The other day, I was on a property tour with a client who hadn’t had much experience in leasing commercial building space. It struck me the confusion caused by how building rental rates are quoted. I believe this is not unique to the Indianapolis office space and Indianapolis industrial markets, but also exists in most U.S. commercial real estate markets.

Confusion exists with the way rates are quoted. Landlords often quote commercial space as a list price, or the rental rate before any concessions are blended into the rate. For example, an office building’s Full Service list rental rate may be $21.00 per rentable square foot. However, if in order to get the tenant to relocate its office to the landlord’s building, the landlord provides the tenant with a rental concession equal to 5 months free rent prior to 60 months of rental payments, the true effective rate would equal $19.38 per rentable square foot.

Simply put, the effective rental rate is the average rental rate a tenant pays during the term of the lease. In the example above, the effective rate is calculated by multiplying the rental rate ($21.00 / rsf) by the payable months of the lease term (60 months) and then dividing the total by the number of months the tenant will occupy the space (65 months = 60 months + 5 months of free rent).

In my last post, I discussed negotiating lease renewals well in advance of scheduled lease expirations vs. waiting out the lease term, thus creating a more competitive environment to renew the lease.  In each case, the length of term of the extended lease, or new lease if a business elects to relocate, is a key variable that greatly influences the negotiations.

From a building owners’ perspective, the term of lease provides some degree of predictability on the cash flow and ultimately the performance of the building.  This is very valuable for landlords and their lenders; since the Net Operating Income (NOI) for a building is a strong indicator of the property’s financial viability.

But what does this mean to the tenant that is negotiating a renewal of its lease or negotiating a new lease altogether?  Simply said, it means that lease term will drive the economic terms of the deal; ie: the longer the term, the more attractive the economic terms the business owner or manager will be able to negotiate.  This is compounded in a down commercial real estate market, which is the case to the extreme today.

Since the current market is depressed, business owners and managers should be entering into longer lease terms to negotiate as attractive terms as possible for as long as possible.  For example, the business will negotiate better economic and business terms today than it will be able to later when the cycle swings back to a normal or even, God forbid, a landlord’s market.  Therefore tenants entering into longer lease terms will pay less rent than businesses entering into leases at some later date when the market swings back to a “landlord friendly” market.

But before everyone gets on the phone with their landlord to begin renegotiating their leases, there are things that should be considered, which are:

• Will the space be adequate in size and function for the lease term committed?
• Is the business growing and if so, at what rate?
• Can the building accommodate growth and can growth of the space to accommodate the business be part of the agreement?
• Are any significant changes to the business operation, such as a sale of the business, predictable during the prospective term?

These, among others, are questions business owners and managers might want to ask themselves when considering lease term.  Each business has its own unique set of considerations to be examined, weighed and balanced.  Once the business vets these factors, it is in a much better position to enter into lease term commitments that best suit the business.

Despite what we read in newspapers and on the internet briefings each day about the world economy’s continued decline, business is still moving. For companies facing real estate leasing decisions in the Indianapolis commercial real estate market and on the national / international stage in general, things are moving in the right direction.

For building owners, the value of a little financial stability, in the form of credit worthy tenants, has skyrocketed. Landlords are beginning to offer significant concessions to my financially stable corporate clients at Carmen Commercial Real Estate, essentially sacrificing return for mitigating risk. Incumbent landlords are offering opportunities for tenants to renegotiate leases early to keep them from "going to the market”.  Landlord’s can essentially eliminate competition for its tenants by negotiating renewal terms with tenants well in advance of the scheduled expiration.  Yet, many landlords are offering aggressive incentive packages to lure tenants from competing buildings even for relocation dates well into the future.

With such an attractive “Tenant Market” environment, Tenants have to weigh the benefit of renegotiating leases or renewing leases early vs. waiting-out existing lease terms.  The advantage to waiting would simply be to create a more competitive scenario by which to have landlords compete for their business.  As a commercial real estate broker that specializes exclusively in Tenant Representation, representing tenants in their office lease negotiations with current or new landlords, it’s my role to advise clients how to leverage market conditions to best manage my clients’ occupancy cost.  Of recent, I’ve been burning up my computer running lease cost scenarios for my clients to evaluate just that:  how to take advantage of the current downturn in the U.S. economy and specifically, the local Indianapolis real estate market.  Evaluate your options quantitatively.  Weighing current market conditions against future market conditions isn’t as "crystal ball" as one might think;  utilize the expertise and resources available to you through commercial real estate professionals.

