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TRANSWESTERN

INSIGHTS  +
TRENDS        +
OPPORTUNITIES

2Q 2014 Edition

The Expansion of Legendary Service
A Message From Robert D. Duncan, Chairman, and Larry P. Heard, President and Chief Executive Officer

A Fresh Look at U.S. Economic Growth
By Alexander (Sandy) Paul
Executive Vice President
Delta Associates

Time to Collaborate on the Correct Office Mix
By Amber Strang
Executive Managing Director, Tenant Advisory
Transwestern

What Building Owners Can Learn From Steve Jobs
By Bo Jackson
Senior Managing Director, Southeast
Atlanta, Georgia
Transwestern

Development Opportunity
Demand for Small Industrial Facilities Expected to Prompt Development
By Jim Martell
President,
Ridge Development

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 181 offices in 40 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

© 2014 TRANSWESTERN    transwestern.com

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Robert D. Duncan  Larry P. Heard

The Expansion of Legendary Service
A Message from Robert D. Duncan and Larry P. Heard

The Transwestern family of companies made significant investments in team members nationally, building upon the accomplished base of professionals who provide legendary service to our valued clients. An expansion of Transwestern’s transactional services and development platforms, most recently, will serve the increased demand in emerging growth markets throughout the U.S.

"Transwestern continuously recruits the industry’s best and brightest professionals to expand upon its national and international reach."

Growth is a natural extension of Transwestern’s activity, including the fourth-quarter acquisition of Richards Barry Joyce & Partners in Boston that created the firm’s 34th U.S. office. Transwestern continuously recruits the industry’s best and brightest professionals to expand upon its national and international reach. Transwestern fortified its industrial brokerage practice in January by acquiring Epic Realty Partners, a well-respected firm in the Chicago Metro. Transwestern now ranks as one of the top five industrial real estate providers in Chicago, the second-largest industrial market in North America.

Transwestern Development Company expanded its capability in March by adding Chicago-based Ridge Development as its industrial development arm – which bolsters the firm’s North American platform. With its national scope, Ridge is responding to increased demand for bulk warehousing and industrial facilities in key logistics markets with multiple transportation linkages. Transwestern Development Co.’s aggressive expansion strategy is now under the capable purview of Carleton Riser, who in January was promoted to president of the firm.

Transwestern is pleased to share this edition of Insights + Trends + Opportunities. We hope its articles will provide valuable information to our many clients, colleagues and industry professionals, to whom we send best wishes for a healthy and prosperous summer.

Gratefully and respectfully yours,


Robert D. Duncan
Chairman

Larry P. Heard
President & Chief Executive Officer

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Alexander (Sandy) Paul

A Fresh Look at U.S. Economic Growth

By Alexander (Sandy) Paul
Executive Vice President
Delta Associates

Thus far in 2014 the U.S. economy looks set to continue on a slow and steady upward trend, one that is sustainable. Financial markets may face some headwinds as they continue to adjust to less stimulus from the Federal Reserve. Adverse weather conditions were a drag on economic activity in early 2014, but their impact should have little bearing on the trajectory of U.S. growth going forward. The private and public sectors are each learning to adapt, and national economic growth has continued, though at a level that is weak for a post-recession recovery. Households should remain upbeat due to increases in net worth from home prices and the stock market. On balance, we look for this recovery to continue on its slow but steady course through 2017 or so, barring a catastrophic event.

"Although the economy continues to move forward, it is doing so at a measured pace, which has encouraged businesses and consumers to alter spending patterns and adjust to limited growth."

Given that job growth is the principal driver of demand for commercial real estate, how has the employment picture evolved? The national economy added 2.4 million new jobs during the 12 months ending April 2014, with the private sector accounting for almost all of these net additions (the public sector added 4,000 positions). Recent month-to-month gains have been strong. Over 200,000 jobs were added in each of the past three months (February through April), boosting optimism for a stronger 2014 than 2013. Overall, though, job growth has been disappointing in this cycle compared to past economic recoveries. Because of population growth, about 140,000 jobs must be created each month just to keep a steady unemployment rate, though this figure varies depending on the labor force participation rate.

Although the economy continues to move forward, it is doing so at a measured pace, which has encouraged businesses and consumers to alter spending patterns and adjust to limited growth. We expect that job growth will continue to be muted relative to previous expansion cycles, but that it will proceed on a slow and steady trend. On balance, we forecast that payroll job growth in 2014 will be slightly better than in 2013, with approximately 2.4 million jobs created this year compared to the 2.3 million created last year.

