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Author Archives: Rhea Campbell - Bella Terra Partners LLC 2011
Our business has been steadily growing over the past three years. Because of this we’ve found ourselves needing to hire additional staff members, develop new vendor relationships for graphic design work, accounting, corporate structure evaluation and human resource advice and coaching. In our search for new vendors, we’ve found both large and small service providers and have found the differences between them startling.
The value we’ve found we can expect for our dollars spent, the level of service provided, and the ability to customize solutions and think clearly and creatively didn’t correlate with vendor size. In fact, our experience has been that bigger is not at all better, but often worse.
When a company aggressively pursues expansion, more often than not the quality of their product or service will suffer if they are focused on the bottom line only. Take Toyota, for instance. While the car maker is known for their quality vehicles, there have been numerous problems that have developed in their vehicles in the last few years. CEO Akio Toyoda himself admitted,
“Toyota’s priority has traditionally been the following: first, safety; second, quality; and third, volume. … These became confused.”
They had allowed their pursuit of volume and revenue to supersede their commitment to quality.
“The decision to grow is often accompanied by a series of decisions to accept slightly lower levels of quality, whether it is for facilities modifications to suit different real estate requirements or ingredient changes to sign on a new distributor,”
says brand expert, Denise Lee Yohn in her recent article.
In commercial real estate, many of the so-called large national firms are also allowing revenue and expansion goals to supersede their commitment to quality. This is particularly true of the large, corporate owned firms that have multiple lines of business spread over multiple service sectors. In the midst of an unpredictable market, these firms have high fixed costs, cumbersome reporting structures, rogue employees without much supervision, and a myopic focus on the bottom line that sacrifices the client experience and therefore the service outcome. In order to succeed at a national level, these organizations have multiple lease obligations, high labor costs, layers of shared services, marketing expenses at the local, regional and national levels, and excessively high IT costs. As a result, their constant need for investment capital requires them to be focused on short-term financial objectives instead of producing long-term value for their clients.
A smaller, more entrepreneurial-minded firm, on the other hand, can foster innovation, creativity, and offer a better quality of service to its clients. Because it has lower fixed costs, it can turn a profit more readily even in mixed economic conditions and with a smaller client base. As a result, these kinds of firms can be more flexible, switch gears quickly in a changing environment, and make their primary focus the delivery of results for their clients.
While large commercial real estate business models may look dominant at first glance, many of them are cannibalizing themselves. When all the dust settles, it will be the well-run franchisors and networks with the consistent ability to generate profits and scale regardless of the economy that will prove to have the better business model.
Research by George Wu a professor of behavioral science at the University of Chicago Graduate School of Business, indicates even skilled negotiators may have underestimated the amount that it was possible to gain in a negotiation.
“When two people are negotiating over an issue such as price or salary, the amounts that each person is willing to give or take (i.e., their bottom lines) determine the range of possible settlements, commonly called the “bargaining zone” or “pie.” Put differently, the pie is the total value available for negotiators to split, and is defined by the size of the bargaining zone—the difference between the maximum amount that one person (e.g., a buyer) is willing to give and the minimum amount the other person is willing to take (e.g., a seller). There will only be an acceptable deal if one person is willing to pay as much as the other person needs. However, most savvy negotiators will not tell their counterpart how much they would really be willing to pay or accept. While each person might have ways of developing informed guesses about the other’s situation, perfectly accurate guesses are hard to come by, and mistakes are inevitable.”
Be sure you get your fair share.
In the last few years we’ve helped our clients renew their office leases more often than we’ve helped them acquire new office leases. Why, you ask? Some of our clients have thought it too risky to move to another location and commit to a longer lease, complete a full interior build out, and interrupt their business operations; others have simply opted for the path of least resistance at a time of great uncertainty about the future. Some have found themselves with reduced credit capacity, which has made acquiring new office space and posting a Letter of Credit difficult or impossible. Others have simply not had the mental capacity or human capital to think long term about their business, brand, and talent needs.
BUT, IT’S EASY.