I just read a news item regarding one of the commercial real estate brokerage giants, Cushman&Wakefield. The article read that according to a company spokesman, Cushman is restructuring its offices worldwide -- including some layoffs -- as a result of the current economic conditions and slowing business. Similarly, according to the New York City real estate trade publication The Real Deal, the world’s largest commercial real estate brokerage company, CB Richard Ellis, has made staff reductions in recent weeks.

These announcements and other news of large and small commercial real estate players cause me to consider how similar this sounds to other periods during my 23 year career when the U.S. economy slowed and profits began to fall. Although none of us like to see a slowing economy, it does act like a market correction. Companies are forced to better control operations, evaluate business development practices and maybe most importantly, consider how it manages existing customer bases.

This is true of the commercial real estate brokerage industry. In addition to what the large players call "managing costs", which often includes staff layoffs, the commercial real estate industry seems to have a way of cleansing itself during these economic downturns. Not only are the salaried payrolls thinned, but the ranks of real estate professionals that are largely compensated through transaction based commissions are often reduced as below average brokers seek better or a more stable compensation.

Over 15 years, I saw two downturns in the economy that caused me to layoff employees. In both cases I believe those employees that were either laid-off or simply migrated to other industries or companies, found careers that were more fulfilling for them. In each case, my business was better off and when the economy, and thus the market, began to grow again, it provided me with the opportunity to add to my staff with professionals that improved my business.

As for the businesses that utilize the services of commercial real estate brokers, an economic downturn means they’ll likely receive a higher quality of service from a more qualified and committed professional. Additionally, it also means the industry as a whole becomes more fundamentally sound. As for the large firms, will their service be hampered by the staff reductions? No, they’ve become successful businesses for a reason: in general, these firms employ some of the best real estate professionals in the business and as such, will continue to be market leaders. To my benefit, and to the benefit of other highly specialized firms, the largest players in our industry provide services in such great scale that they leave profitable niches for me and my "boutique" Tenant Representation firm.

By the way, since it is likely that the trade journals will not pick it up, as self-appointed company spokesman I’m pleased to announce that CarmenCommercial Real Estate Services will not be laying off any employees at this time and we expect continue to provide the same great Tenant Representation service to businesses needing office and industrial space in the greater Indianapolis marketplace. Carmen Commercial Real Estate has become increasingly specialized in providing Tenant Representation and relocation project management services, technology has enhanced the deployment of our services, hence the need for a large staff has decreased.

A new client asked me to explain a term often used in office leasing, which is Add-On Factor. Although it is a somewhat simple concept, it doesn't seem to make sense to many business people. I had a reasonably smart broker that worked with my firm, Carmen Commercial Real Estate Services, for nearly four years and when she moved on to bigger and better things, add-on factor was one of the concepts that she failed to grasp.

To sum it up, the space a tenant actually utilizes within its office suite is called the Usable Area and an Add-On Factor is a percentage of space added to the Usable Area to account for the common areas within the building, i.e. building lobbies, restrooms, janitorial closets, etc.

The sum of the Usable Area and the square footage added through the Add-On factor equals what’s known as the Tenant’s Rentable Area. For example: Tenant "A" has a Usable Area of 1,000 square feet within its office suite and the building uses an Add-On Factor of 15%. Tenant "A" will actually rent, per its lease agreement, 1,150 Rentable Feet, which is the usable area of 1,000 sf + the 150 sf added by the Add-On Factor 15% of 1,000).

Add-On Factors are important to understand in respect that you, as a tenant, pay rent on the square feet added to your lease by Add-On Factors. Although the above example illustrates a relatively small amount of square footage added to Tenant "A" lease, it is not uncommon for the square footage represented by an Add-On Factor to total in the thousands. Imagine if Tenant "B" utilizes 20,000 square feet within its office suite. An Add-On Factor of 15%, which is about average, would total 3,000 square feet. At a rate of $20.00 per square foot, Tenant "B" will pay rent of $60,000 on space that is not even within the Tenant’s suite.

If this is not clear, feel free to email me and I would be glad to try to further explain the concept of Add-On Factors. Also, you can find definitions of many commercial real estate terms on the Carmen Commercial Real Estate website.