The Bureau of Labor Statistics (BLS) projects that the economy will add approximately 15.3 million nonfarm payroll jobs from 2012 through 2022, for an average annual growth rate of 1.1 percent. This compares to an average annual growth rate of 0.3 percent from 2002-2012, though that decade was marred by the Great Recession. While successful commercial real estate development depends on job growth, each property type has particular growth sectors that serve as key drivers – the office sector leans on professional services jobs, the industrial sector on manufacturing and distribution jobs, and so forth. Education/Health Services is projected to be the leader in job growth through 2022, adding 5.7 million jobs. These jobs, many in the mid-wage category, are likely to support apartment development and the creation of medical office space. Professional/Business Services follows, adding 3.5 million positions – a driver of office market activity. The Manufacturing, Federal Government, and Information sectors are expected to shed positions during this ten-year period. Of note, BLS expects the disparity between goods-producing jobs and service jobs as a percentage of total employment to widen. Service jobs as a percentage of all employment is forecasted to rise to 80.9 percent in 2022, from 79.9 percent in 2012. In sum, the U.S. has a service-based economy and it is evolving further in that direction.

              

While employment gains drive the demand side of the commercial real estate equation, what other factors might affect our industry’s performance? Janet Yellen, the Federal Reserve’s new Chair, has made it clear that she intends to follow the principles of her predecessor, Ben Bernanke. Accordingly, the Fed plans to keep short-term rates at their current range of 0 percent to 0.25 percent until unemployment falls further (it is now at 6.3 percent, lower than the Fed’s initial target of 6.5 percent for raising the Federal Funds Rate) or inflation exceeds 2 percent. However, the Fed has been tapering its quantitative easing policy, and is now down to $45 billion per month. The program of long-term bond purchases is expected to wind down steadily through 2014 and conclude by year-end.

For commercial real estate investors, we perceive the tapering decision as a net positive. The Fed’s move sheds light on the improving growth prospects of the U.S. economy, and its steady tapering efforts should remove a portion of the all-too-familiar uncertainty that has plagued business decision-making and capital investment for some time.

"The Fed’s move sheds light on the improving growth prospects of the U.S. economy, and its steady tapering efforts should remove a portion of the all-too-familiar uncertainty that has plagued business decision-making and capital investment for some time."

Overall, our outlook for the U.S. economy is as follows:

  • Real GDP growth: In the 2.4 percent range in 2014. We expect the weather-afflicted 1st quarter 2014 figure of 0.1 percent to rebound as the year progresses.
  • Payroll jobs: 2.4 million added in 2014, slightly outpacing the 2013 total.
  • Housing: Price appreciation around 10 percent in 2014, slightly off last year’s performance.
  • Unemployment rate: Hovering in the 6.5 percent range as 2014 progresses.
  • Federal Funds Rate: 0 percent to 0.25 percent through year-end 2015.
  • Long-term interest rates: Edging higher during 2014.
  • Inflation: Accelerating modestly in 2014 – to near 2.0 percent – as consumer demand strengthens.

Action steps for owners: This forecast suggests gradual improvement in economic growth and employment, though wage growth is likely to trail the rate of job creation. This has implications for owners of multifamily product, emphasizing the need to carefully tailor marketing programs based on the fit of each property for certain wage segments. Developers of office product should assemble sites for the peak delivery period, which varies by market but on balance is likely to be in 2016-2017 as job growth reaches its cyclical apex.

Action steps for tenants: Office tenants continue to have leverage in many markets due to modest demand and the effects of densification – the reduction in the amount of SF leased per worker. However, on balance, tenants’ leverage is gradually eroding as economic growth accelerates. The process is likely to take longer than in prior cycles – tenants may have the upper hand in negotiations for 2-3 more years, on average – but office rents are likely to edge higher in many markets over the next few years.


Alexander (Sandy) Paul
alexander.paul@deltaassociates.com
703.299.6373

Delta Associates

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Amber Strang

Time to Collaborate on the Correct Office Mix

By Amber Strang
Executive Managing Director, Tenant Advisory
Transwestern

For years, corporate America has been busy infusing collaborative space into offices with the belief that greater collaboration is the ticket to increased creativity, productivity and worker satisfaction. Clearly, there are many cases where this has been the result, advancing the thinking that shared workspaces are better than isolated, quiet areas designed for one. However, a closer look shows that in some instances the opposite is true: an abundance of collaborative space aimed to encourage teaming and idea exchange has resulted in a diminished ability to focus, which translates into a decline in productivity.

"One thing is certain: The physical workspace is about so much more than the building a company chooses to purchase or lease, and making a capital investment in real estate-related improvements can help recruit and retain higher-performing, more satisfied employees."

Our experience with clients across a wide spectrum of geographies and industries suggests that the pendulum may have swung too far toward collaborative space in the quest for the optimum office mix. Gensler’s 2013 U.S. Workplace Survey echoes this concern, offering tenants a new perspective with lessons learned by other companies. When 42 percent of respondents to the architecture firm’s survey reported they use makeshift solutions to block out non-work related distractions (such as wearing earbuds and positioning monitors to obstruct eye contact), there is little room to argue there is a productivity issue in some offices across the United States.

This is not to say that we should return to the days of high walls and closed doors. Many companies have been successful in using innovative common spaces to attract a young, creative workforce and, by doing so, have gained a real competitive advantage in their industry. The key is ensuring progressive ideas do not come at the expense of productivity and job satisfaction, which is where workplace design comes into play. Because work, life and economic drivers are constantly changing, companies must stay relevant and tailor their real estate to the needs of today’s workers.

Before embarking on a new space build-out or an existing office redesign, specialists in workplace strategy advise tenants based on a thorough review of desired functionality, current work patterns, performance measurement criteria, the corporate culture and future growth plans. They recognize that employees perform at their optimum when their workplaces support individual and group projects. Striking this perfect balance is a combination of art and science, and the optimal mix of space varies from tenant to tenant based on type of business, work patterns and employee demographics.

Offering employees a choice of when and where to work is also a factor in employee satisfaction. According to the Gensler survey, employees with these freedoms are 12 percent more satisfied with their jobs than those who don’t have options, and employees with more choices were rated as more effective in the areas of focus, collaboration, learning and socializing. Each company’s culture dictates how much autonomy they are willing to grant their workforce, and bestowing choice upon employees has a significant impact on space planning. Shared workstations and generic workspaces are some of the solutions companies have employed to conserve square footage while still comfortably accommodating employees who are only in the office a fraction of the time.

One thing is certain: The physical workspace is about so much more than the building a company chooses to purchase or lease, and making a capital investment in real estate-related improvements can help recruit and retain higher-performing, more satisfied employees. This discussion can and should begin before a transaction is executed, and is best framed in the context of the organization’s larger business goals. Approaching issues surrounding employee work patterns, innovative office solutions and space planning early on in a creative and disciplined manner will not only ensure each tenant’s office space accurately represents the corporate culture and brand, but will also contribute to the company’s long-term profitability and drive unexpected value from the organization’s portfolio.


Amber Strang
amber.strang@transwestern.com
972.774.2548

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Bo Jackson

What Building Owners Can Learn From Steve Jobs

By Bo Jackson
Senior Managing Director, Southeast
Atlanta, Georgia
Transwestern

Steve Jobs created an enviable ecosystem powered by the connectivity among Apple computers, iTunes and iPhones. In a 2010 email recently released as part of litigation between Apple and Samsung Electronics, Jobs referred to Apple’s so-called "lock-in" strategy to keep customers loyal, recognizing that the company’s goal with its cloud services was to "tie all of our products together, so we further lock customers into our ecosystem."

Institutional property owners can capitalize on that ecosystem concept by adapting it to the modern-day office building. How would this design strategy manifest itself in an office tower? Imagine knocking down the figurative walls that exist between tenants in order to build a sense of community and create avenues for synergistic business opportunities among unrelated companies. Tenants that are linked together, both as businesses and collections of individuals, are more likely to stay in a building longer, especially if they are increasingly profitable at the location. Just as an iPhone user struggles with the prospect of losing mobile access to their iTunes library when contemplating a switch to Samsung, so will a tenant that is thoroughly plugged into a building’s community resist opportunities for relocation. An office building with an ecosystem that builds tenant engagement and loyalty possesses a powerful strategy for unlocking the economic value that exists in most multi-tenant office buildings.

“Previously having no formal way to meet their building neighbors, the tenants were eager to learn about each other’s companies and do business together.”

“Companies that use design strategically grow faster and have higher margins than their competitors,” wrote Jeneanne Rae, CEO of Motiv Strategies, in an April 4 blog on Harvard Business Review. Motiv and the Design Management Institute created the Design Value Index, which shows that firms understanding the value of their product’s design as it relates to improved business performance have beat the Standard & Poor’s Index by 228 percent over the last 10 years. Nike was cited as a leader in the area of design, having deployed design as an integrated function across its entire enterprise, with the function reporting directly to CEO Mark Parker.

