Chapter 6 Office & Industrial Property

Major Topics Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Office Property Defining office space quality The demand drivers for office space Translating employment growth to office space demand The trends that shape the amount of space required per worker The supply drivers for office space Industrial Property The demand drivers for Industrial property Factors driving the location decisions Affect of e-commerce Physical and design trends

Office Property Definitions Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Class A Excellent location and accessibility Rent rates in upper 33% of total office market range Class B Good location and access Rent rates in upper 60% of market sectors range Class C Buildings generally more than 15 years old Rent rates in lower 40% of the market sectors range

Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Net Usable or Leaseable Area The actual area of a floor or an office suite that can be occupied Efficiency Ratio The percentage of total usable space to the total gross space in the building. Load Factor The percentage of space on a floor that is not usable, expressed as a percentage of usable area. Office Property Definitions

Reasons for cyclic Real Estate market Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Competition and need to anticipate the market Lead time factor Inconsistent capital flows Lease terms Typical Cycle Recovery Phase: Excess supply keeps rent low, little or no construction, demand picks up Expansion Phase: Rising occupancy and Rents, increased construction rates Mature phase: increased vacancy, construction still on going Correction phase: rents declining, minimum new construction

Office Market Demand Analysis Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Employment trends Influence of computers, telecommuting and shared space Industry and tenant breakdown Breaking down types of businesses Impact of local taxes Additional factors

Influence of Computers, Telecommuting and Shared Space Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Trends that have decreased the amount of space required per office worker: Less filing space required (electronic archives) Office hotelling i.e. sharing office space by employees who spend much time away from office Telecommuting i.e. working part time or full time from home using the new communication facilities

Industry and Tenant Break Down Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Typical Tenant Size Square Feet Per Employee Required by Type of Business or Industry Migration patterns and market share

Breaking down the Types of Businesses Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Standard industrial classification (SIC) business analysis By breaking down the businesses we get following information for each SIC group: Employment projection Percentage of employment requiring office space Average amount of space per worker By following the SIC group trends the real estate analyst can make precise estimates of office space demand

Central Cities vs. Suburbs Actual rate of absorption is almost always biased towards the suburbs Over 2/3 of the office space in the last 10 years in the largest U.S. cities has been absorbed in the suburbs Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner

Additional Factors Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner 1. Space which might be eliminated 2. The sublease space market 3. New space coming online 4. Tenant migration patterns 5. Contiguous space analysis 6. Lease expiration patterns

Impact of Local Taxes Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Local governments compete to get companies (more than 50 employees) within their jurisdiction by giving tax benefits to the employers These incentives matter a lot in location selection when a company is expanding or moving, however the incentives dont matter to a stable company

Supply Side Drivers of Office Space Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner The expected value of a completed office building must exceed the cost by a sufficient margin to be worth the risk of investment Expected finished value is derived by estimating the net operating income (Value = NOI/R, where R is the typical return on capital for investments of similar risk)

National Office Market Trends Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Increase in office hotelling and hence decrease in per employee space requirement Increase in telecommuting and office sharing The average square footage per employee grew rapidly Decreased density of occupancy per worker changed the rules of thumb on parking Suburban office markets have fared better than CBDs City governments in turn have increased incentives to keep major employers in the city

Introduction to Industrial Property Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Industrial property is of two types: Manufacturing (Heavy and Light) property Distribution Warehouse property Some properties include both, such as flex space

Manufacturing Property Characteristics Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner It is mostly custom built and owned by user Finding a suitable location is very crucial Many local governments court manufacturing firms with tax incentives and financing enticements Difficulty in finding location

Factors Influencing Location Decisions Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Labor Cost, Labor Climate and Skills Weight Gaining or Losing manufacturing process Proximity to Suppliers Access to Transportation Facilities Quality of Life Utilities, Taxes, Insurance, Unemployment and other Real Estate costs Environmental regulations

Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Warehouses are unavoidable friction between production and consumption of goods Demand is driven by the location of inventory requirements Criteria of location selection for warehouse are Minimization of transportation cost Speed of delivery Distribution Warehouse Property

Supply of Industrial Property Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Supply is the function of profitability and risk Pre-leased property has the lowest investment risk Measuring Profitability: Minimum return requirements would be the expectation that the total cost of construction including land and site preparation could be paid for through lease payments plus some additional profit

Warehouses in the New Economy Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner

Alternate uses of Warehouse Properties Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner Call Centers Self Storage Warehouses The Carrier/ Telecom Hotel/ E-switch Hotel

END Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner