Guts, brains arid perseverance are as essential as oxygen to today's commercial real estate. Despite the economy's steady but slow expansion and the thinning out of brokers that followed the recession earlier this decade, brokers say the business is as tough as ever.
"The business has probably never been as competitive as it is today," says John Renard, president of Cushman & Wakefield Inc.'s western United States operation. "There are fewer brokers, but they are stronger and more talented."
In addition to instinctual and intellectual assets, brokers also rely more on technology to deliver for their clients. Large and small brokerage firms are developing software for lease projections and financial analysis that all brokers can access, which promotes efficiency and consistency of service. Brokers better jump on the technology bandwagon because corporations are demanding timely and better services.
"It's not enough to represent clients, brokers have to be in a position to help clients make well-informed decisions through business information systems," says Renard, whose firm will spend $10 million on technology this year.
One thing leads to another
While foot canvassing in lower Manhattan seven years ago, Glenn Markman, senior managing director in the New York office of Grubb & Ellis, recognized a situation that naturally sent up a red flag - a large tenant in an aging building spread out over a dozen non-contiguous floors. The Legal Aid Society of New York, one of the country's largest non-profit organizations, occupied more than 100,000 sq. ft. at 15 Park Row, a building near City Hall consisting of irregular floor plates of a little more than 10,000 sq. ft. each.
"The building was obsolete, and the tenant's space was too vertical," says Markman, an 11-year real estate veteran. "After meeting with the society, my gut told me something was going to happen."
The Legal Aid Society's facilities manager described the problems of its vertical expansion in the initial meeting, but the organization also cited smaller unmet space needs in New York's outer boroughs. Markman and fellow Grubb & Ellis broker Robert Martin subsequently tackled these issues while eyeing the big prize - the relocation of the society from 15 Park Row to another building near City Hall.
"The first requirements were as small as 2,500 sq. ft, but as a result of thosethe society began to feel more comfortable with us," Markman explains. "You gain access to a company through the smaller requirements because you begin to understand how decisions are made internally."
The Legal Aid Society's big need included 120,000 to 130,000 sq. ft. on contiguous floors at a rate that started at less than $20 per sq. ft. And, since the society's furniture and equipment was old and it did not have the budget to pay for the soft costs of the move, the landlord was to have deep enough pockets to fund a substantial work letter.
But, as Grubb & Ellis started to look for options in the early-1990s, the recession had wilted the cashflow of most building owners in downtown New York buildings.
Markman showed the Legal Aid Society as many as 50 buildings, not all of which, he admits, were big enough or in the City Hall area. The solution came from an unusual source - a building owned by the U.S. Postal Service that heretofore had only housed the federal government. "We searched every building in the area, but we were going crazy because we couldn't come up with the space," says Markman. "Then Rob (Martin) suggested we call the U.S. Postal Service about 90 Church Street, a building that never had a `for rent' or if or sale' sign on it."
Beginning with the post master general's office in Washington, D.C., Markman was referred to the building's in-house asset manager in New York. By coincidence, the postal service had just hired the New York office of Boston Properties to re-position the asset - a 1 million sq. ft., 1930s art deco structure that is listed on the National Register. The upper floors of the 15-story building were H-shaped and totaled 50,000 sq. ft., which are dimensions conducive to a professional services organization.
Legal Aid liked the upper floors of the building, but the space was occupied by federal agencies. Recognizing that the Legal Aid was a serious prospect, the postal service agreed to pay for the relocation of the top-floor tenants to the structure's lower floors and begin renovation of the three upper floors and common areas.
In 1994, Grubb & Ellis negotiated a 20-year lease with an initial rent below $20 per sq. ft., a $70 per sq. ft. build-out allowance and fixed-rate escalations that allow the tenant to project its rental expense to the penny over the term of the lease. In addition, the postal service agreed to masterlease the building for 30 years to Boston Properties, effectively handing over overall management and leasing responsibilities to the real estate company.
"Legal Aid wanted to know that the building was going to be managed in a manner compatible with other buildings," says Boston Properties' senior vice president Robert Selsam, who negotiated the deal on behalf of the postal service and is directing an overall $50 million renovation of the structure. "The society demanded private management as did the post office, which wants to maximize the building's value."
The society will move into the top three floors next July. Selsam says another 450,000 sq. ft. will be leased tO nongovernment tenants in the coming years.
"It was such a logical deal that we didn't really have to sell it," says Markman of the deal that culminated six years of work and more than 300 meetings. "But it's a good example of perseverance and going outside the box to come up with solutions. It was a creative deal on all accounts. l sometimes can't believe it got done."
Markman still represents the Legal Aid Society.
The ties that bind
When McDonnell Douglas was told to vacate 380,000 sq. ft. it subleased from Hughes Aircraft in Long Beach Calif., almost three years ago, CB Commercial's Bill Peters and Gregg Kirkpatrick checked their date books and rolodexes.
The brokers, who work out of the firm's South Bay office and previously represented McDonnell Douglas in the Long Beach area, provided information about leasing options to McDonnell Douglas, which helped convince the aerospace firm that it would find other suitable space in a market that was tightening significantly. The exposure to a couple of alternatives helped the firm conclude its negotiations with Hughes.
"We greased the wheel for both firms," says Kirkpatrick.
The conclusion of those negotiations resulted in a 250,000 to 300,000 sq. ft. requirement to house up to 1,000 McDonnell Douglas engineers and executives working on its C-17 cargo plane. The firm wanted a location close to Long Beach Airport and in a building that could accommodate high-tech systems.
"There were not many 200,000-plus sq. ft. alternatives out there, but we were aware of several buildings in Long Beach Airport Business Park that were vacant," says Kirkpatrick. The buildings were owned by a lender, Los Angeles-based Coast Federal Savings, which took the assets back a few years earlier. Ironically, McDonnell Douglas leased the buildings until the early-1990s in a deal CB Commercial also arranged. The structures were never re-tenanted, leading to foreclosure.
The 600-acre property abuts Long Beach Airport and Interstate-405, contains a Marriott hotel and is near a golf course. In addition, the buildings contained a direct cable link to McDonnell Douglas' regional headquarters one mile away, which remained in the ground after the firm left the site in the early-1990s.
However, the fact that the buildings were owned by a bank and on land ground leased from the city of Long Beach were drawbacks. The ground lease was due to expire in approximately 30 years. Coast Federal and McDonnell Douglas agreed that if the ground lease was extended, the lease rate would be discounted. Since the buildings remained in good condition and were never re-tenanted after McDonnell Douglas, the deal did not include a build-out allowance.
In mid-1995, the parties negotiated a 10-year deal for 272,000 sq. ft. in three buildings. Months later, the buildings were sold to Arden Realty Group, a Los Angeles based real estate firm.
"McDonnell Douglas is close to the airport under the terms of a long-term lease," adds Kirkpatrick, who began showing Long Beach Airport Business Park to prospects as a CB Commercial trainee 12 years ago. "It's in an area that it knows and likes, and is close to its headquarters."
Long relations, local expertise
When executives of Hoechst Group of Germany decided to consolidate a pharmaceutical division into its headquarters campus in Bridgewater, N.J., earlier this year, the multinational displaced another division, creating a 210,000 sq. ft. requirement in north-central New Jersey. The displaced operation, Hoechst Celanese, the fifth largest chemical company in North America, quickly had to secure a nearby site that would cause little disruption for its 500 employees.
"The company was pleased with its staff and didn't want to put a further burden on them," says S. Bleecker Totten, senior managing director of the Saddle Brook, N.J., office of Edward S. Gordon Co., which has represented Hoechst Celanese exclusively for many years. Totten met the firm's manager of real estate at an Industrial Development Research Council (IDRC) meeting some eight years earlier and parlayed that introduction into a tenant representation agreement.
