Confessions of a Recovering Landlord

What's with the new wave of sub-subleasing going on?

What are critical dates in a commercial lease. How can they trip up a tenant? Who is responsible for tracking them? Enquiring minds want to know!

What everyone wants to know but is afraid to ask. Listen while Bob and Jan clear up any misconceptions!

Should you be underwriting your landlord as closely as they do you? Stay tuned for all the scoop!

Wait, don't turn that dial, today while we do cover some basic terms, we've got lots of examples of how it all can go so wrong.....

Best Single Investment? Listen to Bob and Jan discuss all things regarding the current state of the office sector - nation wide and here at home (DFW)!

• Buying distressed properties
• Bank loans
• CBD areas
• Office pricing
• Subleases
• Vacancies
• Downsizing

Today Bob and Jan discuss the pitfalls of not being aware of the clauses in your lease - especially operating expenses, maintenance and insurance. Listen and protect yourself!

Confessions of a Recovering Landlord has now been around for 100 episodes! Breaking our hands patting ourselves on the back...

To celebrate this milestone we talk about collabs today. Brand new collaborations we are making with a good number of business but the primary one we discuss today is residential real estate agencies. From commission checks to continuing education listen and find out how it's all going down.

How do the failures of banks like Silicon Valley Bank and Signature Bank affect the commercial real estate market, and what impact could this have on tenants and their representatives? Listen as Jan & Bob interview Ben Parkey, Executive Vice President/Market President at Texas Security Bank. Ben helps to answer many questions we all have on our minds after the recent banking debacles of the last couple of weeks.

Industrial statistics shared regarding occupancy, absorption, construction, asking rental rate and much more.

Discussed upcoming office loan maturities - to the tune of $40.47 billion by the end of 2024.  Scary!

Since hybrid work is here to stay how will it be successfully implemented and what does that mean for commercial real estate?

Enforcement of hybrid work policies?

Flex leasing - what is it?

Space as a Service - the new SAS!

Industrial subleases up 46%

And much more....

After all this time, in additional to his other accolades, we now get to call Bob, (drum roll, please) a published author.  Bob has been working on Confessions of a Recovering Landlord for over a decade and it's finally in print!  Jan interviews him on all things near and small including...

• Where did the title of the book come from?
• What was the inspiration behind the book?
• Have any landlords reached out offering money for the book NOT to be published :)?
• What was Bob's favorite part of the book to write and his least favorite?
• What is the confession Friend or Foe about?
• How long did the project actually take and what made you stay with it?
• What was learned writing this book?
• Can the readers expect volume 2 any time soon??

Crystal ball time again!  Listen as Jan asks Bob for his 2023 predictions, like....

• Will the Fed continue to attempt to slow inflation by raising interest rates?
• How will the above prediction affect construction, supply chain management, rental rates?
• How about return to work?  Will it happen and when?
• With the sublease market booming in availability, when, if ever, will office landlords get real?

REATA has many cool features (sounds like I'm selling a car, doesn't it) but one of our favorites is our REATA LeaseTrac System.  LeaseTrac is our system of walking through our clients' lease term with them and it includes:

• Just the Facts - Lease Brief
• Safety Check - LES Quarterly Reviews
• Lease Doctor on-call - Any questions/anytime
• Expense Hawk - Review clients expense reconciliations from their landlords
• Market Manager - keep clients informed of all market conditions to help them forecast costs/evaluate moves/or add a new location

Why is it important for a tenant to use a tenant rep brtoker?

Why is it important for a tenant to use the same tenant rep broker each time?

Bob recently received the designation SIOR - Society of Industrial and Office Realtors and he tells us all about it including:

• What was the driving force behind becoming an SIOR?
• What was required to become an SIOR?
• What will be accomplished by having become an SIOR?
• What was the recent national conference held here in Dallas like?
• How long has the organization SIOR been around and how did it come into existence?

In today's episode we cover a recent New York Times, The Daily Podcast which uncovered a lot of information regarding workplace surveillance primarily in the work from home model....but also in the office!

• VP of business software company in Texas discovers she's being photographed every 10 minutes
• Paid according to employer's definition of "busy" - as provided by keyboard surveillance as well as pictures
• 8 of the 10 largest employers are utilizing software for surveillance
• In place prior to the pandemic but greatly ramped up after
• Possible justification?  Working two jobs simultaneously, porn, video gaming, etc.
• Some employees prefer the system
• New industry created to fake out the system
• Mouse jiggler??

Bob & Jan had the pleasure of interviewing Tim Slaughter with Caddo Office Reimagined to discuss the world of coworking.

• How did Caddo decide to focus on coworking?
• How is their business model different?
• What kind of members are attracted to Caddo?
• What was learned by being a traditional landlord that helped with the coworking venture now?
• How did Caddo fare during downturns?
• Mission + Motto = Over the next five years, Caddo aims to build the most successful neighborhood office brand in Texas.

In today's episode Bob & Jan discuss what CEOs and business owners highest rated desires are for new space for their companies to occupy and they include:

• Space image is consistent with image and values the company wants project to clients, investors and employees
• Health consciousness
• Scale of opulence vs frugality
• Ease of access
• Attract and retain employees
• Location relative to clients, employees and operations
• Encourage and support productivity
• Consistent with value proposition of the company
• Civic responsibility - in a certain city, opportunity zone, congressional district, etc

Buildings are more in demand than ever.  Short supply, big demand and where are prices to go.  That's right....up!  How does that affect the taxes of said building and how are tenant's pro rata share of expenses treated?  Listen to Bob & Jan discuss all things CRE buildings, prices, taxes, and expenses.

• Cost of buildings
• Class of buildings
• Taxes
• How are they calculated
• Appraisal districts
• Tenant expenses
• Protecting your client

When to begin renewal/relocation discussions with a client?  Several factors to consider:

• Is the organization changing rapidly and not sure how much space they will need?
• Company is unsure of the right location for their client base and employees.
• There is a chance the organization will be acquired or might be acquiring themselves.
• Company is confident the economy will experience a downturn bringing lower rental rates OR an upturn bringing higher rates.
• Client has a renewal option which must be exercised by a certain date.  
• Missing a renewal option date could allow the landlord to lease the space out to another tenant, forcing client to move whether they intended to or not.
• The client wants to shrink the size of their space and are willing to sign a longer term lease to accomplish that.
• Client might consider buying a building instead of leasing.
• Client is doing a 5-year or longer forecast and wants to know what to assume for future occupancy costs.
• They want to consider changing their office culture in order to attract the right employees.
• Occupancy costs are generally the second highest expense behind payroll/benefits and should be managed proactively.
• The average project from the start of the search to the signature on the lease is six months.  Purchases generally take even longer.
• If the tenant decides they are better off relocating and the new location requires interior construction, that could add two to six months to the project timeline.

Why use a tenant rep broker?

• A tenant rep broker will almost always save you money (whether through face rate rental price, expenses, tenant improvements, etc).
• The rental rate already includes a fee for the tenant's agent which the landlord pays.  If the tenant doesn't use an advisor, it's like paying for a service without getting the benefit.
• Using an advisor provides professional distance from the negotiation for the CEO.  This allows all items to be considered collectively instead of sequentially.  
• An advisor negotiates many leases a year and is an expert on industry trends, terms and practices.  That knowledge is used on behalf of the tenant and levels the playing field with the landlord.
• An advisor is a fiduciary to the tenant and must put the tenant's interests above his own.  Loyalty is critical.
• The advisor saves the CEO time that he would otherwise have to invest himself in dealing with every aspect of the search (if there is one) and negotiations. 

• Older offices
• High-cost cities
• Migration patterns
• High-cost markets
• Sun Belt
• Remote work
• Class-A Office buildings
• Class-B Office buildings
• Class-C Office Buildings
• Deed in lieu of foreclosure
• Traditional gateway cities
• Texas Triangle - Dallas, Houston & Austin
• Amenity rich buildings
• Luring employees back to the office
• Location, location, amenities
• Virgin Hyperloop
• Freight transportation
• Battery-powered pods
• ELF?

• Fed raised interest rates today a quarter point.
• How does that affect CRE?
• How will it affect the general economy?
• How does this affect the space companies occupy for their businesses?
  • Will demand for space slow?
  • Will rental rates come down?

• How much space do you need for your office?
• Who do you need on your team in order to decide how much space you need?
• Are rents up or down?
• Landlords have representation, do you?
• Is subleased space the way to go?  How much can you save by taking sublease space?
• Why are some companies expanding and others retracting?
• Are employers planning on employees returning to the office?
• Flex space and how is it being used?
• Where is the growth occurring?

Bob & Jan get to grill their new friend, David George, regarding what trends he is seeing regarding employees returning to the office and how those decisions get made.

• What purpose should the office serve?
• What's the narrative companies need to develop to identify benefits to both employees and the business of the new way of working - recognizing that there are constraints for both?
• What does the change journey look like?
• Will the pandemic cause a lasting impact on real estate needs and the design of the office/workplace?

Bob weighs in with his opinions on the following predictions for 2022:

• The U.S. won't see tangible changes to the supply chain this year, but companies will be better equipped to handle delays and shortages.
• Industrial developers will target large office campuses as new sources of industrial development opportunities.
• Hotels will capture record sales prices in 2022.
• The omicron variant, and others that may follow, will prompt employers to delay return-to-office plans and maintain flexibility with employees.
• The infrastructure bill will not have a meaningful impact on the CRE industry in 2022.
• The passing of social spending bills, like Build Back Better, may pose headwinds to CRE demand.
• Rising inflation will compound rising construction costs, resulting in a slowdown or cancellation of some developments.
• Office landlords will invest in hospitality-focused office renovations to lure employees back to the office.
• As residents continue to work from home in 2022, property managers will invest more heavily in technology, specifically in amenity spaces.

• Two large companies (PwC & Glaxo/Smith/Kline) reducing their footprints - sizably 
• WeWork update
• What happens to office buildings
• Employer survey
• CBRE new measure looking for signs of life
• Market conditions update
• Landlords slow to provide proposals

I recently read an article in the online magazine D CRE and it was commenting about the supposition that 30% of workers will quit their current job and either go elsewhere or leave their industries all together.  I've actually heard a higher figure than that.  Microsoft had a survey stating that 41% of the global workforce was contemplating a resignation.  In April, according to that same article, 4 million US workers quit their jobs.

How can employers retain their employees?  According to the Worth.com article leaders need to focus on employee experience, heightened communication, and relationship leadership where bonds are created beyond just the work being done and employee's place in the hierarchy.

The D CRE article had some suggested solutions:

1. Recommended employees stay put.
2. Stay in your geographic market (this helps to build your brand and relationships) - this can build your network net worth.
3. Stay in your chosen career field.
4. Stay with your current employer.
5. Stay in your profession by studying it even further.
6. Stay calm and focused on the 3 F 's - faith, family and friends.

Should you stalk your employees?  Provocative question, right?  In today's episode of the podcast we discuss why that is actually important to the overall health of the company.

What we recommend is that clients plot the home addresses of every employee on a map when considering where to put the office.  And just to be clear, I'm not suggesting we invade anyone's privacy.  We always ask the employers to just forward addresses - no names.  We're just concerned with location - not surveilling anyone!

Smart, but realistically don't we just care about where the CEO lives?  OK, now, that's old school thinking, but remarkably accurate for a long time.  It still is in many cases.  True, but more than ever, employers are:

1. Paying attention to the needs of employees.
2. Wooing them back to the office.
3. Minimizing employee commutes - make them more bearable, especially with WFH.
4. Sometimes, the results of the mapping are surprising.  It can be eye opening.

Mapping can also show a business owner if they should open a second office or provide a coworking membership if a lot of employees are clustered together.

Also, to be considered, where do the company's clients office/live?  And, who wins?  The employees or the customers?

The FDA just gave full approval of the Pfizer vaccine.  Many large companies have announced they will require their employees to be vaccinated to return to the office.  Too Big Brother?  Or a good solution to avoid an incubator for more infections?

