A Tale of Six Cities – CFO.com’s Alix Stuart analyzes corporate real estate stats in six major US cities

Alix Stuart’s A Tale of Six Cities is a well-written article about considerations a CFO must make related to real estate and peripheral costs impacted by real estate, like cost of living.  In the article, Alix identifies six major cities – 2 on the East Coast, 2 on the West Coast and 2 in the Central US – pairs of which account for three major points on the tenant/landlord power spectrum.  Below is a chart that identifies the six cities, linked to their respective reviews, and where they fall in the spectrum.  NOTE: This is not to say that Chicago and Austin are necessarily “value cities”, nor that New York and San Francisco are cut-throat, but rather that these classifications are relative to each other.

Power of Tenant/Landlord City #1 City #2
Stronger Landlord New York City, NY San Francisco, CA
Moderate Las Vegas, NV Charlotte, NC
Stronger Tenant Chicago, IL Austin, TX

For any corporation occupying space in one of these markets, Alix’s analysis of each market, paired with real-world examples and statistics, provides some insight into where the market is trending and whether it will continue to remain a financial opportunity… or hazard.  One thing that I did find absent from the report, however, is whether the average rent per square foot is net or gross.  I would imagine gross, but as we all know, it’s a bad idea to assume.

As a little added bonus, the final page of the article comprises five tips for dealing with rent-hungry landlords.  I particularly admire Jeff Klausner’s wily strategy of negotiating an option to buy their single-tenant office building and then flipping the property for a $2 million profit – now that’s unlocking hidden value.

“Mandates will make hefty amounts of rent expenses disappear”

Sounds nice, doesn’t it?  Too bad it’s really a sensational headline*.  CFO.com surprised me today with an article about the proposed FASB/IASB accounting rule that would promote operating lease expenses to capital lease expenses.  From an accounting perspective, this means that they would now be included on the balance sheet.  According to a Georgia Tech study referenced in the article, this would have a net positive effect on EBITDA (earnings before interest, taxes, depreciation and amortization), because rent expenses would now appear as interest and amortization, not included in the EBITDA calculation.  Despite the impacts that this would have on perceived business performance and investor sentiment**, my big concern is with the wording of my selected quote.

Rent expenses will not actually disappear and I pity anyone naive enough to think so.  I’m shocked that CFO.com, a news source that I have come to respect and rely on for high quality, no nonsense reporting, has allowed misleading wording like this to make its way into an article.  However, I do not want to come off as a curmudgeon, so check out the full article about amending FAS 13 and let me know what you think, as it relates to the world of commercial real estate leasing.

* the quote is technically the “sub-headline”
** at least among the GAAP-challenged

Organizational Traits that Can Help a Firm Better Support Telecommuters

I started to write a comment on a recent CFO.com article about telecommuting and ended up liking the comment so much that I decided to share it here as a post.  Although it focuses primarily on the concept of telecommuting in an organization, it aligns with the corporate real estate concept of workplace integration.  By understanding how employees use (or don’t use) office space, the corporate real estate executive can better plan for efficient space use that complements the workforce’s actual space needs, potentially saving a lot on overall occupancy costs.

During my recent working years, I have had the privilege of working at two firms that provided flexible work experiences.  At the first, I traveled roughly two weeks of every month and was never expected to be in the office when I was actually in my home city.  In my current job, most of my work involves visiting clients and traveling within the city of Chicago, leaving a fair amount of time that I can choose to work in the office or at home.

From my experiences, I’ve found that there are personality traits and organizational traits that help ensure productivity when working from home (or anywhere else out of the office).  The employee must truly understand their work objectives and have a clear sense of what they need to do in order to meet these goals.  Additionally, they must have an internal drive to accomplish these very goals.  The organization, on the other hand, requires two key attributes.  First, if the IT department already supports mobile workers, the infrastructure – e.g. remote access to email and other collaboration tools – will be in place to support home-based or “dial-in” workers.  Second, the other employees need to be understanding if not embracing of this concept.  There is no worse barricade to effective virtual teaming than trying to collaborate with colleagues that resent your flexibility.

The Property Taxman Cometh

I was doing a bit of research to improve my understanding of the financials involved with tenant representation and came upon this older article on CFO.com about corporate property taxes, entitled Poor Move.  Here are the key points from the article:

  • As of the date of the article (02/01/04), property taxes were the single largest non-federal tax obligation for companies, weighing in at 38.3 percent.  Given the significant increase in $/sf prices paid for commercial buildings in the last 18 months, I suspect that this still holds true today, since property taxes are assessed based on FMV.
  • Corporations should seek reductions in property taxes at the time they are considering a relocation.
  • You’ll be paying property tax whether you own your building or rent your commercial space.
  • If you are a major tenant in a building, ensure that your lease obligates the landlord to “go to bat” to reduce property taxes should they change substantially.  If your lease doesn’t have that, bear this wisdom in mind when your lease is up for renegotiation or you relocate.

My hope is that CFO Magazine revisits this article in the 2007/2008 time frame.  My theory is that the only change will be higher rates today.

CFO.com weighs in on commercial real estate

The staff of The Economist have written an article that almost seems like a response to my post Is subprime affecting commercial real estate?.  Their analysis focuses heavily on the acquisition and disposal of commercial properties.  A couple of interesting points to take from the article:

  • 16 of 21 national property markets provided double-digit returns to investors in 2006.
  • Property transactions have slowed since spring of 2007, correlating with changes in credit availability.

The commercial property market is likely not in havoc, unlike the craziness of the residential market, but enthusiasm has definitely cooled.  Because the commercial market has generally been tempered by greater financial planning (i.e. higher minimum down payments and tenant creditworthiness), I don’t believe that there will be major foreclosures and REIT crashes.  However, like the article stated, I do agree that investors will be more sensitive to bidding wars and not display the irrational exuberance that we saw with deals like Blackstone’s acquisition of Equity Office Properties (EOP).

How will this impact tenants?  I anticipate the following:

  • Fewer buildings will be changing ownership multiple times in periods of less than one year.  This will reduce some of the chaos tenants in those buildings have experienced as they occupied space in buildings that changed management and services with each different owner.
  • Less money to put toward building acquisitions will temper the rampant price increases, reducing opportunities for governments to reassess buildings and raise property taxes.  As a result, tenants will be less likely to see exorbitant tax pass-through changes as often as they have in the last 18 months.
  • Investors may begin to get more realistic about the rents that markets can support, rather than raising rates simply to cover their ballooning acquisition costs.