Real estate professionals, on behalf of their owner clients, are in the position to bring design strategies into office buildings. They are in a unique position to establish a building’s ecosystem as the only common thread among all the people working there, other than their proximity to one another. Innovative property managers and leasing professionals can evaluate a collection of tenants in a holistic fashion and innovate ways to connect the dots. Tenants are often unaware of potential business opportunities that may be an elevator ride away. For example, we once organized a focus group of building tenants, but the meeting was delayed because the tenants kept talking to each other. Previously having no formal way to meet their building neighbors, the tenants were eager to learn about each other’s companies and do business together. Likewise, real estate visionaries can deliver strategies and services beyond what a building owner expects. That includes attracting the right mix of companies to the building-tenants that are likely to expand, as well as be loyal to a special office environment. Implementing the strategy also entails uncovering value in building space that doesn’t generate revenue by creating a high-tech center or meeting place for tenants that would simultaneously act as an ecosystem touch point.

Social media is also a valuable resource for creating bonds among individual building users, especially the millennial generation. Property management can spur connections among like-minded professionals and age groups; cementing the building’s importance in their lives. Social media can be employed to form a running group that meets in the morning before work, or it can be a method to share area dining discounts and restaurant suggestions. Envision the experiential value of devising a social media campaign to bring food trucks to the building or organize after-work events. The experience is similar to hotel guests choosing the Ritz Carlton. They could book a room anywhere, but they are attracted to Ritz Carlton’s exceptional level of service and unexpected amenities.

Building owners who work with experienced real estate professionals can uncover hidden revenue opportunities in assets and implement improvements that likewise provide additional value for tenants. In doing so, property owners would be taking a page from the Apple playbook. As Steve Jobs once said: “Innovation distinguishes between a leader and a follower.”


Bo Jackson
bo.jackson@transwestern.com
404.842.6633

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Jim Martell

Development Opportunity
Demand for Small Industrial Facilities Expected to Prompt Development

By Jim Martell
President
Ridge Development

Regional and national industrial developers typically don’t concentrate on 50,000-square-foot to 150,000-square-foot projects because the inventory of that size of buildings is usually plentiful in active markets. However, increased positive absorption rates in this category are creating development opportunities in key markets throughout the country. Demand is outstripping available supply for the first time in a long time. Space requirements are emanating from food- and construction-related users, as well as small manufacturers, suppliers and distributors involved in consumer packaging, metal fabrication, medical supplies and plastics for consumer products. Positive absorption is attributable to a growing confidence among tenants and owner-occupiers that are leasing manufacturing, distribution and flex buildings at an accelerated rate.

"The trend of increasing absorption is expected to prompt more speculative and build-to-suit development of small-scale facilities, which has not happened in eight to 10 years."

The trend of increasing absorption is expected to prompt more speculative and build-to-suit development of small-scale facilities, which has not happened in eight to 10 years. This wave of development will bring state-of-the-art buildings to market featuring higher clear heights, trailer parking, speed bays, wider column spacing and ESFR sprinkler systems. Much of the construction is expected to occur on urban, infill sites or near airports to keep the workers close to their homes. The anticipated development activity could translate into a buying opportunity for investors who target small-scale facilities; users who want to own their properties; or institutional investors that seek to bolster a market’s existing platform or identify a portfolio of properties to acquire.

Transwestern research finds rising demand for 50,000-square-foot to 150,000-square-foot buildings in Los Angeles; Orange County, Calif.; Inland Empire, Calif.; the San Francisco Bay area; Atlanta; Northern New Jersey; Chicago; Miami; and Boston. A prime development market, Los Angeles has a 5.3 percent vacancy rate on a total inventory of 292.6 million square feet, but only 380,634 square feet under construction. Northern New Jersey has only 192,000 square feet under construction though it has a 7.9 percent vacancy rate on inventory of 241 million square feet in this category. Other markets with low amounts of construction underway include San Francisco and Boston. Miami also has only 167,662 square feet in progress with a 7.2 percent vacancy rate.

While much of the current industrial development activity in the U.S. is concentrated on much larger facilities, construction of smaller scale properties is expected to begin drawing attention. In addition to the development and investment opportunities, positive absorption of this size of facilities provides a barometer of entrepreneurial optimism that is driving an important segment of the U.S. economy.


Jim Martell
jim.martell@ridgedevelopment.net
312.257.2880

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