He who hesitates is lost

Landlords Poised to Regain Upper Hand In Recovering Office Market

2011 Sees Office Leasing, Sales and Pricing Improve Amid Growth In Office Jobs and Rising Tenant Demand. Outlook Has Landlords Preparing To Sing: "Our Day Will Come"

Office space absorption doubled during 2011 as the office-using job base expanded and vacancies declined across nearly two-thirds of U.S. submarkets, CoStar Group reported this week in its Year-End 2011 Office Review & Outlook. The report presented to CoStar clients found that positive momentum in office fundamentals and the continued absence of new construction is expected to result in higher rents for building owners over the next few years.

Office sales increased steadily through 2011 over the previous year as investors sought to get ahead of the curve, with investor interest spreading beyond the safer well-leased investment-grade buildings in top-tier markets and into smaller properties and second-tier markets such as Seattle, Atlanta and Northern New Jersey. Total fourth-quarter 2011 office sales are likely to match or exceed fourth-quarter 2010’s impressive $25 billion once all sales are tallied.

Total CRE sales, which evened out in 2011 across all property types, is estimated at nearly $300 billion, the highest since the peak of the real estate boom in 2007, and well above the historical average of around $220 billion since 2000.

Although office tenants continue to hold the cards in many markets CoStar reports the outlook appears to increasingly favor building owners in coming years as the cycle continues.

"To sum it up, for the office market, we’re just now getting started. Now is a good time to be an office investor," said Walter Page, director of research for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting division. "We expect vacancy to continue to decline through 2015, and when you have declining vacancy rates, you can raise rents, returns are better, and for an investor, that’s good news."

Economy Shows Positive Signs For CRE

CoStar Group founder and CEO Andrew Florance noted that, although overall employment growth has been anemic, the U.S. posted a solid 1.7% gain in office-using jobs, led by technology and energy markets such as Seattle, Boston, San Francisco and Dallas.

Other positive signs abound, including a leveling off in the loss of manufacturing jobs and a bottoming of the housing market, which should be less of a drag on the economy going forward, and likely to be the source for new jobs as replacement demand for single-family and apartment housing fuels expected construction demand.

Meanwhile, corporate profits are off the charts, from $800 billion in 2000 to $2 trillion in 2011.

"Coupled with low interest rates, companies are in a position to invest aggressively in new facilities and equipment. From a CRE perspective, Corporate America is well positioned to invest in their businesses, plant facilities and equipment," Florance added.

Challenges remain, including relatively weak consumer confidence, continued high unemployment, a record federal budget deficit and economic upheaval in Europe. Occupancy recovery varies widely between metros, with "have" markets such as supply-constrained New York City showing 7.4% vacancy and housing bust "have-nots" like Phoenix lingering at a stubbornly high 20.7%.

However, CRE values have recovered to roughly 2000-year levels, and vacancies declined across the country last year. In a strong indicator of an impending office rebound, vacancy rates declined in 63% of the 2,400 office submarkets tracked by CoStar. That’s the strongest number since 2004-05, which roughly marked the beginning of the last CRE up cycle.

In the fourth quarter, CoStar recorded 18 million feet of net absorption, which drives occupancy rates and other leasing fundamentals, and a total of 49 million square feet for the year, doubling 2010’s absorption.

Despite rising concerns about the darkening economic picture that started last spring and continued through the year, absorption rose sharply in the second half of 2011, said Page, noting that companies are leasing space "and smaller tenants, the lifeblood of the office sector, are back."

Jay Spivey, CoStar senior director of research and analytics, said that the office recovery, while not feeling very strong so far for many landlords and investors, is actually much stronger than the recovery in the office market following the collapse of Internet companies and real estate downturn 10 years.

"We have seven quarters of positive growth, and at that same point 10 years ago, we were still seeing negative absorption," Spivey said.

Concessions Starting to Disappear

With improving occupancy and little new supply, concessions like free rent and tenant improvements are burning off in some markets and overall, the long downward slide in average office rents has likely bottomed.

CoStar sees significant upside in office rents, which are currently 11% below their long-term trend, Page said. With office construction at an all-time low, rents will rise and are expected to reach their long-term average between 2015 and 2017.

The analysts singled out "premier" suburban areas located near the urban core in markets such as Bethesda, MD, and West Los Angeles are seeing net absorption recover much more quickly on a rolling annual average compared with CBDs or outer suburban areas. Likewise, a survey of four- and five-star buildings in CoStar’s new Building Rating System, the equivalent of the top Class A properties, shows that the best buildings are absorbing most of the space. One- and two-star buildings, typically Class C, were hammered during the recession and are recovering more slowly.

While national vacancy and availability rates are both trending down, there are vast differences within metros and within the CBD and suburban properties in those markets. In Miami, for example, the CBD vacancy rate is about 22%, while suburban and premier suburban rates are lower. By contrast, Atlanta’s Buckhead premier office suburb, where much new construction came on line as the recession hit, has the highest vacancy at over 20%, more than 6 percentage point higher than the Atlanta CBD.

Investors Explore Secondary, Suburban Markets for Deals

The return of portfolio sales outside the largest markets in 2011 shows that investors, who largely retreated to the safety of well-leased properties in safe core markets like Washington and New York over the last couple of years, are ready to assume risk in certain transactions, with the help of a slowly returning flow of debt financing.

Distressed sales volume as a percentage of total office sale transactions fell during 2011. As distress has abated, prices have begun to rise over the last couple of quarters, spreading from investment-grade properties to smaller general commercial sales, according to the CoStar Commercial Repeat Sale Index (CCRSI).

Pricing has risen in most markets and is approaching replacement cost for some buildings, Spivey noted. Higher occupancy buildings are fetching a higher price premium currently than in 2007, possibly opening a window for investors on opportunities in select vacancy challenged properties.




Moving your office? Here is a timeline and some tips.

WHAT AND HOW LONG IS THE RELOCATION PROCESS

TIMELINE

YOU SHOULD BEGIN RELOCATION EFFORTS 4 TO 6 MONTHS BEFORE THE MOVE DATE

WEEK 1

DEFINE YOUR REQUIREMENTS FOR A NEW LOCATION. THIS INCLUDES MEETING WITH MANAGERS AND DEPARTMENT HEADS. TAKING TIME UPFRONT TO DETERMINE A CLEAR CONCISE PICTURE OF WHAT YOU ARE LOOKING FOR WILL SAVE LOTS OF TIME IN THE FUTURE

WEEK 2

BEGIN INSPECTION TOURS OF THE MOST QUALIFIED PROPERTIES

CONDUCT PRELIMINARY SPACE PLANNING IF NEEDED.

WEEKS 3-4

MAP OUT YOUR NEGOTIATION STRATEGY. PRIORITIZE WHAT MATTERS MOST TO YOU. ( RENT REBATE, TENNANT IMPROVEMENT ALLOWANCE, PRIORITY PARKING SPACES, BASE RENT CONCESSIONS, TERM, ANNUAL RENT ADJUSTMENTS, EARLY TERMINATION ALLOWANCE, GUARANTEES, SECURITY DEPOSITS ETC.)

OPEN NEGOTIATIONS WITH A LETTER OF INTENT

RESPOND TO COUNTER OFFERS

WORK WITH SPACE PLANNERS

EVALUATE VARIOUS OFFERS

WEEKS 5-6

UPON ACCEPTANCE OF THE LETTER OF INTENT. ATTORNEYS TO NEGOTIATE THE LEASE

WEEK7

LEASE SIGNING

AT THIS TIME WORKING DRAWINGS FOR TENANT IMPROVEMENTS BASED ON THE SPACE PLAN CAN BE UNDETAKEN. (UNTIL THE LEASE IS SIGNED THE LANDLORD WILL MOST LIKELY NOT BE WILLING TO COMMIT HIS CAPITAL TO A PROJECT THAT MAY OR MAY NOT HAPPEN)

WEEKS 8-24

PLANS AND PERMITS CAN TAKE FROM 2 – 6 WEEKS, DEPENDING ON THE VARIOUS APPROVALS REQUUIRED.

DEPENDING ON HOW MUCH BUILD OUT IS REQUIRED, TENANT IMPROVEMENTS COULD TAKE FROM 8 – 12 WEEKS TO CONSTRUCT.

LIST OF PLAYERS INVOLVED IN A MOVE

YOU NEED A GOOD TEAM TO ASSURE A SMOOTH RELOCATION PROCESS.