Initially, the requirement consisted of 150,000 sq. ft. but soon increased to more than 200,000 sq. ft. At the same time, the suburban New Jersey market continued to tighten. In July, the vacancy rate for Class-A office space in the Route 78/287 corridor stood at just 3.8%, Edward S. Gordon Co. says. And there was just one speculative building under construction in the area.
Within weeks of learning about the requirement, an Edward S. Gordon team consisting of executive director Robert Rudin, consulting director Linda Dow and Totten identified three primary options build another facility at the Bridge water campus, build on a site about 15 miles from its current location or lease the spec facility under way three miles from its Bridgewater site in Warren Township, N.J.
The spec building, a 210,000 sq. ft. project of Bellemead Development Corp. in Somerset Hills Corporate Park, was scheduled for delivery in April of 1997. The project was deemed the quickest solution and in a Route 78 park that was only one exit east of the Bridgewater campus.
A deal was negotiated with Bellemead Development to lease the entire building in just 60 days, compared to a typical six- to 12-month deliberation, effectively tying up on the only available spec space in the Route 78/287 market. Hoechst Glanese inked a 15-year deal with two five-year options for 210,000 sq. ft. in what is New Jersey's largest office lease this year. Occupancy is set for next April.
"I've never seen a transaction this size get done so quickly," adds Totten, a 35-year real estate veteran who spent 15 years with McGraw-Hill before joining Edward S. Gordon. "It was a complex deal, but we had a tenant that wanted to put the matter behind them. And we knew the developer."
The other options involved longer delivery dates and construction headaches. New facilities would take at least 12 months to finish.
Persistence pays off
Like a host of other brokers in Dallas and Austin, Texas, last year, Randy Cooper kept calling on FirstPlus Financial. A few years into a successful national expansion, the 10-year-old financial services company needed approximately 75,000 sq. ft. but refused to grant an exclusive to any broker. Cooper, the vice president of Dallas-based Fults & Associates*ONCOR, employed a problem-solving mentality, listening to FirstPlus Financial's executives and preparing space projection and requirement analysis, instead of registering projects with the tenant.
"We were asking the right questions and trying to find the right space, not just trying to slam a deal," says Cooper.
FirstPlus initially wanted to expand in Austin, while also maintaining a smaller presence in Dallas. But analysis by Fults identified the high cost of keeping the operations split. The broker determined that FirstPlus could cut its real estate operating costs by 15% and secure more efficient phone, computer and network systems by consolidating.
Fults prepared eight options in suburban Dallas, a market in which vacancy rates fell to 12.6% in the first quarter of 1996 from 16.8% a year earlier, that could accommodate extensive telecommunications and computer technology as well as ample parking. When an AT&T sublet came on the market, Cooper recommended that FirstPlus submit a letter of intent at a 10% premium of the asking rate.
"It was a bold move," Cooper admits. FirstPlus didn't take the advice, submitted an offer at the asking rate and didn't get the space.
The experience spoiled the relationship between FirstPlus and Fults - at least for a couple of months. By October, the tenant was frustrated with the brokerage community in general, called on Cooper again and gave him the exclusive.
"The next day another Fults broker came out with a sublease listing of 113,456 sq. ft.," Cooper says. "We toured the space on a Monday, had a letter of intent on Wednesday and negotiated the following week."
In January, FirstPlus signed a seven-year deal for 75,000 sq. ft., with options on another 38,000 sq. ft. The effective rate was $11.40 per sq. ft. The deal included a buildout allowance of $8 per sq. ft.
