Site Selection Magazine Rates Indianapolis in Top 10

Yesterday, Inside Indiana Business reported that Site Selection magazine rated Indianapolis' business climate in the Top 10 cities in the U.S.. The magazine rated Indianapolis best in the midwest and 10th overall, per a survey of natioanl real estate executives and a review of Indianapolis' economic development record.

Once again, Indianapolis rates high as a great place to do business as well as rating high as having an exceptional quality of life. It is also why I'm particularly pleased for my business, Carmen Commercial Real Estate, to be part of the Indianapolis business community.

Indianapolis Office Market Recovery

CoStar Group, the commercial real estate industry’s largest information resource, reported this week in its 2010 Third Quarter Office Review and Outlook that the U.S. office market has begun a recovery, posting positive net absorption for the second consecutive quarter. CoStar cited three major indicators of the recovery process:

1. Positive office employment growth for a second consecutive quarter. Office employment growth indicates that recovery is beginning to take hold despite high unemployment levels and continued layoffs. In the past two quarters, approximately 24,000 and 8,000 office-using jobs respectively have been created, according to U.S. labor statistics.

2. The strength of leasing activity. CoStar Group CEO, Andrew Florance was quoted in the article saying, "Leasing activity in the quarter was healthy and robust," adding, "We’re now seeing the strongest leasing activity numbers we have seen since the peak of the market [in 2005 and 2006]." "Tenants are no longer staying on the sidelines to wait for a better deal. They are trying to move in to capture better deals," Florance said.

3. The historically low level of new office supply. "Office deliveries in the United States remain stunningly low, historical all-time lows," Florance said. "We're down 85% right now in deliveries [from historical averages]. When you look at new construction starts, we're running at about 3 million to 4 million square feet of new construction starts for office space in each quarter in the United States. That is well below what is required to replace depreciating inventory."

CoStar indicated that the U.S. office vacancy rate is clearly moving down and declined slightly in the third quarter to 13.62%. "This means we are no longer in a deteriorating market," Florance said, "and the balance is shifting ever so slightly but consistently from being a tenant market to being an owner market."

Okay, so what does that mean to Indianapolis office tenants? It means that office tenants in general can anticipate rental rates increasing as the recovery progresses. Fortunately for Indianapolis area businesses, there appears to be a bit of a lag before the national trend toward recovery takes place here. In Q3 2010, slight increases in Indianapolis office vacancy occurred, raising the CBD and Suburban markets to 20.3% and 22.4% respectively.

I believe that now is the time to get in the market before further indications of a recovery cause building owners to make marked changes to their leasing plans by increasing effective rents and decreasing lease incentives.

It is worth noting that in the three recessions I’ve experienced personally while working for Duke Realty Corporation and since founding Carmen Commercial Real Estate, I’ve always been amazed by how quickly the market responds, usually with increasing rental rates and diminishing lease incentives, such as landlord buildout allowances and free rent.

If you are interested in exploring your current lease terms and how a renewal negotiation or relocation could potentially lower your facility costs, please contact me. My team and I would be happy to survey the current market and provide our best professional direction for you and your business.

Eight Tips to Negotiating Office Lease Renewals

This evening I came across an article that appeared in Ezine Articles titled: Eight Tips for Negotiating an Office Lease Renewal. In general, this was a well written article that recommended some very good points for business owners and managers when negotiating facility lease renewals. But I believe the strongest point made by the article was never actually articulated by the author.

Most business owners and managers couldn't help but read the author's 8 tips without thinking "how can I possibly find the time to conduct an effective lease renewal negotiation?" And the truth is, most can't. Conducting an effective lease renewal negotiation will mean that business managers must have some level of understanding of the market, the landlord's current circumstances, alternative spaces available to them, and many other factors and dynamics that are pertinent to the negotiation.

Yet most managers and business owners are already stretched for time and resources. Adding the above duties only takes the owner or manager's focus further from their core business.

Therefore, I believe the article reinforces the business owner or manager's need to enlist the resources of a commercial real estate broker to lead, or at least help, in the lease renewal negotiations. Further, if a business owner or manager is going to hire a broker, doesn't it make sense to hire a broker who specializes in Tenant Representation? Further, if the owner or manager is located in a market that has a firm specializing in Tenant Representation, such as my firm, Carmen Commercial Real Estate Services, that specializes in representing tenants in the Indianapolis office space market, the interests of the business are even more assured of being served.

Understanding Capital Gains on Investment Property

Here we are again, in the middle of tax season and trying to understand, or a least our accountants are, the financial implications of the 2009 financial performance of our businesses and ultimately, our personal income. Recently, I was reminded by a long time client of Carmen Commercial Real Estate who purcahsed a building to operate his business about 10 years ago and is now considering selling the building, that many people are not well versed on how capital gains are calculated on the sale of investment property.

I thought an overview of how one calculates capital gains on investment property might be helpful. Since I'm not an accountant, rather than writing this information myself and risking inaccuracy, I thought it prudent to find a good article written by an expert addressing this topic. Thus, I located an article that appeared in the March 2010 newsletter of Gabrielle Glass of First American Exchange Company, which I believe does a thorough job of explaining the topic and walking the reader through an example. Here's a link to this article:

Calculating Immediate Tax Savings

The one thing I want to stress when considering the sale of investment property, consider the tax implications of the sale prior to putting the property on the market. With the help of your accounting and/or tax adivor and your real estate professional, you can get a pretty clear picture of your tax liability from the sale. Further, the results may cause you to reconsider selling the property altogether or to do some tax planning in advance of the sale to position you for down-stream tax implications. An example of this might be to 1031 Exchange, which will allow you to roll gains into another property to avoid immediate taxes from the sale.

In-person Negotiating (cont.)

In my last post, I discussed the value of in-person communications in office lease negotiations. It’s also worth mentioning that the personal investment of time helps to define the level of commitment the various parties has to the business transaction. Through my 25 years of leasing Indianapolis office space and warehouse space, most of which as been operating Carmen Commercial Real Estate Services, I couldn’t think of a more appropriate application of this theory as commercial real estate transactions and specifically, office lease transactions. In the lease transaction process, meetings create a sense of collective accountability to reach compromises and clear hurdles. Lease transactions involve a series of crucial negotiations that are all related and underscored by the importance of long-term financial obligations by both parties.

Other benefits of personal meetings to finalize space negotiations involve the creation of documentation about key lease points and the opportunity to further involve third parties to the transaction, such as brokers, architects and attorneys. Each party should also strategize their respective role to ensure that goals are met and the proper bridges get crossed, which is a role perfectly suited to the cross-industry expertise of your tenant representative.

Whether dealing with engineers over electrical capacity issues or addressing a disagreement about pass-through expenses with your landlord, tenant representatives can effectively assemble and oversee effective team meetings that will knock down hurdles and move the transaction forward in a more effective matter than would be possible through a train of e-mail, lost attachments and poorly worded text messages.

Stress Person-to-Person Lease Negotiations

I recently read that a news item that stated that a reasonable argument can be made that the proliferation of electronic communication…email, has had a negative impact on our ability as business people to empathize with those we do business. Further, it would be difficult to argue that electronic communications hasn’t diminished our effectiveness in business in the name of efficiency.

Sending a brief email to a client or prospective new customer can be seductive because it’s often undisruptive to our daily routines and workflow. However, the limitations of electronic communication are obvious. Simply said, email doesn’t allow for flexibility in the communication process or, maybe better said, doesn’t allow one to “think on their feet” during a discussion.

I can appreciate this view first hand, as President / CEO of Carmen Commercial Real Estate Services, an Indianapolis commercial real estate brokerage company, specializing in Tenant Representation. When negotiating commercial real estate transactions, it is imperative to communicate in a direct manner: over the telephone at a minimum or whenever possible, in-person. One-to-one interaction should become a priority, especially after weeks of e-mails and text messages about key components of an office lease have morphed into a morass of fluctuating numbers and vague confirmations. When discussing the business impact of a significant real estate transaction, no one can afford to be confused.

Possible Change in Lease Accounting

Yesterday I read an article in BKD Insights, a construction and real estate newsletter published by the accounting and advisory firm BKD, LLP, that I believe is important to pass along to my friends and clients. The subject of the article is about a proposal that if adopted, will impact any business that leases office, industrial, or retail building space. According to the article, Proposal Would Make Significant Change in Lease Accounting: "In the paper the FASB and the IASB discuss a proposed change in lease accounting. It would require the lessee to recognize an asset representing its right to use the leased item and a liability for its obligation to pay rentals".

This change will impact some businesses more than others, but based on the example provided in the article, the impact on businesses with substantial annual lease costs could be significant. Therefore, I'm monitoring this potential change in accounting so that if adopted, my clients that occupy Indianapolis office space or facilities elsewhere around the U.S. will be aware of the benefit to their businesses. Thank you to my friends at BKD, LLP for providing us with this valuable insight.

Tenant Representation to Minimize Risk & Cost

The commercial real estate industry is in a state of flux. Building occupancies and rental rates are changing rapidly. The variance between rental rates quoted by landlords and the effective rents tenants and their advisors negotiate can be dramatic. Desperate landlords are increasingly aggressive and very creative in their attempts to fill vacant space. Buildings that once competed within pennies of each other are now offering drastically different economic packages depending upon their current leasing status and capital structure.

