The New Standard - Marketing Commerical Real Estate

The opportunity came my way from my best friend. I was about to learn from a test project about social media marketing in real estate.  Still to this day, majority of the commercial real estate broker dismiss most of the forwarding thinking technology that is already here. This is due primarily to their long client based relationships and tenner in the industry.  

The test project was to assist in the marketing efforts towards exposing an estate to the digital world. Already was an amazing video tour with aerial views taken from a private aerial videographer and a visually appealing web site. The challenge was that there were not many views or visits to the website. The plan was to create a full circle using the other social media platforms such as Facebook and Twitter and utilize all the social media vehicles in sequence to lead followers to the web site.  The truth was that I didn't completely understand how everything was going to work out.  Setting up the accounts were fairly easy and the rests was manpower. The plan was to make as many authentic connections and continue to post daily relevant posts.  The Facebook advertising dollars also assisted greatly. Facebook advertising has a user friendly demographics targeting strategy. Without a doubt, this made a significant difference in targeting new traffic to the site.  The end result was success. I was able to significantly increases to the landing page visiting and expose the estate to a much larger digital world.

Through this experience, I learned a valuable lesson about the social media world and how it might work in commercial real estate.  The next project that I would experiment with would be for an office building in Woodland Hills. When traditional commerical real estate marketing efforts needed some additional support, this is what happened. Stay Tune. http://woodlandhillsoffice.com/

Q4 San Fernando Valley Office and Industrial Market Report

Vacancies Decline to Lowest Levels in More than Four Years as Leasing Activity Remains Brisk

Office leasing activity spiked again in Q4 to 1,359,421 square feet, the highest levels in the past four quarters. In all, 4.6 million SF of space was leased in 2013, the second straight year of solid activity. (Last year, 5.3 million SF of office space was leased in the region.)  

A total of 272,000 SF of office space was absorbed in the quarter, down 30.5 percent from 391,444 square feet in the prior quarter. For 2013, a total of 241,400 SF of office space was absorbed, also down from 2012 when just over 1 million SF of space was absorbed.  

While there is some evidence that at least a portion of the activity in the market represents tenants trading off one space for another, it is also clear that the market’s inventory of office space is slowly filling up.

Vacancies, which have been trending downward for over a year now, dipped to their lowest levels since Q1 2009. The vacancy rate in Q4 was 16.2 percent, an improvement of 50 basis points over Q3 and 40 basis points over the year-ago period. Vacancies in the Los Angeles North market have declined more than 200 basis points since Q4 2011.

With landlords still facing competition for tenants, we are not seeing the tighter vacancy rates reflected in rental rate growth. Average asking lease rates fell by $0.01 to $2.24 per square foot in Q4, and are up by $0.02 per square foot compared to Q4 2012. It is important to note however, that some submarkets are showing rates well in excess of those levels, and we are seeing variations from one building to the next, even within the same submarket, depending on individual factors impacting each property.

Sales activity picked up dramatically compared to 2012. A total of 49 office buildings were sold in 2013 compared to 2012 when 26 office buildings were sold. The median price of buildings sold in 2013 was $186 per square foot, however, the full-year median sale price was adversely impacted by the first half of the year, and prices have been increasing significantly since then. The median price of buildings sold in Q4 was $255 per square foot, a 12 percent increase over the prior quarter.

Economy at a Glance

INVESTMENT: Record highs in the DJIA index and strong stock market returns along with low inflation and minimal interest rate increases are driving near-record high real estate prices, according to a report in Commercial Real Estate Executive. The story cited $660 PSF paid for the Hollywood & Highland Center in L.A. among others.

RENTS: Brokers polled by National Real Estate Investor expect the national office market to shift in favor of landlords in 2014. On a national basis, the office market has registered occupancy gains for 14 consecutive quarters, vacancy fell to 15.1 percent and lease rates inched up 3.5 percent in the fourth quarter of 2013, CPE reported.

STUDIOS: Warner Bros. topped the worldwide box office in 2013 with $4.95 billion in sales. Walt Disney Co. was second with about $4.68 billion in sales and Universal City was third with $3.68 billion in worldwide sales.

RENEWALS: Companies are using lease renewals as an opportunity to downsize in order to conform to today’s workplace dynamics, National Real Estate Investor reported. The office space utilized per employee is estimated to have fallen to 172 SF from 255 SF in 2000 and estimates are that space used per employee will fall to 145 SF by 2018.

 

Extremely Tight Market Limits Options and Curtails Leasing Activity

Following three very busy quarters that removed a good deal of the industrial inventory from the Los Angeles North market, industrial leasing activity slowed in Q4, declining more than 60 percent compared to Q3 and off 22 percent from the comparable year-ago period.

A total of 943,620 square feet of industrial space was leased in the quarter, compared to 1,539,000 square feet in Q3 and 1,213,000 in the fourth quarter of 2012.

The strong activity that preceded the fourth quarter has brought vacancy rates down and limited options for businesses. Overall, the vacancy rate for the current quarter was 4.1 percent, unchanged from Q3. It is also noteworthy, however, that seven out of the 13 submarkets in the Los Angeles North industrial market finished the year with vacancy rates under 3 percent and vacancies were below 2 percent in several markets.

In Woodland Hills, where much of the industrial inventory has been converted to multifamily use, the industrial vacancy rate is 1.4 percent. Glendale’s vacancy rate is 1.7 percent and the North Hollywood/Universal City submarket has a vacancy rate of 1.9 percent.

Just 23,300 square feet of industrial space was absorbed in the region, compared with 488,300 square feet in Q3 and 551,766 square feet in the year-ago period. Chatsworth experienced the highest absorption rate for the year with 695,000 square feet of industrial space absorbed

With so little space available, asking rents rose to $0.63 per square foot in the quarter, a penny per square foot more than the prior quarter and a $0.03 increase over the year ago period. At $0.63 per square foot, asking rents are the highest they have been since Q3 2007 when the rate averaged $0.75 per square foot.

As the industrial market came back with a vengeance so too did sales activity. There were 86 industrial buildings sold in 2013, the largest volume of sales since 2006 when 118 buildings changed hands.

Median sale prices, however, are still lagging the activity we are seeing. In 2013, the median price of buildings sold was $109 per square foot, off 20 percent from the height of the last real estate cycle when the median industrial building price was $137 per square foot.

Economy at a Glance

GDP: The Commerce Department revised third quarter economic growth to 4.1 percent, the strongest growth in nearly two years, the New York Times reported. Previous estimates were 3.6 percent. The increase was attributed to a rise in healthcare, housing and cars as well as exports, state and local government spending and investment in new factories and inventories.

BENTLEY: A record 10,120 Bentleys were sold last year, the luxury maker’s best performance in its 95-year history, according to a report in Bloomberg Businessweek. Bentley said the stock market run-up fueled some of its sales increases, but the company also rolled out a new, lower priced model at the bargain price of about $200,000.

DEMAND: Industrial demand is expected to remain strong over the next two years, with availability rates nationally falling to 11.1 percent, according to CBRE research reported in GlobeSt. Researchers anticipate that the demand will drive rent growth of 4.4 percent in 2014 and 4.6 percent in 2015.

FILMING: L.A.’s location film production increased 19 percent last year to 6,972 days for features and 11 percent to 18,590 days for television, compared to 2012, the Los Angeles Business Journal reported. Commercial shoots were up 5 percent for the same period. The bad news? L.A.’s feature film production is down 50 percent from peak levels in 1996 and TV production is off 38 percent from its peak in 2008.

What is a 1031 Exchange?

1031 tax deferred exchange is a way to postpone capital gains or loss from a sale of property through purchasing another like-kind property within a certain time frame. Although there are several kinds of 1031 exchanges, the Delayed Exchange is the most common.  

“Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.” http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

1031 tax deferred exchange is a way to postpone capital gains or loss from a sale of property through purchasing another like-kind property within a certain time frame. Although there are several kinds of 1031 exchanges, the Delayed Exchange is the most common.  

“Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.” http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

Through the 1031 tax deferred exchange program, property investors are able to reinvest the sale proceeds into another property of equal or larger value.  This has been a common platform property investors have been using over time to create great wealth.

Before the property is sold, escrow will make the necessary arrangements for the 1031 exchange.  At the close of escrow, the proceeds from the sale will be transferred to an Accommodator also known as a Qualified Intermediary.  (A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer or a disqualified person.) http://www.1031.org/about1031/faq.htm

The investor will have 45 days from the date the downleg(relinquished property) is transferred to identify potential exchange properties. There are several different rules on property identification but the 3-property rule seems to be most popular. Within 180 days from the close of escrow of the downleg, one of the three identified properties must be purchased.

Most investors selling their investment property will begin looking for an exchange property from the moment they put their own property up for sale. So in general, if the sale property takes approximately 90 days to close escrow(30 days of marketing & 60 day escrow), they would have additional time to identify several replacement properties and close escrow on the upleg(replacement property).   

Here is a great place and resource to learn more http://www.ipx1031.com/reexchanges.aspx

What is happening in the office leasing market?

I recently attended a round table lunch discussion with Douglas Emmett in Woodland Hills. The meeting took place in their last remaining full floor availability at the Warner Corporate Center near Victory Boulevard and Canoga Avenue. The office space presented very well while the views of Warner Center was clear as day utilizing the office’s full window line and natural lighting. The turnout among active brokers in the area was successful and the discussion moderated by David Hitzel (Regional Manager –Leasing) from Douglas Emmett was very informative as majority of the brokers affirmed the general consensus about Tenants and Landlords in the marketplace.

“We are seeing that Landlords are giving less concession while larger Tenants have fewer choices.” (Broker)

The pace of demand for office space the San Fernando Valley is being funneled from the west Los Angeles markets. The east and central valley including Studio City, Sherman Oaks and Encino continues to see very strong demand while the west valley is still catching up. The tech boom in the west Los Angeles markets has lead way to fewer options of quality office spaces to lease.  As a direct result, Tenants are looking to the central valley along the 405 and 101 corridors as available office spaces are slim. This has resulted in a higher demand for office space and increased rental rates in those areas.

“We expected to see this improving trend towards the Woodland Hills market as the demand for office space continues to extend down the 101 freeway.” (Broker)

“Still we haven’t notice any large hiring in the local area.”(Broker)  Although the office momentum seems positive, new full time job creation continues to be sluggish as this continues to be a major concern for real growth in the local economy.

Q1 2013 San Fernando Valley Office Market Report

Q1 2013 San Fernando Valley Office Market Report (Click Here)

Q3 2012 San Fernando Valley Office Market Report

Q3 2012 San Fernando Valley Office Market Report (Click Here)

Q1 2012 Market Analysis Office Report San Fernando Valley

Q1 2012 Market Analysis Report Office (Click Here)

Q1 2012 Market Analysis Report Industrial (Click Here)

Operating Expenses Pass Through – What extra costs am I responsible for?

Office buildings traditionally use a lease type called a Full Service Gross (FSG) lease.  This lease means your rent already includes taxes, insurance, utilities, repairs and maintenance, etc. except for your phone and internet.  It might seem that other than your fixed annual increase, this is the extent to your rent costs. However that is not always the case.  Pass through costs represent the share of a buildings operating expenses (Taxes, Insurance, utilities, repairs and maintenance, etc.) that the landlord passes on to the tenant each year.  A tenant will have the responsibility to pay their share of any increases in Operational Costs over their “base year”.  The Base Year is referred as the buildings Operating Costs of the 1^st year of the lease and is typically calculated to a “gross up” 95% occupancy level.  The ability to pass through Operating Expenses enables the Landlord to protect themselves against increases in cost due to inflation and other similar forces.  Most common leases favor the landlord and provides them with the ability to pass through these increases.

The landlord typically provides the tenant with their estimated share of Operating Expenses for the projected year based upon previous yearly Operating Expenses.  The tenant will pay 1/12 of their estimated Operating Expenses each month. At the end of each year, the landlord may provide to the tenant a final statement of the actual expenses for the prior year and either the landlord to refund the overpayment or tenant to pay the outstanding difference in balance.  

Putting a cap on annual “controllable expenses” (Building Service Contracts, Personal Salaries, Management Expenses, Capital Expenditures) is a way tenants can protect themselves from excessive pass through costs.   Also requiring the landlord to deliver to a tenant at the end of each year a detailed statement of the actual operating expenses for the prior year will affirm the pass though amount is correct.  On your lease be sure that the specific calculation to your percentage of space is stated and be aware of specific lease language on operating expenses that allows for additional expenses to be backed in.    

What Type of Commerical Lease Are They Asking?

There are a variety of lease types in Commercial Real Estate.  Having a basic understanding of the most commonly used lease types will help you make a better decision when looking for a space to rent.  For example, you are interested in comparing 3 commercial spaces and all identical sizes.  Space 1 is offering $2.35 (FSG) Full Service Gross per sq. ft.  Space 2 is offering $2.25 (MG) Modified Gross per sq. ft.  And Space 3 is offering $1.55 (NNN) Net Net Net per sq. ft.  From the surface the $1.55 NNN sure looks attractive, but beware, that’s not always the case.  Also, lease terms may have slightly different meanings depending on who you ask.

Full Service Gross (FSG): Monthly rent included utilities, janitorial services, taxes, insurance and common area maintenance. In simple terms, the rent includes everything except for you phone and internet.  Also, parking might have an additional cost depending on location. This type of lease is very typical for office buildings. The Landlord is however able to pass on your pro rata share of any annual increases in operating expenses for the following year.  Office buildings also have typical office hours of operation. This means that your Heating, Ventilation, and Air Conditioning (HVAC) will be limited to only those hours.  Most buildings charge for after hour usage should you request access to the HVAC during those times.

Gross Lease: Monthly rent includes maintenance, taxes and insurance. You are responsible for the cost of your own utilities, janitorial, phone and internet.  This is commonly used in multi-tenant commercial buildings.  This type of lease when referred to an Industrial building is sometimes known as an Industrial Gross lease.  If your work hours are early morning, late nights and weekends, this type of lease might be better for you.

Modified Gross Lease (MG): Monthly rent includes a separate charge (e.g. common area maintenance (CAM), janitorial, proportionate share of water) TBD by Landlord. This is typically a hybrid of a Gross Lease.  In this case, you would need to find out from the Ownership exactly what additionally you would be responsible for.  This type of lease is commonly used in multi-tenant commercial buildings. 

Triple Net Lease (NNN): In addition to monthly rent, the tenant is responsible for paying their estimated pro rata share of taxes, insurance, utilities, janitorial service and all common area maintenance.  Any expense to the property can be passed on to the Tenant. This is typically billed to the tenant on a monthly basis in addition to their monthly base rent.  At the end of the year, semi-yearly or quarterly year, if the actual total NNN’s are different, either the Landlord or Tenant will be responsible for the difference in credit or payment.  NNN charges on average can be as low as $.15 per sq. ft. to as large as $1.20 per sq. ft. or higher.  Now depending on the person you ask, the roof and structure of a building may or may not be the Tenants responsibility.  On a lease called an Absolute NNN Lease, the Tenant is responsible for Roof and Structure, however on a NN Lease the Tenant is not responsible.   The monthly base rent might be look appealing, however be careful and know what the NNN charges are so you can budget accordingly. This type of lease is typical on Retail Storefront, Shopping Centers, and Single Tenant Commercial Buildings and favors the Landlord.

San Fernando Valley 3rd Quarter Office and Industrial Market Report

All-around improvements show stability, but growht still elusive

Office - Full Report

Market sees little change as leasing remains constant

Industrial - Full Report

San Fernando Valley & Conejo Valley Landlords vs Tenants

 

2011 still has its challenges ahead for our economy.  I don't expect things to ease up a bit, but I do think our economy is slowly getting better. Still there is a lot of uncertainty with new and exisiting businesses. This uncertainty with businesses are very appearent in the San Fernando Valley and Conejo Valley and the leasing market reveals this truth.  Long term leases are challenging for majority of new and growing businesses and negotiating lease terms has been no easy ride.