It’s times like these that we think to ourselves "what’s next?" But the conditions of our business haven’t changed too dramatically…yet. However, I remember the spring of 2001, when the economy went into deep freeze months -- after the stock market began its long decline. It was then when I began considering ways to save money in the business in even the smallest increments, in an effort to make sure Carmen Commercial Real Estate was going to be around when the economy began its thaw.

As a business owner, I learned something during that economic time that will stick with me and influence how I run my business, and most importantly, influence how I advise my clients, through the balance of my working career. The lesson: Flexibility. Maintain as much flexibility as possible within your facility lease agreements to allow you to modify your agreements in the event things change. And today all indications are that things are definitely changing.

I came across a commercial real estate blog that I thought did a good job explaining some basic terms and concepts used in the commercial real estate leasing business.  My blog focuses on areas more specific to Indianapolis Commercial Real Estate because my company Carmen Commercial Real Estate Services does the majority of its business in the area.  The site: http://blog.mysquarefeet.com/ describes terms such as Operating Expenses, Security Deposits, and Usable vs. Rentable square feet.  I believe it is worthy of a visit if you are either not a real estate professional or are unfamiliar with these terms.

This weekend, I spent some time with other Indianapolis based commercial real estate brokers and in particular Indianapolis Tenant Representatives.  As has been the topic all too often recently, the depressed U.S. economy and economic conditions in Indianapolis specifically, seemed to dominate the conversations.  Talk about bringing you down.  I couldn’t wait to leave the event and escape to my own universe where business seems to be quite robust these days.

On the drive home, in addition to thinking how lucky I am for my business to have a high level of activity in an apparently depressed commercial real estate market, I had to consider why it is that I am busy, when so many other commercial real estate brokers seem to be starving.  I believe my activity level is due to two factors: first, I look at my business as an on-going service business and not as a transactional business, and second, I’ve always maintained an on-going marketing program, which includes business networking. I believe these two factors are keys in allowing me to see a continual stream of new business opportunities.

In light of the economic doom & gloom that seems to be present in newspapers, news broadcasts, and at political conventions, I thought an article that appeared on the CoStar website offered thoughtful insight on commercial real estate market conditions. The article: A Dud of a Thriller? Commercial Real Estate Drama Lacks a Killer is worth reading.

The Indianapolis commercial real estate market continues to be sluggish; it is my impression, however, that companies conducting business in the non-retail sectors seem so be stable and very few are actually reducing size as measured by space occupied.  An informal litmus test of market activity, and certainly from one that I can draw my own impressions, is the number of inquiries my firm, Carmen Commercial Real Estate Services, receives from its website for Tenant Representation services.

I’ve found that over the past 30 days, office space and warehouse space inquiries have actually increased.  It would appear that many Indianapolis area business people are not placing much credibility in the news media outlets predicting the demise of our economy.

While writing my INBiz article for the Indiana Economic Development Corporation last week, I did some informal research to better understand the primary reasons businesses relocate facilities.  My informal research caused me to look back at the businesses I’ve worked with during the seven years I was employed by Duke Realty Corporation and the last 15 years since starting my firm, Carmen Commercial Real Estate Services.  This process brought to light some interesting observations that I thought I would share over the next week or two.

First, there seems to be a direct correlation between a company’s growth and the level of need it has for assistance to manage the business’ real estate strategy, planning and events, such as complete relocations or facility expansions.  What I found was that in general, businesses that are relatively static, stable, and simply aren’t growing, seemed to take on more of the responsibility to manage real estate leases, facility actions, etc. themselves.  On the other hand, businesses owners and managers that I would qualify as “growth oriented” seem to need, or are more willing to bring in outside support for their real estate needs.  I don’t think it stops with the real estate.  It seems that these same “growth oriented” firms utilize a broader scope of outside professional services.

I attribute the greater need for assistance of the growth businesses to a number of characteristics.  Maybe first and foremost is a lack of in-house resources to perform duties related to managing commercial leases and facilities.  Why do they lack in-house resources?  I don’t think there’s any science here.  These business are growing, or trying to grow, and its human capital is dedicated solely to fulfilling its core objectives.  In other words, employees of the company are focused on meeting company objectives and any effort directed to ancillary duties simply dilutes the company’s ability to meet its objectives.

I’ve found that employees within high growth businesses usually don’t have a lot of time to allocate toward duties that are not essential to meeting company objectives and creating value.  Further, taking people away from their day-to-day duties to perform work that is outside their expertise not only reduces company productivity, but also produces a lower quality of work from people ill equipped to perform this work in the first place.  Some of these duties might be real estate cost analysis, negotiation of facility leases and building operating expenses with landlords, property searches and evaluations, construction planning / pricing, and relocation project management.

