Hold or Sell?

In the commercial real estate world, timing is everything.

At this late stage in the cycle, property owners are weighing whether they should hold on to their assets—or sell them.

The time to sell may come after a predetermined hold period, maturing debt, or a dramatic change in occupancy, but the answer is greatly influenced by the perception of the market in which the property is located.

For years, Dallas has been viewed and used as a trading market. A market in which, upon occupancy stabilization, it’s best to sell.

The practice is rooted in the region’s past-history of severe corrections, primarily caused by a tendency to deliver too many new buildings ahead of natural demand.

This view translated into shorter hold periods compared to other major markets across the world. That paradigm is now changing, as tenancy needs evolve.

In the city’s early development stages, developers could build a new building a mile away, and tenants would move with little or no impact to employee commute times, image, or concerns about labor turnover.

As Dallas has matured, we have seen both the emergence of new neighborhoods and business centers as well as character definition and differentiation among office submarkets.

Dallas’s office submarkets are no longer homogeneous or as easily interchangeable.

By John Alvarado, senior vice president, Capital Markets, CBRE.

This article first appeared in D Magazine

Market Momentum

The two most precious commodities in commercial real estate are large assets with high yield (coveted by investors) and deep pools of talent centered around colleges and universities (highly desired by today’s occupiers). No less important — but perhaps less appreciated — is market momentum, which often is the key driver of the biggest market success stories in the past several years.

Momentum can be measured in several ways relevant to commercial real estate. One is rent growth. The higher the rent growth, the more tenant demand that exists in a market relative to supply. Job growth, particularly for office-using jobs, is an equally important measure of market momentum for the same reason. An even more meaningful measurement of market momentum is high-tech job growth, which is both office-using and, because of its relatively high pay compared to other jobs, creates a multiplier effect or virtuous cycle of broader job growth in the local economy.

Placing increased importance on these momentum factors will lead investors and occupiers to markets other than the large gateway cities and even markets with the strongest university bases. While asset-rich gateway cities, like New York and San Francisco, have strong pools of homegrown university talent and will always attract large occupiers, these attributes alone are no longer enough for either investors or occupiers.

Secondary markets like Cambridge, Massachusetts, and San Jose, California, are well-known momentum markets with some of the strongest talent bases and rent growth in the U.S. Less well-known are markets like Tempe, Arizona; Ann Arbor, Michigan; Salt Lake City, Indianapolis, Pittsburgh and Montreal, all of which are gaining tech occupiers and investors because of their deep pools of talent and potential for higher investment yields. Interestingly, while the Raleigh-Durham area of North Carolina scores highly in CBRE’s 2017 Tech-30 Report, the city of Charlotte, North Carolina, scores higher due to its accessibility and critical mass even though the major university concentration is much higher in Raleigh-Durham. This brings home the point that momentum can top even one of the most university-rich markets.

Markets that are showing the greatest momentum (rent growth) are Orange County, California, (23 percent), Nashville (21 percent) and Atlanta (18 percent). Certain city submarkets average a rent premium of 16 percent relative to their broader markets and some are well more than this, including Cambridge, Massachusetts, (120 percent), Santa Monica, California, (92 percent) and Palo Alto, California, (71 percent). Part of the reason for this rapid rent growth is low vacancy and significant barriers to entry for new supply. The Mount Pleasant/False Creek submarket of Vancouver fits this bill, with vacancy at less than 4 percent. And most of these submarkets are extremely tight relative to their overall markets.

Markets that show the best combination of job growth and rent growth, plus the added benefit of lower costs than in gateway cities, include Dallas, Denver, Minneapolis and Toronto; these mid-sized to larger cities possess the trifecta of deep talent pools, high yields relative to their gateway competitors and faster rent and job growth than the average, the critical momentum factor.

While cost pales in comparison to talent and investment yield, it is a consideration for many occupiers (even in tech, as not all tech jobs require the same level of skill or education). Deep pools of highly qualified labor abound in many of these smaller and mid-sized markets.

Cities should never lead with cost as a differentiator from their competitors. It is a race to the bottom, since there will always be cities willing to offer more incentives to lower costs. Those that offer the complete package of talent, investment yield and momentum (high rent growth and job growth) are better positioned to attract investors and occupiers.

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor

This article first appeared on the NAIOP blog.

When Mr. Green Meets Mr. Green

I’ve decided to stop spraying weed killer on my lawn and let it go au natural. I still have someone mow it, but it has sprung a bunch of white and pink flowers (aka pretty weeds) that I think are attractive. I didn’t do this because I am a super “green” guy (though that was part of it).

On a scale of 10, where 1 is “these birds are too noisy so let’s spray some DDT and Agent Orange out there” and 10 is “eating vegetables is murder”, I am probably a 7. I’m environmentally sensitive, but it would not stop me from driving a 1968 Ford Shelby GT 500 that requires a leaded-fuel supplement.

The biggest reason I stopped my weed service was to save my dog Murphy, a three-year-old bearded collie, who, while he is the nicest dog I have ever met (yes I am biased), is made out of glass and has chronic health issues.

We have taken Murphy to the vet almost weekly for the past two years to treat a variety of rashes and intestinal ailments, and a little weed killer on his sensitive skin wasn’t going to aid his recovery. The signs my lawn guys kept putting up after weed treatment—“keep your kids and pets off this lawn for 24 hours”—sealed the deal.  I have enough trouble controlling where I walk, let alone my kids or dog. Hello dandelions!

The choice to “go green” in commercial real estate is evolving as well. Back in 2008 when I hosted a panel of some of the largest commercial real estate investors in the world, I asked them “has the economic case been made to retrofit your projects with environmentally sensitive upgrades?” Not a single hand went up. When Mr. Green (environmental concerns) meets Mr. Green (cold hard cash), tough decisions need to be made.

Fast forward to today. When I ask similar questions at panels, most hands go up both for major building retrofits of common areas and for tenant spaces, as well as for virtually all new office development. Being “certifiably” green through LEED or Energy Star designations is becoming the industry standard. Why? The decision to “go green” has nothing to do with what owners and developers think; it has everything to do with what their tenants and, more importantly, their employees think (those pesky millennials!) Our recent Occupier Survey details the increasing importance of environmental sensitivity among employees.

It is no coincidence that the number of buildings certified as “green” or “efficient” has gone up from 5% in 2005 to 38% last year in the top 30 U.S. markets. Congratulations to Chicago for getting the No. 1 rank as the most-green office market in America. A terrific study jointly led by CBRE and Maastricht University—the 2017 Green Building Adoption Index—will tell you all about it.

Which brings me back to my lawn. Canceling my weed service may be one of my better ideas, but the home sales market may think differently. Someone is going to see my natural lawn and assume that “if he doesn’t care about his lawn, he probably doesn’t care whether his hot water heater is in good shape”. And down the rabbit hole we go.

How much risk am I taking that the market will understand I’m actually giving a little bit of love to Mother Earth? I suppose I can decide to restart the lawn service a year before I decide to sell (and outfit Murphy in a doggie hazmat suit every time he goes outside). Or, I can roll the dice and think that the market is flush with green thumbs who will understand my decisions and cut me some slack. When Mr. Green meets Mr. Green, these are tough decisions to make.

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor, CBRE.

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