Without an expert who follows these trends and interpret the subtleties of landlord pressure points, while possessing the experience to negotiate for appropriate tenant protections, a prospective tenant exposes themselves to unnecessary risk and costs. In order to minimize facility costs and mitigate the risks associated with leasing commercial space, businesses are seeking the services of brokerage firms and professionals that specialize in tenant representation.

Most importantly, exclusive tenant representatives serve only tenants and reject all fiduciary relationships with landlords or their lenders. Unlike full service real estate companies that attempt to represent both tenants and landlords, “Tenant Reps”, as they’re known, never subordinate your interests to those of a landlord or lender who has a financial interest in a prospective building.

If 2010 brings decisions in your business that will impact your space, you may want to consider utilizing a tenant representative to help you maximize the benefit of leasing commercial space in the most favorable tenant market in years, while helping you to navigate the potential pitfalls of today's challenging market conditions.

Tenant Reps Lower Cost

The Indianapolis commercial real estate market and the market throughout the U.S. is more turbulent than it has been in nearly 20 years. In fact, when it’s all said and done, today’s market may prove worse than the first commercial real estate recession I experienced from 1989 to 1993.

In the current environment, Landlords are doing all they can to maintain occupancy and continue to generate enough cash flow to service their debt. In an environment like this, tenants have a tremendous opportunity to negotiate aggressively with landlords; however, there are numerous pitfalls that can trip up even the most stable companies looking for an attractive lease in the right building. That is why it is now more important than ever to rely on a seasoned commercial real estate broker that works exclusively as a tenant representative to assist you with your space needs.

Given current conditions, exclusive tenant representatives' insight is invaluable. A tenant representative is a commercial real estate broker that specializes in only representing tenants, thus, eliminating the potential for conflict of interest that can occur with brokers that both represent tenants and landlords. A “Tenant Rep”, as they’re known, can help you make sense of the quick ups and downs of rental rates, concession trends, occupancy numbers and key company relocations or bankruptcies that are impacting the local real estate community. They are also in touch with important space usage trends, such as how to best leverage open floor plans, negotiate an environmentally-friendly fit-up and whether or not subleasing is a good option for your company.

Temp & Contract Workers Influencing Office Trends

A recent jobs report out of Washington made note of the increasing number of temporary and contract workers that staffing firms are using to fill vacancies in companies throughout the country. In fact, it’s predicted that contract workers could makeup a quarter of the American workforce within only a few years. If this trend picks up in 2010, commercial landlords may start to see tenants downsize, increase demand for smaller office floorplans and even start to seek shorter lease terms to accommodate fluctuating staff needs.

Important for tenants considering taking advantage of this employment trend, which can have a number of business benefits, is how it will impact the concessions a landlord can provide. Current market conditions are more favorable to commercial tenants than they’ve been in nearly 20 years. But landlords cannot afford to offer the types of concession packages on a short-term lease commitments that are common to long term leases, especially when the landlord risks the space may soon be back on the market after the short-term lease. It simply doesn't make financial sense for them.

When a landlord offers abated rent, a generous improvement and relocation allowances or other types of concessions common today, they amortize those costs over the life of the lease. An 18-month lease, for example, will not afford a landlord to offer space in much beyond an "as-is" condition. This is important to understand, as many business managers or owners that I speak with in my day-to-day business with Carmen Commercial Real Estate Services often don’t seem to recognize the difference in value a short-term vs. long-term lease provides to a landlord and thus, they often expect landlord concessions for their 3 year lease that are found in a longer-term lease.

Thus, if a short term lease or other flexibility options are your goal, then understand that your effective rent may be higher and build-out allowance a bit less than what your neighbor, who recently negotiated a five-year lease for space in the same or a comparable building, is paying.

The trend in business to hire contract workers is allowing businesses to reduce overhead, reduce the amount of space leased, and hire specialized employees on a per project basis. It is critical, however, that when seeking space for your temporary employees or contractors that you remain realistic and flexible on your space needs. Serious rent reductions, improvement allowances, green fit-ups and other benefits that have become common will not be as readily granted to a short-term tenant.

That being said, space today remains considerably less expensive than it was a few years ago, so there are still many opportunities to secure quality space and historically low cost. If you're planning on adding contractors or employees in the upcoming future, my firm would be glad to give you some ideas of what is available in the market. Provide us with a snapshot of your data at our Criteria Questionaire, and we'll provide you with a survey of availalbe properties.