they chose (as long as another Lee agent didn't have an existing relationship) and the agents were encouraged to share with each other. Profit was divided at the end of the year and apportioned to each partner according to his contribution. The resulting "splits" exceeded anything in the industry then and now. Lee and Associates "principals" (as we are now called) enjoy the best splits in the industry.http://www.lee-associates.com/ Lee & Associates is now the largest broker owned company in the United States boasting over 60 offices globally.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

Reconciling Operating Expenses

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Today, we venture into the weeds to discuss an event that occurs this time of year. Nope. Not Chinese New Year - which is cool, by the way. But, that of reconciling operating expenses including common area maintenance charges. Fun stuff - huh? Generally, this proceeds with occupants of commercial real estate who do not own their building. In other words, tenants. You see lessees have contracts with landlords - also known as leases, rental agreements, or the like. Contained within each understanding is an outline of such things as base rent, commencement, expiration, rental increases, and responsibility for mowing the grass and fixing a leaky roof. It’s VERY important you - or someone within your group - understand how each of these cost categories is handled.
 
Typically, leases call for you - as the resident - to pay for expenses related to the operation of your address. If your company occupies a suite of offices - most likely you executed a Full Service Gross lease. Similar to other Gross Leases, a FSG lease lays out a rate inclusive of rent, property taxes, insurance for the premises, and general exterior maintenance. Unique to this arrangement is a charge for utilities and janitorial services which are baked into the monthly check you write. If you consider a high rise building with many enterprises - there is a prorata sharing of electricity, water, trash, and the crew that vacuums your conference room in your absence. It would be impractical to contract separately for these services - so owners don’t. Most, however, include an Expense Stop. Simply, anything above is billed to you. Below, base tent takes care of it. More on this in a moment.
 
Industrial landlords take a slightly different approach to re-capture costs. As an occupant of a manufacturing, warehouse, or service building - your lease probably is a TRIPLE Net Lease or an INDUSTRIAL Gross Lease. The main difference here? Rent with a NNN Lease excludes operating expenses with your monthly payment whereas an Industrial Gross Lease lumps them together. Am I saying no expenses are passed along in a NNN arrangement? Quite the contrary. They are invoiced as they occur or annualized and collected monthly.
 
So with that preamble - let’s get to the meat, shall we?
 
Each year between October and December, owners of commercial real estate budget for the following year. Taken into account are such line items as rent, property taxes, insurance, and yes - common area expenses like parking lot sweeping, trash collection, landscape maintenance, and system repairs. Considered? Is a vacancy anticipated? Are lease term extensions expected? Reviewed is how the current year fared. Were expenses properly predicted or dramatically overstated? Next, will the gardener charge us more next year? Have insurance coverages been impacted by a hurricane in South Texas? We know property taxes will increase by 2% unless a change of ownership occurred. Once calculated - a projection of next year’s - starting in January - plus budgeted expenses is forwarded.
 
You may be wondering - what happens if the principal collected too much money this year? Ahhh. That is where the February reconciliation begins. Akin to sending Uncle Sam too many tax dollars in anticipation of a refund - an accounting of charges collected vs realized is accomplished. If you paid too much - expect a bonus from your landlord. Conversely, an underpayment will foster a note that you owe more. Please understand. You have full rights to request backup information on anything for which your owner seeks payment. Typical would be a request for documentation outlining why a winds in Texas would affect a California insurance premium. Or why did trimming the trees cost so much.
 
Finally, the “more on this in a moment” promise. Delve into the terms - Base Year and Expense Stops which Full Service Gross and Industrial Gross leases highlight. Simply, these clauses limit the amount of common area expenses an owner can recover.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com