An Insider's View of Chicago's Commercial Real Estate

2009 Market Overview: Observations & Analysis

Seller's bottom line:
According to Jones Lang Lasalle, since the peak of commercial real estate sale in 2007, the capital markets have significantly slowed down in the first half of 2009. Commercial real estate has started and will continue to decrease in value. Owners that need to refinance are finding credit hard to come by. Landlords find their tenants are in trouble and paying rent late or not at all. The banks are over-collateralized and not lending the tenant or landlord the credit they need to bridge the gap.

Buyer's bottom line:
Commercial Real Estate (CRE) conditions are weak in 2010 and banks with short falls will begin to divest troubled assets. Defaults equals foreclosures and distressed sales. Small Business Administration (SBA) lending is increasing given the stimulus package. User-buyers are at an advantage, as banks that specialize in SBA loans continue to lend. However, money is running out and Congress has yet to clarify a solution for the small business owner's credit line.

Investors bottom line:
Cash is king, credit is non-existent. There are two camps businesses seem to fall into. The first includes large corporate companies that are cash rich or have the government bailing them out. The second includes small businesses with slow sales and no credit to bridge the gap. Investing strictly in commercial real estate such as office, retail or warehousing may be difficult unless the owner can hold the property for a minimum of 5 years. However, mixed-use developments look good to investors. As the residential apartment rental market continues to increase any mixed-use development that has a favorable ratio of residential apartments to commercial space seems to be catching the investors fancy.

Tenant's bottom line:
Landlords still have a mortgage to pay. Rents are decreasing and Tenant Improvements (construction, free rent) are increasing. Leveraging the commercial real estate your business utilizes can bring in savings and increase the bottom line.

The Business Owner’s Upside to a Down Economy: Commercial Real Estate

I just read in the Business Ledger that business owners who lease or buy commercial property can leverage the economy to improve their #1 expense line item after payroll. The bottom line is that the tenant or buyer has an advantage given the turmoil the landlord/seller is experiencing. Landlords are not receiving rent and losing tenants to bankruptcy. Sellers are seeing their property values drop considerably and are looking to short-sale prior to foreclosure.

Seemingly, there is hope for the tenant and buyer. I have always been a proponent of having the business owner’s rights represented. And in today’s economy, appropriate commercial real estate representation is crucial. From the tenant’s vantage point, the lease agreement can make or break a business. There are clauses within every lease, such as termination options (the ability to terminate a lease prior to the lease end date), holdover clauses (lease ends, rent increases at the option of the landlord until a renewal lease is set in place), that the typical business owner may only glance over or overlook. It is the responsibility of the tenant rep to make sure the interests of the business owner are represented and those items negotiated in order to protect the interest of the tenant.

Commercial real estate buyers are looking for a sound analysis of the market. It is the responsibility of the commercial real estate broker to bring to the buyer’s attention the vacancy rates and more importantly the net absorption rate of space. In other words, how much space is available and how quickly can it get filled; this is typically a direct relationship to the asking rent of the project.

In today’s economy, the savvy business owner understands that knowledge is crucial in surviving this recession; and the knowledgeable commercial real estate broker is an invaluable asset as part of the business owner’s team.

Hard Economic Times May Risk Cash Flow

Business owners understand that CASH IS KING!

(If you are unclear about this, please register for Enterprise ProfitAbility today! The next seminar is Dec. 9th.)

But what happens when you are caught between payment delays and this credit crunch? Banks are just not lending to businesses. And if you don't have your own funds, you may not be able to expand as needed or your business can potentially stop completely. So, what do you do?

FACTORING.

What is it? It's the stop gap between payment delays and an income stream. It ensures that you, the business owner has access to capital that you need. Sometimes it calls for selling your income stream. For example, if you have Medicare or medicaid or other government receivables, a factoring company will buy that income stream for you. You have the cash you need without the hassel of waiting on the receivable.

Businesses should be running as usual. But as you plan for the future it may be a good time to have a contingency plan in place, especially for delayed revenue streams.

Don't hesitate to contact us at http://www.tjgcommercial.com/CommercialRealEstate.html for more information.

Business as Usual

We have all watched and read the news nervously the past few months as Wall Street and the White House best decide how to handle the country’s newest financial crisis. But what few people, especially business owners, ask themselves is, ‘What does this really mean for me?’

The answer: Re-evaluation of the coming year’s business plan, some forecasting adjustment, and in the end, not much .

This newest economic slowdown can be interpreted as part of the economic cycle. We, as a country, have been through numerous recessions and stagflations through the years. The recent failures of Wall Street giants do not necessarily mean the business owner is going to shut down.

All business owner should re-evaluate expenses to make sure spending aligns with the overall business plan; however, growth and maintenance of any company relies upon continuing to operate in a manner consistent with the company’s overall vision.

Many in the business world view this current crisis as an industry-specific recession; affecting those companies associated with the financing and banking industries. According to Jim Elsener, business writer for The Business Ledger, “You have to separate what is bad business from a recessionary trend.”

