Market’s strength = closer to the end?

{Singing} It’s beginning to look a lot like 2007…record low cap rates, spec construction at a fever pace, high rental rate expectations, bullish forecasts of continued growth.  Despite what our presidential candidates would tell us, the real estate world is on a roll.

thMulti-channel distribution networks are absorbing distribution space at a phenomenal pace. eCommerce has in effect made warehouse equivalent to retail! More technology and more people are being deployed to meet global supply chain demands. The market dynamics are pushing all boundaries.

Unfortunately all good things must come to an end. Believe me I have my board and plan to ride this wave at maximum pace.  But how long can this last?  I hope a long, long time! In the mean time keep singing.

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Wall Street Journal reports that The Modal Group platform (tenant-rep) is less conflicted.

From the Wall Street Journal

Study Reignites Debate About Broker Interests

New York City Has Been at the Center of the Commercial Real Estate Brokerage Debate

BN-FU196_NYCOMM_J_20141130150724

By PETER GRANT
Nov. 30, 2014 8:56 p.m. ET
A new study by George Washington University’s Center for Real Estate and Urban Analysis has rekindled the debate over whether there are conflicts of interest at some of the country’s largest commercial real estate brokerages.

Brokers who represent only office tenants have argued for years that conflicts exist at firms that represent both landlords and tenants—and that their tenant clients often suffer as a result. Brokers at the so-called full-service firms that represent both have argued back that such potential conflicts aren’t an issue, partly because they typically disclose such relationships to all of their clients.

The George Washington study, written by Peter Smirniotopoulos, an adjunct professor, supports the critics of the full-service firms, arguing that conflicts may not be resolved through current disclosure practices.

“The conflicts of interest issue has not been addressed in any systematic way benefiting tenants,” the study says. “If legal ethics prohibit an attorney or a law firm from representing both the landlord and a tenant [in a lease]…how can the divergent interests of those same parties nonetheless be adequately represented by the same [real estate firm]?”

Executives at full-service firms who have read the study, which was released late last month, have challenged its conclusions, pointing out that their professional ethics require them to represent their clients’ best interests, whether they are landlords or tenants.

They also noted that the study was undertaken by the Center for Real Estate and Urban Analysis in partnership with Boston-based Cresa, one of the largest firms that represents only tenants and a big critic of the full-service firms.

Mr. Smirniotopoulos, who also is a consultant in the real estate industry, said in an interview that Cresa provided a “gift letter” that helped finance the research. But the Center has complete control over the study’s scope and objectivity. “It had to be consistent with scholarly work,” he said.

New York City long has been at the center of the conflict-of-interest debate because Julien Studley, one of the pioneers of the business of representing only tenants, founded his firm here. Earlier this year, that firm was acquired by Savills PLC in a deal that valued Studley at up to $260 million. While Savills is full service, its U.S. division—now named Savills Studley—has remained a tenant-only shop.

“The industry is replete with conflicts,” said Mitchell Steir, the head of Savills Studley, which represents a number of major tenants in New York. “Each side deserves an advocate.”

Cresa’s office in New York has been a relatively small player, but it has grown since it was taken over by Mark Jaccom, who worked at Studley at an earlier stage in his career. Mr. Jaccom said the New York Cresa office employs about 45 people and will represent tenants in about 1.5 million square feet of deals this year, up from 600,000 square feet in 2013. The deals brokered by Cresa this year included Affinity Health Plan’s lease of about 95,000 square feet of space at Simone Development’s Metro Center Atrium in the Bronx, Mr. Jaccom said.

Brokerages that only represent tenants use the conflict-of-interest issue to lure business from full-service firms. “You question how hard [full-service firms] push the landlord who gives them tens of millions of square feet of business for a tenant looking for 20,000 square feet,” Mr. Jaccom said.

But executives at the firms with the largest offices in New York say that tenants clearly like the service they get from full-service operations.

“We represent more tenants for more space than any other firm,” said a spokesman for CBRE Group Inc. “That speaks volumes for the value that we deliver for them.”

Executives at the top firms also pointed out that tenants get more insight into the market when brokerage firms also represent landlords.

“Having a broad perspective from all angles in the market coupled with a strong adherence to confidentiality is a clear advantage to our clients,” a spokeswoman for JLL said in an email.

Some brokers at full-service firms acknowledged that the potential for conflicts of interest exists. But they said it happens very rarely because both tenants and brokers are becoming more sophisticated.

The issues raised in the George Washington report “are valid issues,” said Peter Hennessy, head of the New York region for Cassidy Turley. “But the level of sophistication of brokers is such that they’re able to manage the conflict issue,” he said.

The report recommends further study, better self-regulation and the development of a “model code of conduct” in the commercial brokerage industry.

Write to Peter Grant at peter.grant@wsj.com

Do you expect to overpay on your lease?

US companies occupying industrial real estate, listen up!   The market has pivoted to a Landlord’s market, that means you will pay more.   Taking on this market without proper representation, well why not just tie a steak around your neck and walk into a Lion’s den…you’re dead meat.

th-2

Chicago stats:

Unemployment is down to 6.2%

Vacancy rate has decreased to 8.2%, lowest since 2001!

15 million square feet is under construction!

