Office Property Analysis Lecture 5 Office Property Analysis

Introduction Late 70’s – 80’s, nationwide boom existed in construction of commercial real estate, including office space. Supply GREATLY outpaced demand Rents did not begin to escalate until mid- to late-90’s

Difficulties of Analyzing Office Space Analysts need to know how many tenants made local relocations (within the same market area) Gross Absorption vs. Net Absorption Tenants planning on future expansion may have leased extra space (“shadow space”) Office market made up of distinctive “class levels”

Office Class Levels “Class A” – Excellent location and accessibility, high-quality building and management, over 100K sf in CBD, over 50K sf in suburbs, rent rates upper 33% High land values in a CBD create need for “Class A” structures.

Class “A”

Office Class Levels “Class B” – Good location and access, structure showing minimal obsolescence or deterioration, minimum size 50K sf in CBD, minimum 25K sf in suburbs, rental rates in upper 60% of market

“Class B”

Office Class Levels “Class C” – Buildings generally more than 15 years old, with rent rates in the lower 40% of the market, located in less-desirable areas, little (if any) common space and amenities

“Class C”

Office Property Definitions Gross Square Feet: Total constructed area Net Useable / Leasable Area: Area of a building that can be leased Efficiency Ratio / Core Factor: Percentage of total useable space to the total gross space in the building

Cycles in Office Markets Lecture 5 Cycles in Office Markets

Office Market Real Estate Cycle Expansion: Rising occupancy and rents; increased construction rates Mature: Increased vacancy, construction still in progress Recovery: Excess Supply keeps rents low; little or no construction demand Correction: Rents declining, minimum new construction

Reasoning for Real Estate Cycles in the Office Market Competition and need to anticipate the market Time Factor in developing such a large, durable asset Capital flows are not consistent Lease terms create delays in rent adjustments, and help to induce cycles

Lecture 4 Office Market Trends

Office Market Trends Demand may decrease from hotelling and office sharing Telecommunicating allows employees to work from home Less filing space required, as files are saved electronically Increased density of occupancy per worker has created problems with parking “Green design,” “intelligent buildings,” and increased security have become more important.

Industrial Property Analysis Lecture 5 Industrial Property Analysis

Industrial Real Estate Manufacturing: Structures where products are produced Distribution Warehouse: Structures where finished products are stored for distribution Flex Space: Combination of manufacturing and distribution

Manufacturing Real Estate Build-to-Suit Low profit margins Sale-leasebacks Challenging to find suitable locations Zoning Manufacturing possibly harmful to an area

Manufacturing Location Decisions Labor cost, climate, skills Access to labor Union Representation Proximity to suppliers Access to rail, highway, airports Overall quality of life for upper-level employees

Manufacturing Location Decisions Utilities, taxes, insurance, real estate costs, political attitudes Environmental concerns Locations that will not pollute citizens Environmental studies for land Phase 1: Historical search Phase 2: Physical testing Phase 3: Clean up of site

Demand for Warehouse Space Driven by location of inventory requirements Centralization of many warehouses into fewer warehouses and JIT inventory management allows less total inventory (and less demand for warehouse space) Agglomeration

Specialized Warehouse Products Small Package Warehouses (SPW’s) and High Throughput Distribution Centers (HTD) 150,000 to 500,000 square feet Ample parking (3 spaces per 1,000 sf) Ceiling heights 30 – 32 feet Regional Distribution Bulk Warehouses 250,000 square feet or larger Shallow depth (allows for cross docking) Low parking ratio (1 space per 1,000 sf) 28 – 40 foot ceiling heights Technology for automated forklift operation

Specialized Warehouse Products Dual Function Office / Warehouse Space (flex space) Multi-tenant 16 – 24 foot ceiling heights Rear loading docks or drive-in overhead doors Partially finished for office and showrooms Small parking ratio (2 spaces per 1,000 sf)

Specialized Warehouse Products Call Centers High parking ratio (5 spaces per 1,000 sf) Bathrooms, kitchens, lounges, amenities Self-Storage Warehouses On-Site Management 8 – 10 foot ceilings Telcom Hotels / E-Switch Hotels Can be retrofitted from existing obsolete manufacturing property or warehouses