Archives for October 2022

Vacancy rates at record levels in the US confirm that office tenants have preferred remote and hybrid working arrangements since the beginning of the pandemic. Recent data from the Census Bureau shows that the number of people working from home tripled in 2021 compared to 2019, as companies massively adopted remote working. Working from home has several advantages, including a shorter or no commute, a more flexible work schedule, more time to spend with family and a more comfortable work environment.

Since early 2022, more and more corporations have shifted to hybrid work schedules adapting to employee demands for remote work. As such, they are forced to rethink their office space needs by offering employees a traditional workspace to encourage and enhance their productivity. Coworking and flex spaces are a great alternative to the traditional office space setup for occupiers looking for flexibility and cost savings, as shown by a recent Yardi Kube survey.

The survey was conducted among 1,118 prospective office space tenants in June 2022 and addressed the occupiers’ needs in terms of office space footprint, the advantages of flex spaces and the adoption of hybrid work.

39% of Prospective Tenants Are Now Using or Considering Coworking

According to a Yardi Matrix Coworking Report, the overall supply of coworking spaces was less than 2% in 2019, but it is rapidly increasing as new business models develop. With the pandemic reaching an end, many companies have had to change their workplace strategies to meet the flexible work needs of employees who do not want to give up remote work and completely return to the office. The best solution was hybrid work, which allowed employees to manage their hours and choose when to work from home and when to work from the office. According to 39% of survey respondents, they already have a coworking subscription or are considering flexible office options in the future. Flex office spaces, coworking included, offer many benefits, such as flexibility for occupants, cost savings and space optimization. In addition, they give employees the power to choose how much time they want to spend in the office and when.

Saving Money and Flexibility Drive Coworking Interest

When it comes to the main reason why occupiers are interested in coworking options, 24% of the responses indicated cost savings. The second most popular reason was flexibility to increase or decrease office footprint as needed, with 17% of all responses. Short-term availability was the next factor mentioned by 10% of survey respondents. As stated in a CBRE survey, the office industry is significantly shifting towards flexible offices and responding to the demands of hybrid work. Along the same lines, Brian Sutherland, vice president of sales at Yardi, mentioned in a recent GWA webinar: “Turnkey offices, with everything corporate occupiers need for a properly functioning space, have long been the traditional solution and while this is still the preferred option, flexibility is key. Coworking provides the best of both worlds.”

Other factors of interest for coworking spaces mentioned in the survey include the ability to facilitate a hybrid work model (8%) and access to a larger talent pool because there are no recruiting limitations based on location (7%).

Offices Are Still Essential: Most Occupiers Believe Their Footprint Will Likely Increase or Stay the Same in the Near Future

Many offices remained empty in 2020 as remote working replaced office work. Nowadays, employees have embraced hybrid work more broadly. When asked which way their workspace requirements will change, 56% of respondents said their office footprint would not change, 35% said they want to increase the space where their employees will work and 9% said they plan to lower their footprint and make their offices smaller. Existing lease terms, occupancy rates and new lease proposals are all factors impacting this decision.

The Yardi Kube survey reveals that employees value their time in the office more when they are given autonomy over their workload outside the office. It also shows that companies are promoting an office culture that embraces the priorities of all employees, regardless of their place of work.

66% of Respondents Said They Embrace Hybrid Work

According to the Yardi Kube survey, companies are split between returning to full-time in-office work and fully remote: 34% and 35%, respectively. But most companies are evolving their schedules towards hybrid work, and this differs according to the needs and priorities of each company. Working dynamics vary from one employer to the next. Some 12% like to bring their employees to the office for 1-2 days, while 19% prefer to bring their employees for 3-4 days. For more information and data from the Yardi Kube survey, check out the full article here.

Source: “OFFICE DISRUPTION: OVER A THIRD OF OCCUPIERS CONSIDER COWORKING FOR IN-OFFICE WORK“

John Basile, Executive Vice President, Industrial Services, NAI Hiffman, tells GlobeSt.com that rising escalations are indicative of a market that was (is) extremely tight, with landlords able to push rates, in part, because of Amazon underwriting (outbidding) the whole market in recent years.

