Transcript Chapter 6 Office & Industrial Property

Chapter 6
Office & Industrial Property
Major Topics
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Office Property Definitions
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.
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Reasons for cyclic Real Estate market
 Competition and need to anticipate the
market
 Lead time factor
 Inconsistent capital flows
 Lease terms
Expansion Phase: Rising
occupancy and Rents,
increased construction
rates
Mature phase:
increased vacancy,
construction still on
going
Recovery Phase:
Excess supply keeps
rent low, little or no
construction,
demand picks up
Correction phase: rents
declining, minimum new
construction
Typical Cycle
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Industry and Tenant Break Down
 Typical Tenant Size
 Square Feet Per Employee Required by Type
of Business or Industry
 Migration patterns and market share
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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)
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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”
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Distribution Warehouse Property
 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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Alternate uses of Warehouse
Properties
 Call Centers
 Self Storage Warehouses
 The Carrier/ Telecom Hotel/ E-switch Hotel
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner