Commercial real estate: New metrics required

CHICAGO - Buying, selling, leasing and appraising commercial properties is going to be a whole new ballgame as we move into a post-recession market.

Traditional ways to value properties are obsolete. There needs to be new measures because corporate tenants are looking for more than just traditional amenities. Those property owners and management firms who do not understand that will be left holding a lot of empty space.

Does this sound too radical? If it does, you don't understand the emerging market.

Commercial real estate will continue to suffer as it is hit by several variables:

1) Bad loans and devalued properties. (Similar to the residential markets) 2) Less demand for space. (Companies have cut back and have gotten more people to work out of the house - telecommuting)

3) A more discriminating demand for space. (If buildings do not offer certain intelligent amenities, they will be less desirable and attract less or none of whatever is left in the commercial demand market)

WHO NEEDS SPACE?

Think about who generates demands for space. Within the last decade, there has been a shift in the need for as much commercial space for several reasons: offshoring jobs to other countries, telecommuting where employees are encouraged to work out-of-the- house for major corporations and technological breakthroughs in creating more capabilities for entrepreneurs and start-ups to work out-of-the-house.

The need for space by corporations is shrinking so for the amount of space available, buyers and corporate site selection committees are getting much more discriminating when it comes to evaluating space.

Does the building offer intelligent amenities? What are intelligent amenities? Power and network infrastructure are two major intelligent amenities. The requirements for power and broadband connectivity are becoming quick ways to slice up the market into the “Haves” and “Have-Nots” of potential properties.

If your building or campus does not have redundant feeds for electricity, preferably from two different power grids, chances are you won't be writing a lot of responses for potential deals with corporate tenants. The same goes for broadband connectivity. And “broadband” doesn't mean DSL lines or T1 lines, it means multi-gigabit speeds coming in on fiber optics which is the preferred connectivity for high-end corporate tenants. Either you have it, or you don't.

SOME CLASS A SPACE WILL TURN INTO CLASS B SPACE

Without broadband connectivity, several network carriers to choose from or redundant power supplies, buildings will be in less and less demand or will have to sacrifice price to compete within the market.

A couple of years ago when I was doing some research for the DuPage National Technology Park, the available Class A space within the county could be found in 60 buildings. That was the amount of properties offering competitive available space at the time.

If the requirement was just for space, there would be a glut of buildings to look at and negotiating a low lease would be easy. In fact, tough negotiators would be asking for six to 12 months free rent on a five-year lease - if not more.

As soon as the search parameters were augmented to include the need for broadband connectivity, the amount of buildings offering that amenity dropped down to five. That is over a 90% reduction in the competition and with that targeting, there is no more glut of office space to choose from. See the white paper I wrote on Intelligent Business Campuses: Keys to Future Economic Development (2008) (http://dntp.com/news/pdfs/intelligent_business_campuses.pdf ).

With so many real estate deals going for lowest bid on the commodity of space, intelligent amenities can keep leases up as well as cut out 90% of the competition who were too “cost-conscious” to add them in.

If there are any properties where high-speed connectivity is unavailable, watch as those properties become less and less desirable over time and more and more vacant.

Carlinism: Know intelligent amenities to get tenants or no intelligent amenities will get no tenants.

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