This data tells us there are more people employed, the amount of available space is lowest since 2001, and developers can’t build enough space to meet demand (or to feed their performas).  What does it all mean? Asking prices are up and incentives are down like free rent, large tenant improvement dollars, and risk diversion, you are in a Landlord’s market… expect to pay more.

But you don’t have to.  Embrace the approach of creating a competitive atmosphere where multiple buildings are being seriously considered you should be able to compress the rental rate and get some concessions from Landlords. Consider the vacancy rate of 8.2% it reflects nearly 90 million square feet of available space in Chicago metro!

If you have a renewal or are considering a new location:

  • Engage a real estate professional who has access to on and off market properties
  • Go see everything. You may not have 10 options, but there should be three or four and you need to leverage them.
  • Give yourself time, 9-12 months before your back is against the wall.

This is nothing new, but its never been more important.

Data indicates strong activity in industrial real estate market

From CoStar’s 2014 Mid-Year Report.
The Chicago Industrial market ended the second quarter
2014 with a vacancy rate of 8.5%. The vacancy rate was
down over the previous quarter, with net absorption
totaling positive 2,303,618 square feet in the second quarter.
Vacant sublease space increased in the quarter, ending the
quarter at 1,416,465 square feet. Rental rates ended the second
quarter at $5.23, an increase over the previous quarter. A
total of five buildings delivered to the market in the quarter
totaling 1,708,735 square feet, with 7,721,186 square feet still
under construction at the end of the quarter.
Absorption
Net absorption for the overall Chicago Industrial market
was positive 2,303,618 square feet in the second quarter 2014.
That compares to positive 327,193 square feet in the first quarter
2014, positive 6,177,633 square feet in the fourth quarter
2013, and positive 1,375,931 square feet in the third quarter
2013

.ship data
Tenants moving out of large blocks of space in 2014
include: Quantum Foods, LLC moving out of (269,591) square
feet at 550 W North Frontage Rd, Silgan Containers moving
out of (187,850) square feet at 1191 Lake Ave and Channel
Distribution moving out of (165,762) square feet at CMD
Business Park.
Tenants moving into large blocks of space in 2014 include:
Pactiv Corporation moving into 898,560 square feet at
Pinnacle Business Center, Ferrara Candy Company moving into
747,152 square feet at Carlow Corporate Center, and Midwest
Warehouse & Distribution System moving into 650,494 square
feet at Carlow Corporate Center.
The Flex building market recorded net absorption of positive
84,263 square feet in the second quarter 2014, compared
to positive 287,109 square feet in the first quarter 2014, positive
54,574 in the fourth quarter 2013, and positive 212,314 in the
third quarter 2013.
The Warehouse building market recorded net absorption
of positive 2,219,355 square feet in the second quarter 2014
compared to positive 40,084 square feet in the first quarter
2014, positive 6,123,059 in the fourth quarter 2013, and positive
1,163,617 in the third quarter 2013.
Vacancy
The Industrial vacancy rate in the Chicago market area
decreased to 8.5% at the end of the second quarter 2014. The
vacancy rate was 8.7% at the end of the first quarter 2014,
8.7% at the end of the fourth quarter 2013, and 9.0% at the
end of the third quarter 2013.
Flex projects reported a vacancy rate of 12.1% at the end
of the second quarter 2014, 11.9% at the end of the first quarter
2014, 12.3% at the end of the fourth quarter 2013, and 12.4% at
the end of the third quarter 2013.
Warehouse projects reported a vacancy rate of 8.3% at
the end of the second quarter 2014, 8.5% at the end of first
quarter 2014, 8.4% at the end of the fourth quarter 2013, and
8.8% at the end of the third quarter 2013.Rental Rates
The average quoted asking rental rate for available
Industrial space was $5.23 per square foot per year at the end
of the second quarter 2014 in the Chicago market area. This
represented a 1.0% increase in quoted rental rates from the
end of the first quarter 2014, when rents were reported at $5.18
per square foot.
Rental rates
The average quoted rate within the Flex sector was $10.31
per square foot at the end of the second quarter 2014, while
Warehouse rates stood at $4.91. At the end of the first quarter
2014, Flex rates were $10.33 per square foot, and Warehouse
rates were $4.87.accounting for 276,031,840 square feet of Industrial
space.
ServeAttachment-3.ashx

Sales Activity
Tallying industrial building sales of 15,000 square feet
or larger, Chicago industrial sales figures fell during the first
quarter 2014 in terms of dollar volume compared to the fourth
quarter of 2013.
In the first quarter, 91 industrial transactions closed
with a total volume of $539,789,301. The 91 buildings totaled
13,210,857 square feet and the average price per square foot
equated to $40.86 per square foot. That compares to 154
transactions totaling $637,990,562 in the fourth quarter. The
total square footage was 15,821,506 for an average price per
square foot of $40.32.
Total year-to-date industrial building sales activity in 2014
is up compared to the previous year. In the first three months
of 2014, the market saw 91 industrial sales transactions with
a total volume of $539,789,301. The price per square foot has
averaged $40.86 this year. In the first three months of 2013,
the market posted 85 transactions with a total volume of
$232,203,922. The price per square foot averaged $31.84.
Cap rates have been lower in 2014, averaging 7.37%,
compared to the first three months of last year when they
averaged 8.56%.