Therefore, the theme within these companies seems to be focused on the business objectives, while outsourcing all other duties to outside professionals.
In the upcoming week, I’ll post more key items that I’ve found in my research about growing businesses.

I received a call yesterday from a friend who was putting together budget numbers to roll-out his young tech business.  Although he’s been doing ground work for his company for a few years, Todd was nearing the point of rolling-out his company and executing on his business plan. Todd asked for my help in developing numbers for everything from office rent, voice & data infrastructure, right through monthly rent for water coolers and coffee service.

Todd’s call echoed the handful of calls that I receive each year from entrepreneurs for similar help.  It got me thinking about my greater role as a professional service provider and the responsibility it entails.  Specifically, I’m a commercial real estate broker.  But from a greater perspective, I’m an advisor, a coach, and a cheerleader to my clients; a responsibility that a person in my position cannot to take to lightly.

CARMEN’s typical customer, if there is one, is a privately held small to medium sized business.  Often times, these are young and rapidly growing companies’ resources are already stretched and can ill afford to reallocate its staff to duties they’re unqualified to perform. In many ways, I’m well suited to advise these businesses in the respect that “I’ve been there and done that”.  I’ve been a self employed business owner since starting my tenant representation firm, Indianapolis based Carmen Commercial Real Estate Services, in 1993.  My firm, which helps businesses to locate suitable office and industrial space, negotiate leases, set-up facilities and manage facility leases, has served many types and size organizations.

A few weeks ago, I received a call from Bruce Kidd, a Director at the Indiana Economic Development Corporation. Bruce asked me to consider writing an article for an economic development magazine IEDC publishes each year called INBiz. The purpose of the article is to provide businesses managers with useful information to set-up a facility and to manage their facility leases.  I’m grateful to Bruce and the IEDC for giving me an opportunity to put on paper much of the knowledge I’ve been passing on to growing young businesses for years.  I’ll keep you posted on my progress and when to expect INBiz to be published.

As a follow-up to last week’s post regarding the merger of Jones Lang LaSalle with the Staubach Company, the appeal of exclusive tenant representation is that a client needing space is assured that the advisor is focused strictly upon meeting their needs. In exclusive "boutique" tenant representation firms, such as Carmen Commercial Real Estate Services, there are no conflicts of interest that arise when a real estate company offers leasing and management services. The practice of representing both Tenants and Landlords undermines any promise made to serve the tenant.

Exclusive tenant representation professionals understand fully the regional and local leasing trends because the very nature of their practice keeps them active and alert to the deals and relocations that define the space market. They are not saddled with the burden of serving on several full-service teams or helping a landlord market his building.

Finally, one last thought on Tenant Representation:  the most successful business relocations are rooted in tenant representation relationships that function as partnerships, not merely "agreements." With a single, dedicated focus and by not representing landlords, exclusive tenant representation firms offer the best opportunity for a company to secure the most productive and beneficial occupancy solution and lease negotiation.

After a long hiatus, I’m once again posting to my blog. This month, two of the most prominent commercial real estate companies, Jones Lang LaSalle and Staubach Company, merged.  This merger itself is not unusual, as it seems to follow the trend in the commercial real estate industry of consolidation to take advantage of expanded customer bases, expanded services, not to mention the benefit that often accompanies such consolidations, lower operating overhead through the alignment of duplicate services.  What I believe is most notable about the Staubach / Jones Lang LaSalle merger is the obvious differences in the operating models of these firms.  Staubach operated primarily as a tenant-representation firm throughout North America. Jones Lang LaSalle offered an array of "full services" around the world.

Staubach was a tenant representation stalwart that held firm to the idea that the best way to service tenants was to do so without the conflicts caused by managing and listing property.  The “Tenant Only” business model makes a very compelling case, which proved very successful for Staubach.  I too have subscribed to the “Tenant Only” model since forming my firm in 1993, Carmen Commercial Real Estate Services.  Now, as Staubach Company transitions into the larger “full-service” entity, I suspect that many of the clients represented by the firm, and there are many, must be considering what this merger will mean to them.

