Real Estate

Prices going through the roof

By Troy Sympson

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Walter Byrd
Managing Director
Transwestern

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Businesses are always looking at ways to cut costs and improve the bottom line. However, this can be a difficult undertaking once you factor in the across-the-board increases in operating costs that have occurred over the past few years.

“Real estate costs are generally the second highest expense for operating a business and fall a distant second to labor cost for most companies” says Walter Byrd, Managing Director of Transwestern. “However, since real estate leases tend to be five-year agreements or longer, many companies look at real estate as a rather static cost and very controllable.”

Smart Business asked Byrd how real estate can play a role in reducing not only occupancy cost, but other costs as well.

How are property insurance and real estate taxes affecting the average tenant’s real estate costs?

The recent increases in insurance and real estate taxes over the last two years have driven up the average tenant’s real estate costs 10 to 15 percent annually. Tenants are experiencing what we call ‘indigestion.’ They’re not only being hit with increases from the previous year, they’re also billed additional increases going forward, which are difficult to stomach. For example, many tenants get a reconciliation statement from their landlord in March or April for the previous year’s increase in taxes and insurance as well as a bill for the differential for the first three months of the current year. On top of that, going forward, their rent has been increased to cover these additional costs. This becomes quite a burden for some companies to be hit with an unexpected lump-sum bill that was not budgeted for, and on top of that, their monthly costs increase going forward.

What other factors impact lease rates?

The sluggishness in the stock market over the last seven years has not only encouraged the average consumer to invest in real estate but also the institutional investor, as well. The increasing demand for office and industrial properties has driven up prices and conversely lease rates as well. As leases come up for renewal, the new owners of many of these assets expect to achieve higher rates to meet their investment returns. When coupled with real estate taxes and insurance, you have staggering new rates compared to leases signed five or six years ago.

How does the cost to lease office and warehouse space compare historically?

As mentioned, the leases that were done five to six years ago during the last economic slowdown are coming up for renewal, and tenants are shocked by significantly higher lease rates, often 30 to 40 percent higher. However, if you look at lease rates for office and industrial properties over the previous 10 years, the increase from 10 years ago to today almost mirrors the inflation rate over the same time period. Unfortunately, we tend to have shorter memories, and five to six years ago, rates were the same as they were 10 years ago because the market was down at the time and rates were depressed. So, at first glance, there’s a big increase in rates from five years ago, but from a historical standpoint, rates are really no higher than they were 10 years ago, adjusted for inflation.

Also keep in mind that because real estate is a static cost in many companies’ minds, many of those companies who enjoyed the lower rates from five to six years ago used those savings to offset the rising labor and health insurance costs that we have experienced for the last three to four years.

What advice are you giving to clients to help control occupancy costs?

First and foremost, we advise clients to start the process 12 to 18 months in advance and retain an experienced real estate professional to help guide them. By starting earlier, companies have the opportunity to fully evaluate all of their operational needs, which, in turn, should allow them to choose the optimal location and plan the most efficient use of space. The right location and efficient space can benefit a company by reducing overall occupancy cost, improving employee workspace, thus improving morale and reducing turnover, adjusting to demographic shifts by locating closer to employees, and finally adjusting to traffic congestion and seeking mass transit alternatives to reduce employee commuting time. All of these benefits can help a company increase efficiency, reduce real estate cost and possibly labor cost. Not only does this improve the bottom line, but it also reduces the impact that sudden increases in expenses such as taxes and insurance can have on costs.

Transwestern, one of the largest privately held commercial real estate firms in the U.S., is focused on creating value for our clients in each local market we serve. With 24 offices in nearly all major domestic markets, Transwestern’s business model offers fully integrated real estate services and operates through six distinct functional lines of business: tenant advisory, investment services, agency leasing, property management, development and research for a broad range of property types including office, industrial, retail, health care and multifamily. For more information go to www.transwestern.net.

WALTER BYRD is the Managing Director for Transwestern in Miami. Reach him at walter.byrd@transwestern.net or (305) 808-7825