1. COMMERCIAL REAL ESTATE BROKER REPRESENTING YOUR INTERESTS

2. ATTORNEY

3.ARCHITECT/SPACE PLANNER (OFTEN FURNISHED BY LANDLORD)

4.TELECOM

5. I. T.

6. MOVING COMPANY

7. OFFICE FURNITURE

8.GENERAL CONTRACTOR (SOMETIMES FURNISHED BY LANDLORD)

9. BANK (IF PURCHASING)

10 BUILDING INSPECTOR (IN SOME INSTANCES)

Biggest Suburban Lease Signed Since 2010

Acco Brands to move in biggest suburban lease since 2010

By: Ryan Ori January 11, 2012

(Crain's) — In the largest suburban office lease in more than a year, Acco Brands Corp. is moving its headquarters to a 189,092-square-foot office building at Kemper Lakes Business Center in Long Grove.

Acco Brands says it will occupy all of the three-story, Class A building, a 10% increase from its current space. It currently occupies 170,139 square feet at 300 Tower Parkway in north suburban Lincolnshire.

The move to 4 Corporate Drive in the northwest suburb is another boost to the Lake County submarket, which is awash in office space but has experienced a recent rally of sorts.

The submarket had an area-worst 28.1% vacancy rate to end 2011, according to Chicago-based Jones Lang LaSalle Inc. But that was down from 29.7% a year earlier, with help from four leases of more than 100,000 square feet in 2011.

Acco Brands, an office and computer products supplier, plans to move into its new building in March 2013, a company spokesman says. It has about 450 employees in Lincolnshire and 4,000 worldwide.

Terms of the 10-year lease were not disclosed. It was the largest suburban lease since third-quarter 2010 and the largest relocation since first-quarter 2010.

“Big deals are getting done in the suburbs, and there are a lot still in the pipeline,” says Dan McCarthy, a Jones Lang LaSalle senior vice-president who represented pharmacy benefits manager Catalyst Rx in a 106,000-square-foot lease in Bannockburn in the fall. “The large corporations that have the ability to make a commitment right now are locking in some great deals.

“It's the small and mid-size spaces that aren't being absorbed. That's going to have to change for the market to get healthy.”

The headquarters move is not connected to Acco's pending acquisition of packing company MeadWestvaco Corp.'s office supplies business, the Acco spokesman says. Most MeadWestvaco employees in that deal are expected to continue working in Kettering, Ohio, he says.

Acco's move would provide enough extra space to take on additional employees if needed, the spokesman says. The headquarters has executives and employees in sales, marketing, purchasing, sourcing, human relations, legal and corporate communications, he says.

The new building will include engineering and product innovation labs. The Kemper Lakes complex's amenities include a 600-seat auditorium, fitness center, day care and cafeteria. The office buildings are alongside a golf course.

“We're excited about the opportunity to provide our people with a working environment that offers state-of-the-art amenities and the ability to accommodate future business growth,” Acco President Boris Elisman says in a statement. “Our employees will be involved in every stage of the design of our office space, ensuring that we create the ideal environment for collaboration and product innovation.”

The Kemper Lakes campus has four buildings with a combined 1.1 million square feet. Philadelphia-based BPG Properties Ltd. bought it for $30.6 million in 2005, when it was 20% leased, and has done about $35 million in renovation work, says Chicago-based BPG senior vice-president Joseph Neverauskas says.

Kemper Lakes is 62% occupied and will be about 80% leased when Acco moves in, and no leases will expire before then, Mr. Neverauskas says. Two tenants will be moved from the building Acco will occupy to other space in the complex, Mr. Neverauskas says.

“Over the past few years activity has been pretty slow,” Mr. Neverauskas says. “The Chicago suburbs have been stagnant during this recession we've just had.

“I think the market is improving, but until the economy picks up and employment starts to grow, it's still a bumpy road. The key is to have quality product with great amenities.”

Acco was represented by Lou Hall, an executive director in the Chicago office of Cushman & Wakefield Inc., which also manages the office campus.

BPG was represented by Principal Steve Kling and Senior Vice-president David Florent of Colliers International.

Acco makes a range of office supplies such as planners, laminating equipment, shredders, power adapters, staplers, binders, dry-erase boards and audio-visual equipment. The company markets products in more than 100 countries under names including Swingline, Day-Timer, Kensington, Wilson Jones, Rexel, NOBO and Quartet.

Thank you

It is hard to believe that another year has come and gone. Both Jim and I here at Chicago Commercial Realty Brokerage, THE CCRB, want to thank you for all your support. Whether that support came in the form of a transaction we did together, a referral you gave us or just a friendly conversation, we thank you. Everyone here at THE CCRB wishes you health, happiness and prosperity for the New Year.

Happy New Year.