The Strategic Thinking Advisory Committee of the National Association of REALTORS® (NAR) was tasked with the responsibility to produce a report detailing the risks and opportunities in the commercial real estate industry. NAR retained the services of one of the leading research and information companies in the real estate industry, T3 Sixty, Inc. Their findings are published in this study.
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By: National Association of REALTORS® (Strategic Thinking Advisory Committee)
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Archives for May 2017
Landlords Enter the Flexible Office Marketplace
Coworking companies are capturing demand from tenants looking for short-term and flexible space, and office building owners want in on the business.
An increasing number of office landlords are offering flexible options to tenants who desire temporary space or a lease commitment of less than three years. A new report from LiquidSpace, an online transactional platform for linking office tenants with flexible opportunities, noted that more than 30 percent of public listings on LiquidSpace come from businesses sharing excess space, but building owners have jumped into the mix and now account for 7 percent of listings—double the amount a year ago.
“The opportunity to provide flexible space has gotten large enough [that] it’s now on landlords’ radar screen,” says Mark Gilbreath, founder/CEO of LiquidSpace. According to Gilbreath, companies using LiquidSpace include large, creditworthy tenants seeking flexible, creative space for teams of 15 to more than 100 members who are working on special projects or entering new markets and are unsure of future space needs.
WeWork, Regus, Industrious and other coworking companies are capturing demand from this market, and office building owners want in on the business, he notes. “WeWork, for instance, recently opened a 90,000-sq.-ft. WeWork in downtown San Diego—the largest WeWork in Southern California.”
Jon Slavet, WeWork general manager on the West Coast, notes that this location already has a team of 40 and is expecting to add regional headquarters of large, branded companies. The San Diego facility occupies three full floors with space that can be reconfigured to accommodate up to 500 employees for companies that make a two- or three-year commitment.
Colliers International’s Ryan Hoopes, senior associate for flexible workspace advisory services, says his group is seeing a lot of interest in flexible office space from local, regional and institutional landlords and is advising clients to include flexible space in their portfolios. While the number of office landlords entering the flexible market is rising rapidly, Hoopes believes it is just the tip of what’s to come.
He notes that landlords are creating flexible space independently using mechanisms such as LiquidSpace’s altSpace initiative, a pre-built, modular office strategy. Landlords are also partnering with third-party co-working operators to establish flexible space in their buildings, agreeing to share risk along with revenue.
“Big owners want to provide flexible space to incubate early-stage tenants as they grow,” Hoopes says. For example, Dallas-based value-add investor Quadrant Investment Properties is creating an altSpace at The Centrum building in Dallas, a 400,000-sq.-ft., $25 million redevelopment Quadrant will complete in mid-2017, for an online marketing platform. This is Quadrant Investment’s first venture into the flexible space segment of the market.
The tenant wanted to consolidate 65 employees under one roof, but only wanted to commit to a three- or four-year deal because the office is growing and it will eventually need additional space, notes Chad Cook, Quadrant Investment Property founder.
The altSpace team of workplace designers and furniture providers is configuring a flexible office environment in a raw, 19,000-sq.-ft. space in The Centrum, he adds. Cook notes that the modular design allows users to configure a variety of common spaces within the work area, creating the potential for a denser arrangement as the company grows.
Shorter business cycles, an increase in contract assignments and temporary staffing and workforces distributed through multiple geographic locations serve as underlying drivers of demand for flexible office space. Companies are trying to position regional teams close to customers or key partners or entering new markets to tap talent.
According to the LiquidSpace report, technology companies lead the categories of tenants currently seeking flexible space at 41 percent, followed by consulting firms (24 percent); financial services (10 percent); media (7 percent), real estate (6 percent) and marketing, non-profit and accounting firms (4 percent).
The report notes that ubiquity of high-speed WiFi, mobile devices, video conferencing, cloud computing and collaborative software has provided employees the freedom to work from various locations, reducing the number of people working at the same time in the same office.
In today’s environment, office users can find themselves using only 40 percent of their desks, so companies are realizing they may not need all of the space they are leasing, according to Andy Liverman, LiquidSpace director of product marketing. He adds that some landlords are leveraging space occupants shed to establish flexible space.
Hoopes is currently seeking flexible workspaces for a multimarket corporate tenant in Santa Monica, Calif. and the Boston area. The workspaces are meant to help the tenant attract and retain programmers, one of the most sought-after professionals today. “My client wants to give his programmers as much flexibility in where and how they work as possible, but doesn’t want to pay for more space than is needed,” Hoopes says.
Space in co-working facilities is “move-in-ready” and includes WiFi; a full-range of amenities; and the flexibility to rent space by the hour, day, month or year. That convenience, however, comes at a 181 percent premium. Shared offices cost about $139 per sq. ft., compared to the average rent of $49.59 per sq. ft. for traditional class-A office space, according to a JLL Shared Workspaces report. As more landlords enter the flexible marketplace, the report noted that they will present competition for co-working operators, and rents are likely to become more competitive.
Office building owners are also offering space with flexible terms to fill temporary gaps in long-term tenancy. Even in core urban markets with tight vacancy rates, office users renewing leases are shedding excess space and right-sizing offices to align with current workplace trends. Hoopes notes that providing temporary or flex space is a way for landlords to use excess space to recover dollars they’re missing.
The Swig Company, a San Francisco-based building owner, partnered with LiquidSpace to create two altSpace prototypes. Deborah Boyer, executive vice president with the company, says this pre-built, modular office space strategy offers several configuration options depending on the size and preferences of a company’s workforce.
What makes flexible office providers successful is the ability to offer quick delivery of move-in ready, functional workspace, she says, noting that altSpace is a cost-effective, plug-and-play solution. It can be move-in ready immediately because unlike custom-designed build-outs it does not require permits, inspections or other governmental processes that delay occupancy.
The Liquidspace report also notes that U.S. office stock is aging, with more than 70 percent of total office space located in buildings built before 1980. As owners look for ways to revitalize and reposition older buildings, Liverman says they are finding flexible office conversions can attract desirable tenants.
By: Patricia Kirk (National Real Estate Investor)
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3 Key Commercial Legislative Issues for 2017
This Commercial Connections exclusive explores the importance of energy efficiency legislation and increases in credit union activity on commercial real estate. Read it now.
Energy Efficiency Legislation
Since 2005, Section 179D, the Energy Efficient Commercial Buildings Deduction, has rewarded commercial building owners for improving their buildings’ energy efficiency. Commercial building owners who meet the efficiency requirements (via the building envelope, HVAC system, hot water, or the interior lighting system) will receive a deduction of as much as $1.80 per square foot in the year the upgrade goes into service, and it is available for both new construction and retrofits. 179D does this while giving the building owners flexibility of choice in how they accomplish that goal. In addition to reducing energy consumption and money, these improvements can also increase a property’s attractiveness to new tenants and help it retain value as it ages. Congress has passed short-term extensions for 179D several times, but allowed it to expire at the end of 2016. NAR supports 179D and participates in an industry coalition devoted to reauthorizing it and will continue to advocate for a long-term extension, preferably retroactively avoiding any gaps in its coverage, in the 115th Congress.
Bottom Line: Failure to reauthorize 179D will result in the loss of a valuable tax deduction for property managers faced with the need to make the expensive construction and renovations tenants expect.
National Flood Insurance Program Reform and Reauthorization
Flooding is the most expensive and common natural disaster in the U.S., and without the federally run National Flood Insurance Program (NFIP), business owners in more than 20,000 communities nationwide could have difficulty obtaining a mortgage or insurance to protect their properties. The NFIP’s current authorization will expire on September 30, 2017. NAR has ardently supported a long-term reauthorization and strengthening of the NFIP, improving the accuracy of flood maps, and encouraging the development of private market options to keep costs competitive. As it stands now, the NFIP is nearly $30billion in debt to the Treasury, the result of catastrophic losses beginning with Hurricane Katrina in 2005, which the program had to borrow from taxpayers to cover. NAR recognizes the need for reforms to the program to put it on the path to self-sufficiency, and the need to avoid gaps in its authorization, which would negatively affect property values and sales in flood plains. NAR is working closely with Congress, FEMA, and other commercial real estate industry groups to craft a reauthorization bill that addresses these issues, improves the NFIP, and protects property-owners from gaps in coverage.