He said he also is seeing 3% property management fees on these higher prices, adding to the cost.

“The disconnect between tenants and landlords is ongoing,” Basile said. “I’m having this discussion right now with clients. They hesitate to lock in a 10- or 15-year lease at 4%, saying we may be going into a recession, and Amazon’s pullback should change pricing.

“I tell them, these are the market conditions right now, and you’re not the only ones facing these terms. Most properties have competitive bidding – landlords can pick and choose.”

He said it’s still a landlord’s market, and when a tenant loses out on a space, he can usually show them that the competitor had the higher rate, had the higher escalator, and had the simpler delivery conditions.

“Although some tenants will walk away, others may reluctantly accept the terms before them because the alternative would be more costly ­– for example, the inability to expand their operations,” Basile said.

“Nevertheless, we are seeing small signs of change. Up until about three to four months ago, landlords were pushing for shorter terms because rents were rising so quickly. On a 10-year lease, they were already below market by year 4 by as much as 20% to 30%. Now, they may take the 10-year term but hold out for a higher escalator.

“A good broker adds value in this climate by knowing if terms the landlord is seeking are in line current market conditions and other landlords. Brokers can also help tenants assess the risk of not taking the deal and, if they decide to move forward, structure the lease in a way that maximizes value and flexibility for the tenant.

“It’s important to note that not all markets are getting the same escalators; even submarkets may vary. Good brokers know the norm for those and where the landlord may be able to make concessions.”

Additional Factors for Increases

Larry Much, executive vice president and founding principal of NAI Hiffman, said there are additional factors that might not be measured when determining the annual increases.

1. Term of lease: While there are long-term transactions showing annual increases of greater than 3% annually, part of that depends on the original lease rate and potentially rent abatement
2. TI: The amount of tenant improvements funding could impact the annual increases
3. Landlord motivations: Some landlords are long-term hold and will look at the yield over the term more than the annual increases

“In addition to the annual rent increases, there are other increased costs associated with occupancy,” Much said. “For example, in Cook County, the real estate tax rate varies within the county, and the multiplier varies by municipality.”

Source: “Amazon Underwriting ‘Outbidding the Whole Market’ for Industrial“

Buoyed by increased demand from third party logistics providers, the big box corner of the industrial market is poised for growth despite lingering economic uncertainty. While e-commerce growth has waned somewhat as of late, TPL and manufacturing activity has surged, offsetting that dip.

A new report from Colliers found that new development for bulk facilities reached 88.5 million square feet at midyear, and the firm’s analysts say that number will likely increase at the end of this year. As of midyear 2022, total product under construction totaled 308.4 million square feet at midyear, a 30% increase year-over-year.

“Core markets including the Inland Empire, Dallas-Fort Worth, Atlanta, Chicago, Northern-Central New Jersey, Southern New Jersey-Eastern Pennsylvania and Toronto continue to be the destinations of choice for many occupiers,” said Stephanie Rodriguez, national director of industrial services at Colliers. “We’re also seeing emerging markets near fast-growing population centers and highly-utlized logistics hubs in continue to grow.”

And third-party logistics increased its market share of bulk transactions in the U.S. to 31.4% at midyear, up from 29.9% one year ago, according to Colliers. In addition, “a resurgence in U.S. manufacturing is also benefitting the industrial sector,” analysts note. “This shift in occupancy resulted in more than 231.8 million square feet of occupancy gains at midyear, and nearly 92.5 million square feet of occupancy gains were recorded in the big-box market. This positive momentum in third-party logistics related to occupancy gains, is largely aided by more occupiers opting to outsource fulfillment and distribution.”

Chicago and Southern New Jersey-Eastern Pennsylvania both posted occupancy gains in excess of 10 million square feet  at 11.8 million square feet and11.6 million square feet, respectively. On the flip side, the I-4 Corridor in Florida posted the least, at just 414,000 square feet, followed by Toronto

Capitalization rates remained steady over last year’s number at 5.5%, despite sales volume hitting $76.5 billion at midyear, up from $55.4 billion a year ago.

