Office & Industrial Property Analysis: Market Trends & Cycle Analysis

1. 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 ofAnalyzing 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. 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. 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