The landlord has made these types of transactions relatively easy and attractive to these tenants by crafting, in partnership with the tenant’s professional, “blend and extend” solutions. “Blend and extend,” as it’s known in the office leasing market, is the name given to the process by which a landlord renews a tenant with unexpired term on their lease by blending the unexpired term with the new term. The tenant is happy because they don’t have to go through the process of a new office search, a lease negotiation, and a move. The landlord is happy because there is no downtime, no marketing effort, and no exposure or risk if the landlord is trying to refinance their building or market it for sale. It’s easy and both tenants and landlords like easy.
THERE IS MORE TO IT.
Regardless of what a tenant thinks is the best scenario–stay put or move–both options, renewing or relocating, must be evaluated side-by-side in a transparent way. The ability for a tenant to rethink their office layout and workflow or working adjacencies often allows efficiencies to be gained that can trump the initial economic offering or improve the landlord’s economic offer through a reduced footprint. Not to mention the not-so-obvious benefits that can be associated with moving, such as rebranding, creating a more convenient location for a specific sector or talent a business is trying to acquire, and energizing the team. Repeatedly, we’ve seen final deal structures of one building, deemed too expensive at the outset of the search, come out the winning option at the end of the process because of the tenant’s ability to take less space in one building than they would take in their existing space. With a renewed sense of hope in the economy, many of our clients are not only looking for good economic value in their leasehold, but also are beginning to look at how their office space will support their future growth, energize their brand, reposition them in the market place and/or allow them to capture market share or talent from competitors in a weakened condition. In other words, tenants are beginning to come out from under the “recession rock” and plan for future growth and market position of their organization.
I CAN’T BE BOTHERED.
Some may argue that moving is a hassle. It takes some extra time and effort, and your current landlord may be willing to give you, what looks like on the surface, an appealing deal if you stay in place with them. However, with the right professional helping you sort through the myriad options available and assisting you to identify, interview, and select vendors to complete most of the heavy lifting, the process–whether you opt for a move or stay in place end game–should be easy and seamless. Moving offices may not be the best option for every company but certainly needs to be one of the options considered by your real estate professional regardless of whether your initial reaction is simply to stay in place.
MY BEST ADVICE?
Use your real estate professional to prepare and evaluate all scenarios in a transparent and easy-to-digest method. Consider not only the high-level economics of each scenario but also space adjacencies, technology, and furniture costs, access to new talent, the ability to retain current talent, your brand and image, and how each scenario contributes to energizing your operations and assisting you to reach your quantitative, qualitative and operational goals. Figuring out which scenario is best for your company in the coming years does not mean finding which is the easiest path to take. In the long run, operational productivity will earn you more profit than saving a few dollars on your lease or providing you an easier up-front process.
At a glance…
- Chicago office vacancy remains above ‘equilibrium’ by four points (14.4%), yet virtually unchanged from the previous quarter.
- Rental rates continue to soften, slipping to $28.30 per rentable square foot (rsf), a decrease from last quarter’s $29.25.
- Landlords continue to be aggressive in negotiating to retain existing tenants.
- The bulk of market activity involves flight to quality in the leasing market with tenants taking advantage of historically low pricing.
- Office space absorption figures suggest a slight increase in overall demand and leasing activity. Absorption is positive 80,622 rsf for the quarter, compared to the previous quarter of negative 27,582 rsf.
- Sublease vacancy decreased to 2,511,330 available rsf from 2,658,482 available rsf
- Many companies have excess, underutilized space. The bulk of this ‘shadow space’ must be absorbed before a healthy market returns
Issues impacting Chicago office space, and many other markets, include: high unemployment, housing foreclosures and weak pricing, stagnant economic growth and diminished financial reserves of the small business.
We expect the recovery to move slowly for commercial office space in Chicago.