Getting credit is more difficult. Nevertheless, a company or individual who has a good credit history, as well as cash collateral are able to find financing. Banks are not freezing loans, just being more responsible to whom they lend money. The current state of affairs does not allow risks to be taken as loosely; lending institutions are being more selective in their lending practices.

When a company has something of intrinsic value to sell, there are buyers. The overall quantity of bids may be low; quality of bids, however, should remain high.

The bottom line is…business as usual. Our economy needs companies of all sizes to continue selling and buying.

To read more from Jim Elsener’s article, please click here.

Strategic Planning Crucial in Real Estate

Anytime decisions are made regarding the allocation of a company’s assets, the decision makers generally consult the company’s overall business strategy. Such actions as hiring and firing, purchasing equipment, and production demand knowledge of a company’s strategy in order to execute the plan appropriately.

However, many business owners do not fully realize that real estate decisions also need to be tied directly to the company’s overall business plan.

Without this type of executive planning, companies run the risk of getting themselves into difficult real estate transactions. Defining a company's real estate investment leads to positive productivity and growth, rather than negatively impacting the company's pocket book

In an article written in the Journal of Real Estate Research, authors Hugh O. Nourse and Stepehen E. Roulac provide rationale for incorporating a company’s real estate needs into its overall corporate strategy. Some topics that warrant consideration before any real estate transaction should occur include:

• What value does the new real estate add to the company?
• Is real estate essential to the success or failure of a firm’s product distribution, or an auxiliary factor of production?
• How important is geographic location to the business?
• Are workers impacted by a specific office or building design; specifically regarding job performance?
• Is there a plan in place should the company need to upgrade facilities in the future?

Surprisingly, many business owners do not give proper thought to incorporating, or even designing, a real estate strategy that fits into the overall business strategy of an organization. There needs to be a plan for action should an organization require real estate now or in the future.

Furthermore, many businesses focus in on “let’s make a deal” approach in securing real estate. Shopping around and performing due diligence is always recommended, however, price should not be the ultimate factor in making a real estate decision. The most important decision making factor should be whether the property connects with and supports the company’s overall business strategy.

In conclusion, tying real estate decisions to a company’s overall business strategy is crucial for any firm. Real estate decisions are just as important as those affecting personnel, production, or operations. Otherwise, it is possible that corporate real estate decisions “may be made that are unrelated to or even in conflict with the enterprise’s overall business strategy rather than being consistent with the real estate strategy and thereby reinforcing the overall business strategy” (Nourse 488).

To read the entire article, please click here.

Nourse, Hugh O. and Roulac, Stephen E. “Linking Real Estate Decisions to Corportae Strategy.” Journal of
Real Estate Reasearch. Volume 8, Number 4. 1993: Pages 475-494. 30 September 2008.

Collective Bargaining

As a small business owner, I believe its very important to focus in on the economies of scale, especially when it comes to office space. Let's say you are a company of 3 people that requires two offices, large work area, small reception and a coffee bar (would be a nice perk). At the same time, you know of one to three more people that would like to become your office mates.

In this situation collective bargaining may be a great way to go. You are sharing space without paying a premium to the executive suite centers. By going to larger space you have an opportunity to share come area expenses, copy machine, phones, fax, etc.

Nevertheless, one has to pay attention to the structure of the lease. Is one company going to sign and have separate agreements with the other office mates; or do all sign the lease? The situation can become tricky and should be worked through with someone that has knowledge in this area of lease negotiation.

Quick note on Lease Review....

I must emphasize that it is very important an attorney review your existing or upcoming lease. Attorney's have a knack for catching the legal wrinkles in a lease and making sure that it is fair and equitable. They are also very clear on the fact that the lease follows the accepted and agreed to Letter of Intent between the Landlord and prospective Tenant.

So, you may be asking why am I bringing this up? A friend shared a story of how she chose to have her lease reviewed by a friend of a friend's friend. This friend reviewed the lease and addressed only the business terms that were already accepted and agreed to. Obviously that did not work well for the landlord and the landlord required the prospective tenant abide to the agreed and accepted business terms. This friend of a friend's friend also was not an attorney and did not address some major legal issues in the lease.

In my experience as a commercial real estate broker, I can read, review and discuss the business terms of the lease. I can also discuss the definitions of the lease and determine if there are red flags that should be legally addressed by the attorney. But I, as a commercial real estate broker, am legally required to refer all legal matters to your attorney. Specifically, in Illinois, Commercial Real Estate Brokers CANNOT advise you legally.

A good commercial real estate broker will guide you in acquiring the real estate that meets your needs. They will refer you to the appropriate real estate attorney. They will work with your attorney to make sure the business terms are reflected appropriately in the forthcoming lease and that there are no surprises.

The Landlord

Whether you are buying or leasing, the landlord can be quite intimidating. No Fear. There is way to much space available for the small business owner to choose from.

I just met a small business owner that was being pressured by the landlord to sign a lease without ownership approving the space plan. Bad Idea. If your particular business requires some kind of special plumbing or electricty, say for a kitchen or IT servers, please do yourself a favor and walk away from the deal. It's better to open late, than get yourself in a legal bind because you've signed a lease where the space no longer works for you.