On one hand, many businesses engage a commercial real estate brokerage firm because of the firm’s principles and operating model.  However, over time relationships are built upon confidence and trust that customers have in the individual commercial brokers that are actually providing the service.  Nevertheless, the underlying principle remains: I’ve convinced businesses to utilize my services because I’m free from the conflicts of interest that accompany full-service brokerage firms. Subsequently, if I’m absorbed into an entity that provides a wide array of services, some of which conflict with the services that I have previously provided to customers, I have to believe that my clients might be justified in having concerns that my firm’s business model no longer reflects, in fact, may contradict the basis by which I was hired to represent them.

Once your office needs are identified, as discussed in my previous blog, your office broker should be able to provide you with a list of properties that meet, or come close to meeting, your geographic parameters and physical facility needs.  In many markets, such as the market my firm, CARMEN Commercial Real Estate, primarily works, which is the Indianapolis commercial real estate market, a search can uncover many possible alternatives.  Therefore, in order to conduct an effective evaluation of the property alternatives it makes sense to make a first pass through of the property survey provided by your broker to further identify the best alternatives to meet your needs.

 It may seem easy to eliminate building alternatives that at first glance don’t appear to meet your needs; however, be cautious and maintain an open mind in tossing out the weaker alternatives.  Often times, the buildings which are most frequently dismissed can be a “diamond in the rough” because owners of these buildings will frequently discount the rental rates or provide tenants with greater tenant finish and other moving related allowances to induce tenants to lease space in these buildings. 

Once the survey provided by your Commercial Real Estate Broker has been thinned out you will be prepared to take the next step, which often times is an actual tour of the various properties

When you, as a business owner or manager, hire a commercial real estate broker to represent your business in its search and negotiation for office or warehouse space, the above question: “What do you need” is often the first question you’re asked by the commercial broker.  Needless to say, the question is often received with surprise and perplex.  More often then not, the commercial tenant doesn’t know their needs as it pertains to office space.  Further, the business may have naively hired the broker to help them identify space needs.

During my 23 years of leasing all types of commercial real estate, but specifically Indianapolis office space and Indianapolis warehouse space, as well as representing tenants throughout the US, it is not uncommon that business owners and managers are not aware of their specific needs for commercial space. Additionally, many businesses have hired a broker to help them uncover some important questions about their future office space.  Ironically, commercial real estate brokers, including me, are not equipped to uncover these needs, unless of course, the broker was trained in space planning and design.

When my clients lease Indianapolis office space or warehouse space, unless they have a very clear understanding of their needs, I will recommend their hiring a commercial space planner and / or designer to help with a needs assessment.  In fact, this step has become so important, my firm, CARMEN Commercial Real Estate Services, as a service to its clients, has a project manager and designer on staff to guide clients through a programming process and needs assessment.  Until the business’ needs are identified and clearly defined, I cannot effectively perform my work.

As a further note on this subject, you should beware of the commercial real estate broker that feels compelled to first ask its client:  “What do you need?”  You have to ask yourself if this is a professional that is willing to do all of the ground work that is necessary to understanding your business and its needs.  Or worse, is this broker more focused on getting your business to a closing, as opposed to providing your business with a valuable service.

Visit our project management post.

A talented commercial real estate broker is worth their weight in gold, unless of course, the broker is packing on a few extra pounds as I am currently. In general, I’ve found that when a broker represents a business in its lease negotiations, the business will save approximately 10 to 25% purely on the economics of its lease occupancy cost. These savings are gained through rental abatement, above standard tenant improvements, and moving allowances. Further savings are incurred by a business that utilizes a commercial broker through time savings and, in the cases of a firm that provides clients Project Management services, through efficiently managing a relocation and procurement of furniture, fixtures and equipment

Most businesses conclude that it makes a lot of sense to bring an expert on the team and engage a broker for the reasons I identified in my earlier post, Part II – Why use a Broker.. In the Indianapolis commercial real estate marketplace, where Carmen Commercial Real Estate Services is based, approximately 98% of all transactions that occur in the Indianapolis commercial real estate marketplace involve a broker representing at least one, but usually all, of the parties involved in the transaction.

Once a business has determined that it will engage a broker to represent the business in searching for a new office or simply to renegotiate an existing lease, the question then becomes how to choose the right broker. Making the right choice can mean a pretty dramatic difference in the project outcome as measured in lease savings and minimizing the interruptions to a business..

Over the coming week, I’ll provide you with criteria and explanations that should be helpful in selecting a broker to represent your business.