“The industrial sector firmly remains in the number two slot behind multifamily for total share of total deal activity,” said Amanda Ortiz, national director of industrial research at Colliers. “All but five of the top 25 industrial markets achieved new records for deal volume in the first half of the year, with the top five each transacting more than $2.5 billion in investments.”

Source: “Big Box Market Booms Despite Economic Headwinds“

Ask Google, “How long does it take to get a business loan?” Same-day approval! Get fast funding! Approval in hours!, etc. are just a few of the marketing slogans that pop to the top of the web search page. The truth is those slogans usually are far-fetched. Realistically, the commercial loan process can take a minimum of 45 to 60 days, which means if your business plan requires a loan before the end of the year, it’s time to start the process now.

RIAs often have great plans for growth when they start a new year. However, as the leadership team gets busy those plans get put aside. It happens to all of us. With the fourth quarter looming, it’s time to put those plans back into focus. If those goals involve a cash infusion, it’s time to move the lending process forward. Why? Getting funding involves six steps that take time:

1. Introspective assessment. Before contacting a lending institution, educate yourself about options for a loan, ask for referrals to lenders based on need and, most importantly, be sure to have your financials in order. Once you locate the right lender, you’ll be asked to provide financial statements dating back two to three years, company tax returns from the last two years, pro forma financial statements and personal financials. The process moves faster if everything is in order.

2. Shop lenders. Find the right lender by meeting with a few professionals to hear how they work. Ask about their lending steps, the types of loans they process and how they provide ongoing support through the loan term. Be prepared to answer several questions. Lenders need to understand how you’ll use the loan to analyze the potential capacity for repayment. They also want to understand your character and business integrity to paint an accurate picture for a sound partnership.

3. Understand collateral. This is important to ensure you shop for the right type of lending partner. Lenders make key decisions about the loan by assessing collateral during the process. Traditional business lenders assess property and assets, such as equipment or inventory. RIAs typically have desks, chairs, computers and intangible assets that often don’t add up to secure a business loan. An RIA firm is best served by locating a specialty lender when shopping for a partner. Specialty lenders understand RIA firms have cash flow based on the book of business related to future revenue that can be assessed as collateral. RIA lenders understand the nature of income streams, and their underwriters have full understanding of the risks. This means you can reduce the time it takes to get a loan because you don’t have to explain your business model.

4. Term sheet. Once you’ve found the right lending partner, you’ll be provided a term sheet, which is another name for a proposal. It will provide an overview of key financial and other terms of a transaction. It sets out the terms by which a lender is willing to lend to a borrower and is used as a basis for drafting a loan agreement. It outlines the type and amount of loan(s) needed for working capital, an acquisition or an earnout.

5. Five c’s of credit. Underwriters will review your financials to make key decisions related to a loan and its collateral. They’re looking at the capacity of the debit loan your business can sustain, reviewing capital ratios to ensure your business does not become overleveraged and reviewing market conditions related to the loan and factors that could impact repayment. During the process, the lending team also is getting to know you, your leadership team and business model to understand your character.
6. Business valuation. During the process, lenders may need a business valuation, which they would rely on to determine if a sale would provide sufficient funds to repay the loan in case of default. For larger loan transactions, a third-party business (enterprise) valuation of the agency may be requested.

Here’s the good news. Most loans won’t materially alter what you owe in taxes. Receiving a lump sum in your bank account from a lender isn’t the same as earning money for your business, so that principal amount won’t be taxed. The primary way that your tax responsibilities will change is related to the interest payments you make on your loan. Depending on the type of loan, as well as the legal structure of your business, you generally can deduct your interest payments and lower your tax burden.

Don’t be fooled by the advertising copy promising instantaneous results. Each step in this process takes time while the clock inexorably ticks toward the new year. Starting as soon as possible and being prepared with financial documentation in place are keys to getting in under the year-end wire.

Source: “Time Is Fleeting: Lending Approval Explained“