Employers' view point would probably be - it's my company, it's my space, and my responsibility to ensure (as best I can) the safety and health of all my employees.  Requiring them to be vaccinated/masked/tested is my choice.  Employers' rights are as important as employees' rights.  Just where does, however, one start and one end?  And how do you balance them?  Taking a hard line could mean you end up with no employees.  In our company, we haven't made any absolute unilateral demands on our team members.  As the pandemic has progressed, we went to Zoom meetings, then back to in-person, back to Zoom when someone's family member got covid, and then back to in-person.

Now, flip side.  What about those that aren't in good health, took the vaccine as early as they could, but have to have that job?  Should they be required to come to work if their cubemate isn't taking the same precautions?  What if they're caring for an elderly parent at home and don't want to bring the virus home?

All extremely valid points, but get back to the original premise which is - do employers have the right to force their employees to get vaccinated?  I think it is important for an employer to provide as safe an environment for their employees as possible.  I mean, look at what landlords are currently going through to ensure a safe/clean environment for their tenants.

Personally, I don't think you can mandate this across the board.  There are going to be exceptions to every rule and I think each company will have to decide this for themselves.

I saw a headline this week that the DFW office market is trending up.  Again?  We just had this conversation a few weeks ago.  How is it different this time?  The article was from D Magazine's CRE edition written by J. J. Leonard and he did a good job of slicing and dicing the data to reach that conclusion.  I'm not sure, however, the numbers from CoStar would agree.  First, he states that suburban markets are dominated by small and medium-sized businesses whereas downtown normally appeals to larger, national tenants.  He correctly points out that national companies typically make policy that applies everywhere in the country and they are slow to change.  Small and local companies can be more nimble in their decisions.

So getting back to local control (smaller tenants) appears to be what is driving the deal activity mentioned in the article.  It says that absorption was positive for the first time in four quarters at the end of the 2nd quarter.  CoStar says we've had 5 quarters of negative absorption.

To reach his conclusion, J. J. acknowledged that his numbers were fueled by Charles Schwab moving into its million SF campus.  He also says that numbers all over the metroplex were trending positive.  He says that if you remove JC Penney's bankruptcy-driven move-out of its 1.2 million-square-foot campus in Plano in the 1st quarter, absorption would be only slightly down, and Class A absorption would be over 600,000 square feet positive.  But you can't do that, of course.  If you keep Schwab in the mix, you have to do the same for Penney's.  The article says the 2nd half of 2021 will have positive absorption and in that regard, CoStar agrees. In fact, CoStar is predicting that 2021 will end the year with 2.7 million SF of positive absorption and remain positive into the future.  I'm hopeful that this will be true but with we've been over the last year and a half and with the current conditions of the delta variant, I'm skeptical.

Also, the article states that rental rates have increased again and now average $29.44.  I'm not seeing that yet.  CoStar says that overall rates fell 0.2% which means they are basically flat and they average $27.76.  But average rates really don't tell the story.  The truth is in the details.  For example, I was doing some research on an area of Tarrant County the other day.  This was for office condos.  I found rental rates that varied from $17.50 to $28.00 for what looked like comparable buildings.  An average rate of $22.75 would be very misleading because not a single building was quoting $22.75.

The tenant's market may be coming to an end.

No one ever got fired for buying IBM.  That was the saying to justify buying PCs from IBM in the late 1980s.  What does this have to do with negotiating office and warehouse leases?  People that work for large corporations who make decisions about what consultant to hire or product to buy for sure thinks about the perceived risk of hiring or buying the wrong one.  If it goes bad for some reason, can they be criticized for using the wrong one?  What's the safe decision?

And, we definitely see this play out in commercial real estate.  All the big shops have excellent CRE professionals and we do business with a lot of them.  But there are a few reasons why I think a boutique firm is a better way to go.

1. Boutiques aren't full service.  Lots of people talk about how they are full service, as if that's a good thing.  But it's not-why? Mainly because of conflicts of interest.  When I was an asset manager and we listed a building for sale, the details of our leases (we called it the rent roll) mysteriously ended up in the hands of the tenant rep group of the listing company.  And when I was outsourcing our leasing to the asset services divisions, I was told that they would put a tenant rep on my account because they know deals coming down the pike before anyone else and I'd get a crack at them before other landlords.
2. The experience of the person actually handling the assignments.  Let's say a company with 25 locations in the US hired one of the biggies.  They will be assigned an account manager to be their primary contact.  That person works with all the agents in the various cities to get the deal done.  But the individuals in each of those cities are often junior agents who aren't that experienced.  In a boutique shop, all the work will be handled by a highly experienced agent.  If it's in the client's best interest, they will partner with the best person in the local market to help with the transaction - they aren't required to use someone in the same company.
3. Building relationships is critical and that's often hard in a big shop.

Most of the independent brokers I know once worked for one of the biggies.  I often ask them if they miss it.  The answers is always no.  I also ask if there is anything that the big companies did for their clients that an independent can't do.  Every one has said no.  I've mentioned before on this podcast that after 9 years on my own as a corporate real estate advisor I joined a regional firm because I had always wondered about that question - what are they doing for their clients that I'm not doing.  I quickly learned the answer was nothing.

So, if you want to know your agent has no conflicts of interest and is highly experienced use an independent brokerage company.

It's time for another list of predictions that we can tear apart.  Today, the top 10 commercial real estate predictions for 2021-even though we're half-way through the year!  Let's see just how accurate these really have been so far.

I love tearing into these crystal ball projections to see what I agree with or not.  A law firm in California, Allen Matkins, conducts an annual forecast event and publishes the top trends for the coming year according to CRE "experts".  The list we'll discuss today was created in November 2020 - 8 to 9 months ago.  How much do you think will look brilliant in hindsight versus what will look really stupid.  By the way, shout out to The Tenant Advocate, Benjamin Osgood, for posting about this on Twitter.  Here's our springboard list for discussion:

1. Rapid But Uneven Market Recovery
2. COVID-19 Will Bring a Widespread Expansion of Office Touchless Technology
3. Employee Office Culture Will Return
4. The Office of the Future Will Prioritize Collaboration
5. Global Capital is Still Looking to Invest in the US
6. COVID-19 is Accelerating Technology Trends That Were Already Occurring
7. Leasing Transactions Continue to be Extremely Slow
8. Renewals Will Dominate the Leasing Market for the Next Year
9. Construction is Generally Moving Forward on Schedule
10. Permitting Challenges are Widespread

One of the most desired characteristics in today's leasing world is flexibility.  In today's podcast we discuss why flexibility is so important and why landlords charge extra for it.

Some companies are growing rapidly while others are shrinking-this is what makes flexibility in their leases so appealing.  Companies have plans and may be waiting on that one big contract to be signed when, poof, it all vanishes overnight.  In other cases, the new contract takes them by surprise and they have a hard time managing the growth.  Flexibility, in some cases, is the difference between staying in business and failure.  Much of the flexibility needed right now though doesn't have anything to do with whether the underlying business is going well or not.  It's a function of working from home or other places, allowing people to live anywhere they like, hybrid working arrangements and employee reluctance to return to the office.

So, some of the ways tenants can achieve the ever-illusive flexibility:

1. Lease more space than is needed initially and sublet it out until the company needs the space.
2. Lease what is needed now and have a right to expand to a future date.
3. Buy a membership in a coworking space (extreme flexibility, but most expensive option).
4. Buy your own building and sublease out what's not needed.  Non-renew tenants when you need the additional space.
5. Secure a very short-term lease (again, usually a more expensive option).
6. Hub and spoke model where the hub is an office but spokes are employees WFH or coworking.