The building, which is called 1250 Mockingbird, is located in the Stemmons Freeway submarket, one of the last suburbs to accommodate large users, and owned by Mutual of New York and leased by ARES, a Mutual of New York subsidiary. The previous tenant, STM Mortgage Co., negotiated a $300,000 cancellation agreement with Mutual of New York, which helped FirstPlus secure the space at a rate that Cooper says is approximately 35% below market. Mutual of New York, which was represented by Jeff Laures and John Crowley of ARES, also benefited because there was very little downtime in re-tenanting the space.
"Between October and January, this is the only deal I worked on," Cooper says, who estimates that hundreds of meetings took place to complete the transaction. "It's a deal that worked out well for everyone."
Big assignment, big broker
The beauty contest to win the brokerage work from the National Rural Electronic Cooperative Association (NRECA) three years ago was not for a typical assignment. Instead the requirements for the association, which employs 400 people in metropolitan Washington, D.C., involved four different jobs in two neighboring markets.
"It wasn't just one vanilla leasing assignment," says Jim Creedon, senior vice president of The Charles E. Smith Cos., a Washington, D.C.-based full-service real estate firm that won the right to lease three buildings and dispose of one. Led by Creedon, associate vice president William Hylton and vice president Dennis Turner, The Charles E. Smith Cos. completed the leaseup of one building last year and another in early 1996. The other assignment involves the preleasing of a planned 165,000 sq. ft. new structure in Arlington, Va., and the sale of NRECA's former headquarters in downtown Washington, D.C.
In 1993, NRECA bought land in Arlington to construct a two-building head' quarters campus that is part of a mixed-use park called The Ellipse at Ballston. The first building was completed a year ago. The association occupies 66% of the 270,000 sq. ft. building, and The Smith Cos. was hired to lease the balance. The brokerage firm leased 90,000 sq. ft. to seven firms. The second building will contain 197,000 sq. ft.
NRECA's decision to buy the development parcel in northern Virginia has proven to be shrewd. Creedon says land values in Arlington have doubled since the site was acquired three years ago.
"The association has taken an aggressive posture in acquiring land at an advantageous time," says Creedon, who has worked closely with NRECA for three years. "It took some risk, but it's reaping the benefits now. There's good activity in the Northern Virginia market."
The rental rates at its headquarters building in Arlington are in the $25 per sq. ft. range. The rates are approximately 15% higher than last year, a trend The Smith Cos. and NRECA hope to exploit as they prelease the new building in The Ellipse at Ballston.
NRECA moved its headquarters from an owned facility at 1800 Massachusetts Avenue. The 186,000 sq. ft. building was built by the association in 1979. The Smith Cos. also were instructed to lease' up the structure and then sell it.
"It was an unusual assignment in that there were four different components," says Creedon, whose firm leased 5.5 million sq. ft. in the Washington, D.C., area last year. "NRECA liked our marketing approach and our track record with neighboring deals."
The Smith Cos. is the largest real estate firm in the Washington, D.C., area, with 2,000 people on the payroll, but investment sales is not one of its specialties. As a result, it partnered with Vector, a Washington, D.C.-based investment sales firm, to market the building to investors. Prices for Class-A downtown Washington, D.C., office buildings generally range from $200 to $275 per sq. ft.
How to grow the business
For six years Brannen/Goddard Co., a full-service firm, managed the personal real estate holdings of the principals of a European software company. When the executives of the firm started a major expansion in the United States, they fumed to the Atlanta-based real estate company.
"The principals said, `You're doing a good job with our investments, can you help us with the real estate as we grow this software company'," says Brannen/Goddard Co. vice president Jim Devaney, the lead broker representing the client, the name of which he refuses to disclose. "The client has no in-house real estate department. I am the single point of contact, and I quarterback all the requirements around the country."
Devaney receives a well-defined requirement from the client, including complete details such as head count and space use. "The location of the facilities is driven by where other high-tech companies are," says Devaney, whose firm is the Atlanta affiliate of New America Network. "In the beginning the deals were completed pretty quickly, but as the client has grown so have the internal processes."