Landlords need some incentives in this market to get their vacancies leased up.  1 month rent abatement per year, 6 month teaser rates, free parking, tenant improvement allowance and an active broker willing to work are some successful elements in this market. In the San Fernando Valley and Conjeo Valley market, there are still too many vacancies to raise rents much further. Creative rent structures is another creative element is consummating a new lease. Its not unusual to see a flat lease for the next few years either. 

Tenants getting closer to lease end have been beginning to tour the market place about a year to six month in advance to see where they can strike a deal. I convey to each tenant that every landlord has a different business model. Whether their model is occupancy percentage, credit tenancy, price per square foot for rent, etc. makes its difficult for some tenants to understand that even though there is vacancy in their local market place, landlords may not necessarily budge where tenants would like. I let each tenant I represent know that the only way to find out where the landlord is will to make a deal is by requesting a lease proposal and negotiating.

Majority of the time, unless specific reasons other than rental price, most tenants will continue to renew their lease. $.10 per square foot isn't really going to make much of a justification to move unless they are a small tenant.  It's typical for tenants to tour the marketplace and to have found themselves back at thier exisiting space renewing their lease for another few more years with some incentives like free rent, new carpet and paint.

For Landlords, it can be very advantagous to consider early lease renewals for tenants. Why? The known is better than the unknown and diminishes the risk of losing a credit worthy tenant. It's easier to control costs like improvements to space, commissions, loss of income for vacancy, and overall real estate costs associated with time. 

But the only really way to know if you had a good lease is only after the lease is over.   

San Fernando Valley Office & Industrial 3rd Quarter 2010 Market Analysis

Leasing Velocity Remains Steady, But Absorption Weakens

Q3 2010-LAN Office 10-10

Leasing Volume and Sales Prices Rise, Improving Absorption Rates

Q3 2010-LA Industrial 10-10

Commerical Real Estate Debt Maturity A Huge Problem

An estimated $1.4 trillion in commercial real estate debt is set to come due between 2010 and 2014. As the maturity dates come closer to being due, lenders are trying to work out extention plans for borrowers, thus "amend and extend".

Commerical Real Estate Capital Gain Taxes Going UP

This coming January 1, 2011 the capital gains tax reduction signed under President Bush will revert back to the former 20 percent capital gain tax rate prior to 2003.

Thinking about Selling and cashing out. Take advantage now and close before the year-end.

San Fernando Valley Commercial Real Estate Thinks Out Of The Box

 "It's all about timing and luck".  Being persistent and when you make the next call, you hope to find your nut which is probably going to be disguised as a white elephant.  The question becomes, how are you going to crack it so that makes economic sense to the next investor? 

Industrial buildings in the west valley with 60's construction were built to suite the infrastructure of that era.  As you can imagine, office laboratory build out, development and testing quarters, and unique mezzanine space with double doors that drop off from the second floor and not to mention the clear height that changes from 12' 16' 14' 10.5' 21'.

Functionality is key in bringing in the right tenant to occupy a building.  So how do we take a vacant concrete box erected in the 60's and bring it to functioning standards of today?  "Land value son", that's what I keep hearing.  Or can an investor think outside of the box and reinvent the way to look at these buildings keeping with functionality and return on investment?  How about from the tenant representative angle, can they conjure up some ideal and unique functioning work space for those archaic build outs to tenants from around the world? I'm sure they can.

Industrial Live-Work Spaces (Downtown LA Brewery -http://www.the-brewery.net/),

Time and money always determine all the answers.  With the choices tenants have these days, most are looking for the bread and butter tilt-up 18'+ clear height with dock high loading and plenty of parking. Fresh carpet and new paint seems to always grab the eye of those on looking tenants.  And when tenants look, investors see that too.

Thank goodness for challenging times, it brings the best ideas to the table for the rest to follow.