I love the idea of touring buildings virtually - it can narrow the list quickly and people from all over the world can be a part of it!  I recently read a BisNow article that cast doubts about whether virtual touring would still be necessary after Covid.  They said it will be a mixed bag.  The people they interviewed making the technology for virtual tours think it's here to stay, of course.  Those companies saw huge adoption and growth in 2020.  So they think it's here to stay.  And, in some ways, I don't disagree.  It seems like a new bar has been set.  It used to be that still photos and floor plans were all that was expected.  Now, a 3D floor plan allowing you to walk through the space on any computer in the world is the expectation.  If a client can narrow the list of properties that they might have previously toured from 20 to 5, that saves money.  Furthermore, they might only have local managers tour the properties in person avoiding a few people flying from the corporate office.  That saves, airfare, hotels, rental cars and food.  That can really add up.

That said, there is no substitute for being there in person.  And the cost is a rounding error.  But the virtual tour might be good enough for out-of-towners.  I think it will depend on the proximity of the decision makers and their priorities at the time.  

Virtual touring has been used in residential and multi-family for years now and those people are often local.  I read that 85% of home buyers search houses online and tour them virtually before ever touring one in person.  I do see the use of virtual tours continuing and growing in commercial, but never to the extend it's used in residential.  We used it here at REATA over the last year.  When a client decided to sublease their space, we created the 3D or 360-degree floor plan and tour.  We also had one client from the coast do a virtual tour where my smart phone was on a gimbal and the clients were watching through a Zoom connection.  It was also nice because it was recorded so people who missed the tour could watch it later.  The downside to that, however, is that we never had all the decision makers in one place at one time focused on the decision.  It created a disjointed process that took longer than it might have had everyone been together in person.

So, while a virtual tour can definitely help to eliminate major issues, it definitely doesn't encompass the feel.  I've looked at homes online before that once I got to the actual premises it showed very differently.  To quote the article, "I've definitely seen a lot of these videos, and basically, the only thing it helps me with is OK, you know, I can tell whether the space is a hellhole, but that's about it".  And I don't know that I disagree.  A good photographer can make anything look good.  I can't imagine having a client make a final decision using only virtual tours without having someone tour it and shoot it with their own equipment.  That said, virtual still serves a purpose.  While touring in person a client can whip out their phone and take pics/or videos of things they liked or didn't to job their memories later.

New technology developed during Covid specifically allows for this-we have been testing an app that replaces tour books and allows all participants to take photos and video and upload them to a common place on the app for that building.  Everyone can then see what everyone else is thinking.  This technology was developed in warp speed during Covid.  It's definitely not market ready but it shows where things are headed and is further confirmation that virtual touring will be one tool that is here to stay.  

10 reasons why you should relocate your business to DFW?  Seriously??  I'm limited to 10?  Come be our neighbors...you'll like it!

Let's dive right in:

1. Central Time Zone - with the advent of constant shipping/traveling/gotta be there now being centrally located in the country is highly desirable.   Distribution of good is faster and cheaper and travel is more convenient.
2. DFW Airport - having a huge, international airport that flies practically anywhere is invaluable to business owners.  You can fly anywhere in North and Central America within about 3 hours or less.  It's the 4th busiest airport in the world based on passenger travel behind 2 in China and Atlanta.  It's interesting, of the top 15 airports in the world, 9 are in China, 1 in Japan and 5 in the US - Atlanta, DFW, Denver and LAX.  A great airport like that is a huge economic engine for the region.
3. Low Taxes (corporate & individual) - Texas has always prided itself on having no income tax.  That said, we do have a higher property tax rate, but the net is still heavily advantaged to us.  Corporate taxes incentives are normally given away like candy whenever a big company states they wish to move to a city in Texas.  If you look at the total tax burden paid by individuals in the US, guess which state is #1 (and not in a good way) - NY.  Hawaii, Vermont, Maine and Connecticut or Minnesota (depending on the source) round out the top 5.  Texas is #30 according to Wallethub.com and #47 according to TaxFoundation.org.  Corporate taxes are a little different.  South Dakota & Wyoming tie for 1st, then Missouri, North Carolina and South Carolina are the top 5 according to Taxfoundation.org.  Texas is #47.
4. Low Cost of Living - housing, food, taxes (again-see above), transportation-just across the board we rate better than most big areas.  NYC is the worst in the US followed by SF, Anchorage, Honolulu and Brooklyn.  Dallas is #52 according to Numbeo.com
5. Labor Force - we've always had a wealth of blue collar workers, financial and oil and gas workers etc.  While Austin is now called "Silicon Hills" for the tech companies it's attracting, DFW is one of the top cities in terms of high-quality tech worker availability.
6. Weather - normally, Texas is a more moderate climate than other locales, but of late, it's hard to predict the weather anywhere!  120 degrees in Seattle recently?  All said, we still experience more sunshine and less rain, sleet and snow than many metropolitan areas.  This translate to more reliable transportation of people and goods and a smoother overall economy.
7. Education - while I know you are referencing our big universities and their panoply of disciplines, I also would point out that there are lots of other educational venues locally from tech to real estate to hospitality to culinary.
8. Cultural Opportunities - DFW area is the home to many one-of-a-kind culture venues from the Kimball and Amon Carter Museums in Fort Worth to the Nasher Sculpture Center in Downtown Dallas.  There are far too many to name.
9. Quality of Life - DFW is highly liveable with lots of things to do and the weather to allow you to do it.
10. Pro-Business Attitude of People and Governments - one of the best reasons to live here are people's attitudes.  Government and schools understand that businesses and the jobs they create are what attracts people to DFW.  People move here with no jobs just because of the reputation.

You've heard a ton of talk, including on this podcast, about WFH, returning to work or a hybrid of the two.  But before you use the great reset of 2020 as the excuse to pull the trigger on shedding some overhead costs (think office space), there are 8 things you might want to consider first.

OK, first things first, we are going back to the office, correct?  For the most part, I think yes, the majority of people will go back.  Will it look different?  Yes, for sure.  Some companies will go back in full, others will expand, others will do the hybrid thing and others will reduce or go totally remote.  

The first thing to be considered before you pull the trigger would be - what do you want to be when you grow up?  What are your long term goals and objectives for your company?  We always start with this because it drives every other decision.  So big picture - what do you envision for your company in the future, 3, 5 or 10 years?  Will you be growing or shrinking, getting into new businesses, growing through acquisition or planning to be acquired?  What customers are you targeting, where are they located and how do you plan to reach them?  There will need to be a lot of communication among management, ownership, customers and even employees upfront to accomplish all this.  

The second thing to consider would be the workforce plan.  What's the impact of the big picture plan on headcount?  What's the change to the numbers, where will those people be located, do they need an office, a cube, or just an internet connection?  If they need an office or cube, where does it need to be and does it need to be dedicated to that person full-time or can it be shared?  How many days a week will people come to the office?  Companies will also need to take into account the collaboration space and meeting space.  If they are potentially changing the way they use their office space, they need to rethink what the office is even for.  There is a mind-shift that will be needed.  That mind-shift changes the way the business is operated which then changes the way space is used.  All that should be taken into account when determining what the office will look like and who needs what resources and accommodations.

The third item would be to generate a space program.  This space plan allows you to translate the workforce plan into an office size plan.  It shows you the approximate size of space needed in each location.  This allows your tenant rep to determine what options are available and provide estimates of the cost.

The fourth item to consider would be lawyers and human resources.  Make sure your plan can be properly and legally implemented.  You may need to re-write employees handbooks and policies.

Item number five would be to create a plan for the employee experience.  Now more than ever, employers want to make a strong case for why employees should come back to the office.  Make their workforce want to come back to the office.  This includes the office space itself, a clear hybrid plan for splitting time between home and office, amenities (in the space, the building and the area), and the safety of being in the office.

Number six is communication.  More than every, stay in touch with employees, understand their thoughts, feelings, fears and goals.

Number seven is to make sure your technology infrastructure is set up for the coming changes.  

Number eight is when to go and speak with your landlord....this is a really important point and there isn't a single right answer, honestly.  It really depends  on what the plan is and how much time is left on the current lease.