Major transactions this quarter:
- Groupon at 303 E Wacker (150,000 rsf short term sublease expansion)
- PNC Bank at 1N Franklin (116,000 rsf renewal/expansion)
- University Health Consortium at 155 N Wacker Drive (Relocation to 56,290 rsf)
- Crain’s Communications at 150 N Michigan Avenue (Relocation to 54,425 rsf)
New construction may be coming:
A new, 1 million rsf office tower may be coming to the downtown market in 2014. In November 2010, Trammell Crow and Insite Real Estate announced their plans to construct the tower at 301 S Wacker Drive. Alter Group and White Parks Realty are also eyeing 625 W Adams as a site for a 490,000 rsf office tower. Finally, Fifield and CBRE are alleged to be planning a 350,000 to 425,000 rsf office tower at 601 W Monroe.
Where is the opportunity?
There is a lack of A+ prime -view, high-rise space. What little there is will not be discounted as much as tenants would like to see. However, great opportunities continue to exist in the B and B+ building segment. Landlords under pressure are looking to minimize the negative market forces by packaging creative deal structures.
It’s a great time to be a tenant in the market. Don’t be one without excellent representation.
In their article, Workshifting Benefits: The Bottom Line, The Telework Research Network gave compelling statistics about the benefits of employee telecommuting. Telecommuting is a relatively new trend in business that allows employees to work from home, part to full-time. With the current resources available through technology, it is likely feasible for 40% of the workforce and has benefits for the employer, employee and the community. For the employer, more telecommuting employees means reduced real estate costs, turnover and higher productivity. Telecommuting employees themselves will reap benefits such as saving money on gas, work related expenses and gaining back the time they used to spend commuting. And, the overall community can benefit by the reduction of the overall use of oil, greenhouse gases, car accidents and highway maintenance.
Telecommuting or Alternative Workplace Strategy should be a consideration when conducting a facility needs analysis. Often times companies can achieve significant real estate cost savings by carefully evaluating whether adopting this strategy is something that works for their culture or workflows.
Chicago, IL – April 27, 2011 – Clifton Gunderson has signed a short term sublease for 3,397 rentable square feet at 311 South Wacker Drive on the 9th floor to accommodate their newly formed litigation practice
“Formerly office space for Sellers Capital, the space has highly upgraded millwork and beautifully built out offices that provided Clifton Gunderson with a turnkey office solution allowing this business line within the organization to get up and running quickly,” says Rhea Campbell of Bella Terra Partners, who represented them. Clifton Gunderson announced in a separate message that “moving to this location further demonstrates Clifton Gunderson’s commitment to the ever-growing needs of the Chicago community.”
Clifton Gunderson is ranked as one of the nation’s largest certified public accounting and consulting firms. The firm provides a wide range of assurance, tax and consulting services to clients in a variety of industries. Founded in 1960, Clifton Gunderson has a staff of more than 1,900 professionals serving clients from 46 offices across the country.
In the week ending April 9, the advance figure for seasonally adjusted initial claims was 412,000, an increase of 27,000 from the previous week’s revised figure of 385,000. The 4-week moving average was 395,750, an increase of 5,500 from the previous week’s revised average of 390,250.
The advance seasonally adjusted insured unemployment rate was 2.9 percent for the week ending April 2, a decrease of 0.1 percentage point from the prior week’s unrevised rate of 3.0 percent. The advance number for seasonally adjusted insured unemployment during the week ending April 2 was 3,680,000, a decrease of 58,000 from the preceding week’s revised level of 3,738,000. The 4-week moving average was 3,728,750, a decrease of 20,750 from the preceding week’s revised average of 3,749,500. The advance number of actual initial claims under state programs, unadjusted, totaled 443,503 in the week ending April 9, an increase of 89,686 from the previous week. There were 514,136 initial claims in the comparable week in 2010.
Jobs drive office space absorption….
“The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $389.3 billion, an increase of 0.4 percent (±0.5%)* from the previous month, and 7.1 percent (±0.7%) above March 2010. Total sales for the January through March 2011 period were up 8.1 percent (±0.5%) from the same period a year ago. The January to February 2011 percent change was revised from +1.0 percent (±0.5%) to +1.1 percent (±0.2%).”
“Gasoline stations sales were up 16.7 percent (±1.7%) from March 2010.”
This confirms that the economy in Q1 slowed down materially toward the end, and was certainly not as had been predicted early in 2011.