The ‘ex’ factor Featured

8:00pm EDT October 26, 2007

Dynamic in nature, the real estate market is heavily influenced by a number of external factors. Interest rates, fuel prices and retail sales are just some of the issues that directly impact the real estate marketplace. These economic indicators have a direct bearing on all businesses — regardless of their sector or size.

“External factors, whether directly or indirectly, can have a dramatic impact on a company’s bottom line — something all business owners are focused on,” says Susan Kitzmiller, research manager at CB Richard Ellis.

Smart Business spoke with Kitzmiller about the outside factors affecting the real estate market, the importance of being aware of these factors, and how the market in Cincinnati is currently shaping up.

What external factors influence the real estate market?

Nearly everything can potentially impact real estate markets. Interest rates and the recent credit crunch caused by the fear of a subprime debt crisis are two highly publicized factors, but you also have to look at housing starts, retail sales and employment figures. These kinds of issues may not have a direct impact on your real estate expenses as an employer, but they do impact the dynamics of your business as well as the needs of your employees. They certainly impact the needs of your clients and your prospects, and you need to pay attention to these factors as you consider the possibility of growth, consolidation or relocation.

Why is it so important for companies to be aware of these outside factors?

All of these factors can have an impact on your clients’ or prospects’ abilities to grow their businesses, which drives their potential needs for more space. These factors may influence whether a company stays conservative, by opting not to expand or expanding at a slower pace. Conversely, these factors could drive their need to expand on a much faster pace at a much larger scale than originally planned.

How are commercial rental rates affected by such factors as occupancy levels and cost of construction?

One thing the occupier of a space may not be aware of, but that we watch closely for, is the investment cycle of a building. If owners want to put a building on the market for sale, their stance in terms of rents and occupancies may be different than when they are acting as a long-term holder of that building. Owners may try to fill the building so that it holds a higher value, or they may resist filling the building in hopes that a potential buyer will buy it for the upside potential and plan to fill it at a higher rate. The point is that the relationship you have with landlords is likely to be impacted by their investment strategy. As an occupier of office space, it is important to know what is going on in the office market — specific to your building, in your market and your neighborhood. These factors can impact the cost of space and the relative advantage of relocating.

The owner’s return on investment is heavily influenced by construction costs. As in any other business, the economics of the project from the outset to completion influence how much of a return the owner can expect to receive on a project and how long it will take to achieve that expected return. Tenant improvements can also factor into overall construction costs in helping to keep construction costs down.

How is the environment for commercial real estate in Cincinnati currently shaping up?

Cincinnati is experiencing a tight industrial market with limited inventory for larger scale deals of 100,000 square feet and greater. These larger deals are mostly taking place in the Northern Kentucky area, while the medium-sized deals, from 50,000 to 100,000 square feet, are typically found in the Northern Cincinnati area. Freestanding building sales continue to be strong as their available time on the market continues to decrease. Cincinnati’s office leasing market continues to get stronger as vacancies decrease. The market is seeing more large deals than ever before. This activity is expected to continue well into 2008.

Why is the rise of mixed-use projects beneficial to all parties involved?

These projects work to everyone’s advantage for a couple of reasons. First, they allow the owners/developers to spread the risk and cost across different product types that appeal to different audiences, especially if it is expected to take awhile for the office space to lease at your desired rate. Second, employers like locating in these types of projects because employees tend to be happier and more efficient when they can go to lunch or simply run errands within walking distance of their office. And if there were a residential component to the building, then some people would not have to go very far for work, shopping and dining.

SUSAN KITZMILLER is research manager at CB Richard Ellis. Reach her at (513) 369-1355 or susan.kitzmiller@cbre.com.