1. Office Property Analysis
Lecture 5
Office
Property Analysis

2. 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

3. 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”

4. 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.

5. Class “A”

6. 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

7. “Class B”

8. 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

9. “Class C”

10. 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

11. Cycles in Office Markets
Lecture 5
Cycles in
Office Markets

12. 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

13. 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

14. Lecture 4
Office Market Trends

15. 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.

16. Industrial Property Analysis
Lecture 5
Industrial
Property Analysis

17. 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

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

19. 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

20. 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

21. 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

22. 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

23. 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)

24. 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