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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 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
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 don’t 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
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
“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