Bottom Line: Loss of government assistance represents a direct threat to commercial real estate values and a potentially devastating financial quagmire for property managers and investors.
Increases in Credit Union Activity
According to the NAR’s 2016 Commercial Lending Survey, funding from credit unions accounts for only 6% of deals that members closed. However, two rules passed in 2016 by the National Credit Union Administration (NCUA) were designed to increase the amount of business that credit unions are permitted to do. First, the Member Business Loan (MBL) rule expanded how credit unions evaluate loan applications made by members. The rule grants more autonomy and flexibility to credit union boards during the loan evaluation process. The second rule change expanded the field of membership requirements for customers joining credit unions, making the potential customer base for credit unions less restrictive.
Bottom Line: These two rules increase both the number of credit union members and the amount of lending from credit unions to their members, resulting in more lending options for REALTORS® and their clients.
By: Erin Stackley, Stephanie A. Spear (National Association of REALTORS®)
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Spring 2017: Investment Springs Eternal
Using Your Time, Money, & Energy for Growth. Read about commercial advocacy on Capitol Hill, inside MIPIM 2017, Q&A with NAR’S deputy chief lobbyist, Smart Growth grants, plus explore new research, IREM®’s Sustainability certification, and more.
Spring is upon us, and the bloom of the cherry blossoms in Washington, D.C. means the arrival of my favorite meeting of the year: the REALTORS® Legislative Meetings and Trade Expo.
Members around the country have heard me say this many times, but it cannot be repeated enough. 2017 is not only for the political and policy arenas, but for our own industry. Advocacy efforts put forth during the Legislative Meetings in May will ensure future success for our members. Successful advocacy initiatives depend on visibility. The Capitol Hill visits during our time in D.C. ensure REALTORS® are included in vital conversations regarding commercial real estate issues important to both your businesses and our nation’s economy.
Over the course of seven days, close to 10,000 REALTORS® descend upon our nation’s Capital and make sure not only their voices, but also the voices of our entire association, are heard loud and clear. REALTORS® who practice commercial real estate help revitalize communities by facilitating investments and promoting the sale and lease of commercial properties, enhancing neighborhoods and creating millions of jobs across the country. Our presence is a reminder that commercial practitioners help create the business and services that power great communities.
When legislators and regulators sit down for a visit with our members they become keenly aware of the key role commercial real estate plays in the health of our nation and are more likely to fight to ensure government policies that safeguard a national interest in a healthy commercial sector. This year there are several issues we want to shine the light on during our conversations with key stakeholders.
We must ensure the tax code continues to reflect the values that make our communities strong and our country exceptional. As an association, we are committed to fighting on behalf of important tax incentives like the mortgage interest deduction and 1031 like-kind exchanges. REALTORS® will continue to but rather a deferral encouraging further investment into our communities and our economy.
Our association also supports legislation and regulations designed to protect and enhance the flow of capital to commercial real estate. We can look to financing as one key element. We need regulators to realize how smaller lenders and banks are often the ones who suffer most at the hands of new regulations. When lending options are scarce our communities are stymied and growth slows to a trickle. We are going to need your help in order to weather some of the changes that lie ahead. We must come together, combine our voices, and be heard. One thing is certain, the work of motivated REALTORS® can change our country and our communities.
The advocacy we do in Washington this May is just one piece
of the puzzle – there is a revolution occurring within all aspects of our industry altering the course of our business. Let’s look towards the future and act in the moment. I encourage all of you to remain engaged and energized, and I want to thank you for all that you do to support the REALTOR® family.
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By: National Associations of REALTORS®
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