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.

The beautiful weather over the Labor Day weekend was at fault for my NOT getting to my good intention list.  Instead on Saturday, I threw my dog Teddy in the back seat, opened the windows on my car, justified my thoughtless waste of gasoline as “necessary on such a nice day” and spent the afternoon cruising around Carmel and the north side of Indianapolis.

While cruising down Carmel’s Main Street, as I’ve been many times before, I was once again, astonish by how far the City of Carmel  has come since I arrived here in 1985.  Upon my arrival from Chicago, I thought Carmel to be little more than a rural bedroom community.  As with many gradual changes, Carmel’s transition seemed to occur one building, one park, one road expansion at a time.

Yet, the last decade brought remarkable change to Carmel.  You don’t have to be an urban detective to notice the massive road improvements, an extensive park system, and the redevelopment of a once deteriorating and largely vacant downtown.  Under the direction of Mayor Jim Brainard, who took office in 1996, the city followed what seemed to be a carefully scripted economic development effort that has helped it attract many businesses, which has directly or indirectly built the city’s tax base.  The city’s progress has become one of the Midwest’s most admired.

For the benefit of their citizens, I hope other communities take note of this thriving example of the fruits of economic development.  Nearly every aspect of commerce seems to be thriving in this community.  Carmel retail centers and office properties of every size and type have been developed, providing homes to businesses of nearly every size and type. Carmel residents can work, shop and live without leaving the community, which is not a bad thing with gasoline prices of $4 per gallon.

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.

As I mentioned last week, we continued the River Place “road shows” in Austin and Dallas.  While on the road, I had the opportunity to meet with the Vice President of Real Estate for Whole Foods Market at the company’s headquarters and flagship store in downtown Austin.

The reason for my visit to the Whole Foods HQ was simply to bring our contact up to speed on our plans for River Place, in the event the company decides to open new stores in Indianapolis.  The amount and type of consumer traffic that these stores generate is very desirable to a development like River Place, which is why many of the most successful mixed-use projects around the U.S. host a Whole Foods stores.

If you’ve not been to a Whole Foods store, it’s an amazing experience. Whole Foods Market has grown from a single, natural and organic foods store to a chain of 270 stores in North America and the UK. They are highly selective about what they sell and dedicated to quality standards and committed to, as they say on their website “a sustainable agriculture; while keeping the balance of the food chain, people and Mother Earth.” The Whole Foods website goes on to say that they respect the neighborhood and want to become an integral part of the community and demonstrates their neighborhood commitment by supporting food banks, sponsoring neighborhood events, compensating their team members for community service work and contributing at least 5% of total net profits to non-for-profit organizations. My conclusion after our recent meeting is the company’s employees embodies the philosophy stated on its web site.  Clearly, the people and culture that Whole Foods nurtures is the basis for this successful organization.

If you’re like me and the other 566,127 people that live within a 10 mile radius and roughly 15 minute drive time of River Place, keep your fingers crossed that Whole Foods considers our site, or at least a location somewhere between Fishers, Carmel, and the Geist Communities.  Here’s a couple blogs to check out: General Company blog or the blog of John Mackey, CEO of Whole Foods.

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.

Tomorrow, we continue our “road shows” for Centre Properties' River Place development.  My collegue Dean Almas and I will be meeting with national retailers based in Austin and Dallas, Texas.  From these Road Shows we hope to build the identity of River Place, provide retailers with a clear understanding of what we hope to accomplish with our development, and ultimately attract retailers to what we believe is going to be the most exciting mixed-use development in Indiana.

During our trip we’ll have the opportunity to also visit some of the most well known and successfully developed mixed-use lifestyle centers.  While in Austin we’ll visit the Domain. Simon Property Group, the developer, successfully integrated a retail lifestyle center with office, residential, entertainment, and hospitality products.

When we arrive in Dallas, we hope to take enough time to visit Legacy in north suburban Plano and Southlake Town Square, located in northwest suburban Southlake, Texas.  Both are innovative mixed-use projects that once again have combined a variety of retail, office, entertainment, and residential products to create thriving communities.

Later this week I’ll share my observations about these projects.

Over the past month, I have been doing “road shows” for Centre Properties to build awareness among national retailers of Centre’s new River Place development, which is an 86 acre mixed-use development located in north suburban Indianapolis.  During recent trips to Seattle, New York City, Milwaukee, Chicago, and Las Vegas, I’ve taken the opportunity to visit mixed-use projects, which incorporate residential and office elements into retail lifestyle centers.

I’ve taken note on how diverse these projects are in size, scope and product mix.  I was also struck by how successful some of these projects seem and how developers have found the one ingredient that may be the most influential element of creating a successful mixed-use project: the creation of “a sense of place” that holds the attention of consumers longer than the occasional trip to the mall. The sense of place comes from creating a pedestrian friendly environment that holds consumers with a more engaging experience than merely the traditional passive shopping experience found so often in enclosed malls and power centers. 

This was clear two weeks ago when on a Tuesday evening a colleague of mine and I dropped by Bayside in north suburban Milwaukee.  We arrived at the project at roughly 9:00 PM and were immediately struck by how many people remained at an hour and on a day of the week that I would have ordinarily expected to see little sign of life.  Instead, people milled around, ate in open air restaurants, and gathered in a square that was the central focal point of the development.  Clearly, the developer of Bayside found the ingredients that resulted in a broader experience for its visitors.

These experiences have been invaluable in helping to shape River Place and incorporating features, such as a gathering place and the river front park that we’re developing alongside the lifestyle center.

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.