And, if you find yourself in that position, please do not hesitate to call a qualified local commercial real estate broker and find out what your options are. Options. That's the name of the game. I'd bet you a swanky dinner , if that landlord knew the small business owner had other options, they'd be way more amenable.

Personal Touch is Still Key

I was just perusing the February 2008 Issue of Commercial Property News (CPN) when I came across an article that hit home for me: Lost Connection, Technology May Enhance Business; Industry Still Wants Human Touch. My mentor, a 30 year veteran in the real estate community, has always told me to pick up the phone and make an appointment for lunch, coffee, whatever; just connect face to face. I have to admit, it makes all the difference.

This week, I've been incredibly sick, yet still needed to move things along for clients. I've used technology as a primary source for communication. Emails come to my phone, which is next to me at all times. My computer is not far away as I need to pass along vital information for negotiation. Yet when my client said I need you at this meeting, I showed up. And that connection brought value to my client. As a result, the loyalty ticker just shot up with this client. On the other hand, because my voice sounds like a frog, I've avoided the phone at all costs. Information was communicated using technology. It was prompt and efficient. Nevertheless, another client was incredibly annoyed that I wasn't available via phone for that real-time interaction.

To sum it up, I concurr with the article. Technology has made commercial real estate more efficient. But it's the face to face that makes the deal.

How to marry office image and functionality?

I find that many business owners I meet are challenged in finding the "perfect" space. Typically location trumps all other considerations. Nevertheless understanding how your clients view your business is critical in the decision making process. If you are a consulting company with the majority of work done at the client site, then the image of your office may not be as important as the amenities such as hotels and restaurants. Yet, office image can be the deciding factor for clients when comparing two different companies of similar caliber. So, what's the secret? Frankly, it's having a conversation with someone who is trained to listen to your real estate concerns. This person's focus is to tease out how your business works and to match it with the appropriate real estate. So don't be scared to pick up the phone and talk to your local commercial real estate broker. They will definately guide you in the right direction.

Should a Small Business Lease Space or Buy Space???

I've been working with small businesses that at times seem to waffel between leasing and buying. I think that there are two major questions to ask yourself before making a decision:

1) Is your business in a growth phase; or is it a mature business with a consistent client base?
2) What kind of upfront costs can your business handle?

Typically, the positives in a purchase tend to be fixed costs, certain tax deductions, potential additional income, appreciation of property. The negatives of purchase can include the fact that in a relatively short period of time your business space needs may change. Upfront costs such as down payment and buildout can tie up working capital. And the property may take more time away from the actual business.

To lease space, a small business owner can chose their location!location!location! Working capital is not tied up in a mortgage. The landlord focuses on the real estate so that the business owner can focus on the business. The downside is that there are variable costs involved and there is no equity.

So how does one make the right choice? Checking in with your financial planner and accountant is a great start. Then the next step includes a discussion with a reputable commerical real estate broker. It's at this step that one can look at what the market bears and make educated decisions that are right for the business.

Happy New Year!! The perfect time to set real estate goals!!!

It's the beginning of 2008. It's time to set your small business real estate resolution. Even if you are not planning on making any real estate decisions anytime soon, it's important to review how your business goals align with future real estate needs...just like that financial plan....

Perhaps it's a small home based business that is moderately expanding. All of a sudden, the garage just doesn't cut it. What to do? Or you've been in busines for 10 years, and the space you are currently in not only is too small, but the landlord has asked you to leave asap. And what about those landlords that keep raising the rent?

Well, hopefully you've connected with a commercial real estate broker (http://www.tjgcommercial.com/ ) that has reviewed your business goals with you and has designed a real estate acquisition plan that fits your needs. It may be a plan that is attainable in 3-6 months, or 5 years. Regardless, a good commercial real estate broker will not only review your current situation and suggest areas of improvement; but will also assist in defining what the optimal options are in the future.

The New Frontier: Southland

Southland…the New Frontier. This is the place for commercial/residential expansion in Chicagoland. It’s mission: to accommodate the population explosion that is expected to double in the next 20 years.

I was reading The Business Ledger’s article (November 12, 2007) on Southland; apparently, the I-355 to I-80 expansion has opened its doors to businesses.

Now the question is:

How does this community retain the high-end commercial developers which will bring about office parks, high end retail and not cause LocationVelocity ?

According to the 2007 September/October issue of The Leader (www.corenetglobal.org), Location Velocity is a concept where today’s location may become detrimental tomorrow due to an abundance of similar businesses.

It is imperative that any business looking to open or expand into this area choose it not only for its ideal geographic location, but also take a look at the Southland labor market indicators.

Currently, The Business Ledger reports (11/12/2007) that this new I-355 to I-80 expansion will increase the population in Lenox by 462%. Depending on the time frame (and it’s not clear in the article) this jump could indicate positive growth or an agitated area that isn’t stable.

Hence, labor market indicators are key.