Long and short arms
As the investment sales brokers in the Atlanta office of Cushman & Wakefield prepared a presentation for the owners of Promenade 11 in Midtown Atlanta in mid-1995, they need only look out their office window to see the object of their labor. The brokerage firm's office is a few blocks from the 38-story office tower, which, at the time, was owned by a partnership between AT&T and Charlotte, N.C.-based Faison Associates.
But it's hard to win a high-profile assignment like the six-year-old, 770,840 sq. ft. office tower, the seventh-largest office building in Atlanta, and Cushman & Wakefield was looking for any advantage it could muster.
"You never see what your competitors do or who they are," says David L. Meline, a Cushman & Wakefield associate who helped win the account and market the building, which sold for about $150 million in June to Chicago-based Equity Office Properties. The Cushman & Wakefield team also included directors Reynolds Couch and Bill Shanahan, and executive director John Cefaly.
Atlanta is one of the country's most favorable investment markets. Equitable Real Estate Investment Management Inc. and Real Estate Research Corp. ranked the city as the top investment choice in its Emerging Trends report. Investors approached the owners of Promenade II in the last two years, but it was not until last fall that AT&T and Faison considered selling the asset.
Because of the size of the building and a desire by the owners to sell it on an all-cash basis, the Cushman & Wakefield team, which was assisted by an Atlanta-based financial analyst and a five-person market research staff, employed a focused marketing strategy.
Bids were received from foreign and domestic institutions and opportunity real estate funds (Cushman & Wakefield will not disclose the number of offers it received) and the firm met weekly with its client during the market process.
The sales process took 10 months, culminating in the deal with Equity Office Properties. At $195 per sq. ft., the deal represents the highest price fetched for an Atlanta office building in seven years.
Persevering in a political town
When the Commodity Futures Trading Commission (CFTC) expanded in the early-1990s, its director worked informalIy with Louis Christopher, associate vice president of Carey Winston Co., a Washington, D.C.-based brokerage firm.
"The CFTC wanted to lease space in the building it occupied and was concerned that it wasn't getting a good deal," explains Christopher, who earlier had cold-called on the CFTC. "We showed them other space in the market. They ended up leasing space in their building and not in any of the buildings we showed, but a relationship was formed."
Soon thereafter, the CFTC interviewed brokerage firms to consolidate from 120,000 sq. ft. in two buildings to one location. Carey Winston Co. was one of the firms interviewed. Due in large part to the previous relationship, the CFTC awarded Carey Winston an exclusive representation.
"Dealing with a government agency was a learning experience," says Christopher. "The CFTC director knew the government's rules about leasing space, and he was looking at us for the real estate expertise."
Christopher and fellow broker Mark F. Minich, who also had worked previously with the CFTC, reviewed all of CFTC's requirements, which were similar to a law firm's. But government regulations and a presidential election complicated the representation, turning a likely 18-month deal into a three-year assignment. Carey Winston's initial recommendation to sign a lease at 1200 K Street in Washington, D.C., died when President Bush lost the 1992 election. But the brokers stuck with the assignment, briefing a sucession of new commissioners on the agency's requirement, the market and available sites. Simultaneously, the CFTC solicited 18 offers for office space in an advertisement in Commerce Business Daily.
Carey Winston analyzed the options and narrowed the choices to five. After a review, all of the parties agreed that Three Lafayette Center, a 260,000 sq. ft. building owned by the Equitable Life Assurance Society, was the best option.
The initial requirement was for 140,000 sq. ft. of office space on as few floors as possible, says Christopher. After nine months of negotiation, the CFTC signed a 10-year deal for a 131,000 sq. ft. lease. CFTC moved into the space a year ago.
"This is the first office lease over 100,000 sq. ft. in which a federal government agency was fully advised and exclusively represented by a private sector real estate company," adds Christopher. "I think it positions us as one of the most experienced players for government work if and when the GSA (General Services Administration) modifies the rules that agencies follow."