Just read a jobs report in the NYT and the headline made me feel good and then the article left me confused.  So, here's the headline:  U.S. Jobs Report for June Shows a Gain of 850,000, Better Than Expected.  That's great news, right?  But, as I've heard before.....read on.  While they do state that 850,000 more people were hired, it also states unemployment rose to 5.9%.  Reuters states that "employment is about 6.8 million jobs below its peak in February 2020".  They giveth and they taketh away.

What does that actually mean and how will that affect CRE?  Basically, it means that we are still in a recession as far as full employment goes.  We lost jobs due to the pandemic that have yet to be restored.  That said, we are on a non-farm hiring uptick which bodes well for the coming months.  NYT states that full employment should be reached by mid-2022.  One would assume a lot of the employment gains must have been in the hospitality sector what with the bars, restaurants, hotels and travel opening back up.  However, the article also states that some of those displaced hospitality workers have moved over to the industrial sector which is going gang-busters.

Reading on, another quote from Reuters that was a real head-scratcher: "Construction payrolls contracted for the third straight month.  Though the sector remains supported by robust demand for housing, scarcity of workers and expensive raw materials like framing lumber are hampering homebuilding".  I head that one home builder has temporarily placed a hold on all new home orders for a year to a year and half due to inventory.

Crazy, and wow, is this affecting CRE!  We recently were working with a client who's in the process of moving to a new location.  I've mentioned this example previously, but it bears repeating in this context.  The landlord had promised a turnkey construction where they would pay for the full project cost, but when the landlord got quotes from GCs, the landlord re-traded the deal to a fixed allowance.  Some contractors won't guarantee their bids more than about 20 minutes!

Some labor shortages are expected to ease after schools reopen in the fall.  I would imagine day care for the average family during the pandemic has been nothing short of scary.  So let's get granular about what all this means for CRE.

As always, it depends on which sector of CRE you are referencing.  Industrial sales and leasing are going through the roof, literally!  Reference episode #58 where we discuss the impact of e-commerce on the industrial market.  Distribution centers, warehouses, manufacturing, and light industrial are all booming.  Whether owning or leasing, it's a hot market and inventory is low.

Office, not so much.  Take a listen to episode #59 tp see what I mean.  While landlords are talking an optimistic game, the statistics don't seem to support that.  If you're an owner, it's a scary time unless you have large, secured, credited tenants.  For tenants, it's a good time to negotiate a lease - maybe not quite as good as a few months ago, but you should still be able to get a good deal for your company.  Hospitality and retail - I'll just say I'm glad we don't work in those property types!

Last week I saw a headline that said "The DFW Office Market Rebound is Underway".  The article was a Cushman & Wakefield second quarter report and in it one of their tenant rep brokers was quoted as saying, "While absorption numbers were negative for the second quarter, the DFW office market rebound is underway, and activity has picked up significantly in the last 30 days".  The article went on to say that according to the firm's data, net absorption was negative 895,503 SF with Class B space accounting for 762,004 of that negative absorption.  

Sorry, but the above stats just don't ring true for me-how can you still have negative absorption and say the market is rebounding?  Other stats quoted in the article were:  

1. 1.2 million SF of new construction came online in the second quarter with 4.6 million SF of office space still under construction
2. The vacancy rate in the second quarter was 22.1%

They followed this info with a quote from one of their leasing agents:  "We've seen a steady increase in activity since the first quarter, and we expect it to continue through the end of the year.  Companies are coming back to the office in full, and those that did short-term deals are back out in the market ready for longer-term commitments.  Dallas is in a very good spot right now".

Frankly, I'm not so optimistic.  I often look to CoStar for market rates.  How do their numbers compare to what C&W is saying?

1. 5.3 million SF negative absorption in the last 12 months - 5 quarters in a row
2. Total activity averaged 25.8 million SF 2017-2019
3. Sublease space is still at 9.3 million SF - stable
4. Construction 4.2 million SF delivered in last 12 months - 7.1 million SF underway
5. 18% vacancy - 3% subleases available
6. Rental rates fell 0.2%

Bottom line for me is I still don't see the basis for a headline like DFW office market rebounding.  I still think companies overall will continue to shed space.  That should keep downward pressure on rental rates.  We aren't seeing them fall much, however.