chapter 6 office & industrial property. major topics real estate principles for the new economy:...

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


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 sector’s

range

Class C Buildings generally more than 15 years old Rent rates in lower 40% of the market

sector’s range


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


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


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


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


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


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


Additional Factors


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


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 don’t matter to a stable company

Supply Side Drivers of Office Space


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


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


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


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


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


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


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


SPW or HTD Warehouse Large running 150,000 to 500,000 sq.ft

Requires much more parking due to high labor use

Ceiling heights about 30 to 32 feet

Web-link

Office/ Warehouse or “Flex” Space Multi-tenant Lower ceilings often 16 to 24 feet Rear loading docks or drive in doors Less than 30% finished space for offices or

showrooms Parking ratio 2 cars per 1000 sq.ft

Alternate uses of Warehouse Properties


Call Centers

Self Storage Warehouses

The Carrier/ Telecom Hotel/ E-switch Hotel

END


chapter 6 office & industrial property. major topics real estate principles for the new economy:...

Documents

new space

office space average

office space quality

new economy

geltner office property

office worker

office telecommuting

geltner slide