Chapter 6 Office & Industrial Property

1. Chapter 6Office & Industrial Property

2. Major Topics Office Property • Defining office space quality • The demand drivers for office space • Translating employment growth to office space demand • The trends that shape the amount of space required per worker Industrial Property • The demand drivers for Industrial property • Factors driving the location decisions • Affect of e-commerce “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

3. Reasons for cyclic Real Estate market • Competition and Lead time factor • Inconsistent capital flows • Lease terms Expansion Phase: Rising occupancy and Rents, increased construction rates Mature phase: increased vacancy, construction still on going Recovery Phase: Excess supply keeps rent low, little or no construction, demand picks up Correction phase: rents declining, minimum new construction Typical Cycle “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

4. Office Property Definitions • Occupancy (Vacancy) rate -- % of total square footage of leaseable space that is occupied (vacant) • (Net) Absorption -- net change in space available for lease between two dates

5. Texas Market Reports • http://recenter.tamu.edu/mreports/

6. Austin Office Space – 1/2005

7. Austin Office Space – 1/2005

8. Austin Office Space – 1/2005

9. Office Property Definitions • Class A • Excellent location and accessibility • Rent rates in upper 33% of total office market range • Class B • Good location and access • Rent rates in upper 60% of market sector’s range • Class C • Buildings generally more than 15 years old • Rent rates in lower 40%

10. Rental Rates/SF/Year

11. Office Property Definitions • Net Usable or Leaseable Area • The actual area of a floor or an office suite that can be occupied • Efficiency Ratio • The percentage of total usable space to the total gross space in the building. • Load Factor • The percentage of space on a floor that is not usable

12. Office Market Demand Analysis • Employment trends • Net new demand = expected new employees * avg space required • Space Required • Archiving, telecommuting and hotelling • Types of businesses • Location • Impact of local taxes

13. Location • Actual rate of absorption is almost always biased towards the suburbs • Over 2/3 of the office space in the last 10 years in the largest U.S. cities has been absorbed in the suburbs • Tax benefits, enterprise zones “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

14. National Office Market Trends • Increase in office hotelling and hence decrease in per employee space requirement • Increase in telecommuting and office sharing • Suburban office markets have fared better than CBDs • City governments in turn have increased incentives to keep major employers in the city

15. Introduction to Industrial Property • Industrial property is of two types: • Manufacturing (Heavy and Light) property • Distribution Warehouse property • “Flex space”  both on property • “Build-to-Suit” properties • Impact on own vs. lease decision?

16. Six-Month Absorption -- Austin-RR

17. Office/Manufacturing/Warehouse

18. Flex Space

19. Factors Influencing Location Decisions • Labor Cost, Labor Climate and Skills • Proximity to Suppliers • Access to Transportation Facilities • Quality of Life • Utilities, Taxes, Insurance, Unemployment and other Real Estate costs • Environmental regulations

20. Distribution Warehouse Property • Demand is driven by the location of inventory requirements • Criteria of location selection for warehouse are • Price/Weight ratio of product • Minimization of transportation cost • Speed of delivery

21. END “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner