Speculative development is on the rise, but competition is heating up

In the Cleveland industrial market, the vacancy rate in the third quarter was 3.9 percent, which historically is the lowest it’s ever been. That’s driving demand for newer, more functional structures, particularly high-bay bulk distribution warehouses, as the economic pendulum continues to swing towards a service-oriented rather than production-oriented market.

Though speculative properties in Cleveland tend to be constructed by homegrown developers, competition in larger markets such as New York and Chicago means Cleveland is getting some attention from national developers.

“We’re getting calls each week from developers that want land for spec buildings,” says George J. Pofok, CCIM, SIOR, senior vice president at Cushman & Wakefield/CRESCO Real Estate. “Out-of-state developers definitely are taking interest in the Northeast Ohio market.”

It’s difficult now to find large tracts of available land in Cuyahoga County, so interest is picking up in tertiary markets such as Summit and Medina counties. That means opportunities abound for developers capable of striking while the iron is hot.

Smart Business spoke with Pofok about speculative development in Cleveland and the surrounding markets.

What is happening to the real estate market as building on spec increases?
Tenants are seeing an increase in occupancy costs. In the past, a tenant could do short term one- to three-year flat deals. But the market has shifted and landlords are getting five- to seven-year deals with 2 percent annual increases.

Costs are also increasing for buyers. A company that recently purchased a property in Parma set a high benchmark for value per square foot, and the building the company left and put on the market came under contract after just three showings.

That’s not to say all buildings sell quickly. It’s really about connecting the right buyer to the right property at the right time.

What effect does an increase in spec-built properties have on lessees?
With the vacancy rate so low, tenants could benefit from a couple million square feet of spec construction because there’s still such a demand for more modern facilities. Developers are building more distribution or light assembly structures.

These buildings range from 125,000 to 250,000 square feet, have 28- to 32-foot ceilings, truck docks in the rear and nominal office space. Companies are often able to take advantage of the cube height, thus reducing their footprint, which helps offset the higher rents for new construction.

Who should capitalize on this trend?
Developers that are aggressive, have cash and can react quickly should act now to take advantage of the current market. There is an element of, ‘if you build it, they will come’ in the market right now. Companies that are aggressive and can move quickly should see a lot of success in this market.

It’s really about getting a shovel in the ground as quickly as possible. Once a property is purchased, developers need to be out there, breaking ground within days or weeks. Developers that have bought land and expect to wait until next spring will be six months behind the curve.

While expediency is important, so is due diligence. Developers also need to complete zoning and environmental work, and have site layout discussions with the municipality. Developers that have experience with that will do well.

There is demand in the market from tenants, and there is investor money looking for deals and a return. Both are relying on developers to initiate the process.

What are the risks?
Timing and location are as critical as building the right product. It doesn’t yet make sense to go out to an extreme tertiary market and put up a 500,000-square-foot spec building. The focus still is in the primary and secondary markets.

There is significant opportunity in the market now. But looking into 2019, though the economy seems to be moving along at a good pace, there is less certainty.

The Cleveland market can easily absorb another couple million square feet of spec properties without a significant impact on the market vacancy rate. But that requires developers to be aggressive, find the right piece of dirt and get to building.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

The case for new construction in a tight manufacturing real estate market

Manufacturing is alive and well, but there are underlying, uncontrollable factors that are affecting this sector.

For instance, despite the lowest unemployment numbers in the U.S. in decades, there are still thousands of manufacturing positions left unfilled and a shortage that is affecting companies’ relocation and expansion considerations.

“The brick-and-mortar aspect of a move will be just about equivalent regardless of location,” says Joseph V. Barna, Principal at Cushman & Wakefield/CRESCO Real Estate. “But there’s no sense in making a significant investment into a facility if your location makes it difficult to attract a workforce capable of getting the necessary production out of it.”

Manufacturing is also being reshaped by ever-advancing technology and shifting trends in logistics. Companies in the manufacturing sector need to understand all the ways in which their facility and its location affect its ability to operate successfully, both today and in the future.

Smart Business spoke with Barna about the ways in which these trends should inform manufacturers’ real estate decisions.

How are these trends affecting the decision between new construction and retrofitting existing buildings?
Northeast Ohio has possibly its lowest industrial vacancy rate in 30 years — about 3.5 percent on average. However, 80 percent of the limited available properties are considered obsolete in that they’re inefficient and can’t be economically retrofitted to meet today’s demands.

Getting what they want means a facility with state-of-the-art amenities and sophisticated, energy-efficient mechanicals. Coupled with municipal or state tax abatements, companies are finding that new construction is the better way to go.

The right work environment is not only necessary for operational efficiency, but also to secure and keep employees. Today’s manufacturing employees don’t want to work in a dark, dirty environment. And because talented, experienced workers are in demand, they can be fickle about their choice of employer.

What should owners who decide to build keep in mind as they design their space?
Think about the future. Buy more land than is currently needed to facilitate expansion. That will also make the property appealing to future users, increasing its future value.

Having additional land available for expansion can also accommodate the changing needs of some users. For example, companies once needed the additional space to stage a number of trucks and trailers. With trends shifting in fulfillment, that land is more often used for employee parking — sometimes thousands of parking spaces. By understanding the trends, a property can be set up to meet future needs.

Construct a facility that’s easy to convert for alternative uses. That likely means a rectangular shape, having ample docks for trucks, a ceiling clearance of 28 to 34 feet and extra land regardless of what’s needed for current operations.

New construction will cost just about the same to put a building up in the middle of the city as it would in a suburban park. To protect the facility’s ongoing appreciation, it’s better to build in a high-demand area that’s more likely to increase in value. Then, when it’s time to sell, the upside appreciation will be significantly better than if it were located in a low-demand area.

Always keep the exit strategy in mind. In addition to the physical structure, features such as good highway access and proximity to the workforce are always desirable.

Why is it important to think about the future when considering a move?
Owners need to understand their company’s long-term growth forecast because what may be a perfect building for today’s needs might not accommodate future growth. Understand the total operating costs of a facility. That’s more than the cost of the brick-and-mortar building. It’s how much it costs to keep it running with new energy-efficient mechanical systems.

Do a thorough analysis before making any move and get consultation from trusted advisers — an attorney, real estate expert, financial adviser or construction provider — because there are many considerations to make. With such a significant investment, even little mistakes can affect the outcome and future value.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Take the time to understand the language in your lease before you sign it

Due diligence is a crucial step for any business that seeks to make a smooth transition into newly leased space, says Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate.

“When you sign a long-term lease, you are now married and committed to that space and the landlord,” Caplan says.

“You need a strong lease agreement to protect both parties and to ensure that everyone understands how certain responsibilities will be managed. The manner in which this process is conducted can go a long way toward achieving this goal.”

Smart Business spoke with Caplan about subtle, but significant issues you should understand before finalizing your next lease.

What key components are included in most building leases?

The most basic element of the lease is the description of the premises, which should include the size; the location in the building if there are multiple tenants; a description of the common area(s); the amount of parking that you receive for your employees, clients who visit your facility and trucks; and the common area factor of the building, if applicable.

It should also be clear who is responsible for the build-out, or any work that is required to convert the space to fit your needs. Besides rent, other potential add-ons to the lease payments could be real estate taxes, building insurance, common area maintenance and cleaning fees, which all should be laid out.

Make sure that all dates are understood such as lease start, rent start, termination, option notice, payments due, etc. These are all common items to include when leasing space and should not be overlooked.

What are some leasing issues that companies commonly forget to address?

One common omission is an adequate description of the condition of the premises that the landlord will be providing for the tenant.

This would include things like new walls, paint, carpet, cleaning, repairs, etc., to differentiate from ‘as-is condition.’
Understand the operating expenses of the property and how they are or may be passed on to the tenant(s). In most leases, the interior maintenance is the responsibility of the tenant while the landlord is responsible for the exterior, structure, roof, parking lot, etc.

Typically the cost of landlord maintenance and repairs are passed through to the tenant, while the landlord is financially responsible for replacement of capital expenses such as a new roof or parking lot.

Sometimes the landlord is permitted to pass through amortized portions of capital expenses.

A good lease provides detail so that both parties understand who is responsible to make what repairs and also who is ultimately responsible to pay for said repairs.

Insure the ability to get and install high-speed Internet, satellite dishes and other high-tech communications systems in the premises and through the common areas, roof, etc.

Understand the damage and destruction clause regarding timing and responsibility if there is a significant fire, flood or other occurrence at the property. The best advice is to include language in the lease that both parties agree to in order to prevent any misunderstandings should the worst occur.

How can you protect against an unresponsive landlord?

If you are constantly having roof leaks and the landlord doesn’t schedule a contractor to fix the leak(s), after a designated period of time, you, the tenant, should be able to call a roofer and have it fixed. The same applies for any other major maintenance or repair issue. A self-help clause gives you the legal ability to potentially apply the cost towards rent or another financial obligation to the landlord. This can only be done if No. 1, the landlord is unresponsive after repeated notifications to address a problem and No. 2, it’s written in the lease that you have the right to do this.

It’s important before you sign your lease that you determine whether your potential landlord is capable of performing all of its obligations. You can be proactive and work with a quality real estate broker who can pass on the experiences of other tenants with different landlords and give you a sense as to whether you might have reason to be concerned before you sign your lease.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Operational flexibility is helping landlords revive dormant properties

Some area landlords are finding new and better uses for industrial buildings that don’t fit the specifications today’s manufacturers desire. To turn those properties productive again, they’re reimagining them as mixed-use, residential and retail spaces that have the potential to anchor burgeoning neighborhoods.

“Landlords who have a shell of a former industrial-use building that’s been deemed obsolete because the ceiling is too low, the loading areas are too short or the location isn’t ideal are being transformed into multi-use properties,” says Eliot Kijewski, senior vice president at Cushman & Wakefield/CRESCO Real Estate.

He says examples of this change can be seen on the Detroit Shoreway, Midtown and other up-and-coming Cleveland neighborhoods that have shown that repurposing existing properties can create great success for all involved. It doesn’t require rebuilding and there’s no land to pay for, meaning that the application of operational flexibility is economical.

Smart Business spoke with Kijewski about how area landlords can apply operational flexibility to awaken once-dormant properties.

Why is operational flexibility a topic that’s being discussed today?
We’re seeing an ever-changing work environment with emphasis shifting somewhat to tech-oriented companies that need flexibility and a location that caters to what professionals desire. Many of the successfully converted properties are on public transportation routes.

They offer greater use of space per square foot per person, and they can accommodate on-the-go workplaces and shared workspaces that are the trend at the moment.

It’s also influenced in part by communities attracting and adapting to the needs of young professionals who want to live and work in the city. Many of the manufacturing shops in some of these neighborhoods aren’t able to grow to accommodate the needs of companies in this industry and have had to move outside of the city to areas with dedicated industrial zones.

They’re leaving behind old structures that aren’t suitable for the needs of today’s manufacturers, so landlords are taking a cue from the communities and adapting, which benefits everyone involved.

What advantage does it provide to owners?
Operational flexibility enables landlords to adapt to an ever-changing workforce. Offices, light assembly and even commercial kitchens can work within a manufacturing shell and get their businesses off the ground. It’s better than starting from scratch because the bones are there, and any specific requirements of the business typically can be accommodated, such as additional power and Wi-Fi.

How has Cleveland’s commercial real estate market responded to the need for operational flexibility?
There are some landlords and developers who have been able to create a niche by adapting their buildings through operational efficiency to meet changing market demands, and they’ve seen success because of it. It’s easy to look across the market and find those who haven’t adapted.

However, some of the change reflects community zoning laws that haven’t caught up to the trend and now don’t allow landlords to be flexible to meet these new needs.

Industry is also helping to drive change, both in communities and with developers. Cleveland Clinic and Cleveland State University, for example, have helped transform the landscape in their respective communities.

Developers and landlords can look to the very recent past and the recession to see how some recreated themselves, did so for very little money and helped fashion a new landscape. They improved and made viable again buildings they owned, sometimes through public assistance, and became a vehicle for job creation in the process.

Landlords whose properties have stagnated or aren’t winning lease-ups can recover by recreating their property through operational flexibility to make it more attractive and in-demand.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

How to navigate today’s commercial, industrial real estate markets

Commercial and industrial real estate activity has remained very strong with no real end in sight. It has been a landlord/seller market for a while, but now it’s time for tenants/buyers to do their homework and bid aggressively before an attractive opportunity is lost.

“We are continuing to see more and more multiple offers,” says George J. Pofok, CCIM, SIOR, senior vice president for Cushman & Wakefield/CRESCO Real Estate.

“There has even been significant movement in the class C-type buildings that have previously been on the market for an extended time. This is because inventory levels are so low. Companies that need additional space may choose a less-than-ideal building since it is their only option.”

Smart Business spoke with Pofok about how to navigate today’s commercial and industrial real estate market in order to take advantage of available opportunities.

What are the real estate options today for a company looking to grow?
While new construction may cost $60 to $90 per square foot for industrial use, if a company is able to acquire a lesser quality building in the low to mid-$20s per square foot, and spends another $20 per foot to renovate, it’s definitely a savings. With that being said, those types of deals are becoming extremely scarce with recent activity.

What about new construction?
Given the tightness in the market, companies should explore new construction opportunities. While speculative new construction had been dormant during the last economic slowdown, over the past year or so there have been five new speculative construction projects with three additional projects under construction.

The market can even continue to support additional new construction projects.

The cost of new construction might be higher today than it is for existing buildings, but in the long run, companies may save on aspects such as costs for utilities and taxes.

What advantages might a speculative construction project offer?
The speculative product is more for the warehouse/distribution/light assembly type of operation rather than heavy manufacturing, but it is definitely a good option.

Buildings constructed today typically are more energy efficient, have higher ceilings, and more docks and drive-ins compared to those built 10 to 20 years ago.

While the norm in the past may have been an 18-foot ceiling, today’s buildings are being developed with 30 to 32-foot ceilings so companies can rack more product in a smaller footprint. For example, with an 18-foot ceiling, companies may have required 50,000 square feet of space. But if they can take advantage of the higher ceiling/cube height, they can reduce their footprint to 30,000 square feet.

What steps should a company take when exploring existing space?
Companies should do their homework before they get into the market. They need to secure pre-approvals from a lender and have completed their own internal analysis as to their specific facility needs — docks, drive-ins, ceiling height and perhaps a location analysis of employee drive times.

It is extremely important to start early. There is a longer lead time required for manufacturing operations vs. warehouse / distribution operations.

A manufacturing operation has to build inventory so that it can shut down and move equipment before it can ramp up production again, so additional time is needed. But a warehousing operation only needs a short amount of time to relocate racking and product to the new location.

In addition, once a company identifies a building that fits its needs, it should take action. The company can’t wait two or three weeks because that space likely won’t be available long in today’s environment.

How does a company prepare for competitive bidding?
The broker should advise the company that the market is tight and it should be ready to be aggressive with an offer once it has found the space it desires. The offer should also be as clean as possible — free of demands such as an extended due diligence period or a larger-than-typical share of the due diligence costs. A seller might not look favorably on those types of requests, so the fewer strings attached, the better.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

How to negotiate a sale-leaseback so that both parties benefit

There has been a steady flow of sale-leasebacks in Cleveland as local, regional and national investors find themselves flush with cash, but with limited properties to buy.

“There’s a lot of activity from outsiders looking in,” says Joseph V. Barna, SIOR, a principal at Cushman & Wakefield/CRESCO Real Estate.

The reason, he says, is because it’s so competitive in the major markets.

“If a property becomes available in Los Angeles, Dallas or Houston, there could be 30 investors chasing it who are all capable of writing a check. That’s led investors to look to secondary markets, such as Cleveland, where they’re able to transact at higher capitalization rates with less competition. Cleveland has become a sweet spot because there’s a good mix of opportunity and competition.”

Smart Business spoke with Barna about how sale-leasebacks are being used to satisfy investors’ appetites while offering sellers significant benefits.

What are the conditions that create an ideal situation for a sale-leaseback?
In a sale-leaseback, owners sell their property to an investor while retaining the benefits of using the property, typically on a long-term lease of 10-20 years. The structure is increasingly popular because it allows owners to use the real estate without tying up debt and equity capital.

Companies best positioned to consider a sale-leaseback are those that have a lot of equity in the property and can benefit from freeing that up — for instance, to make an acquisition, pay down debt or as part of an exit strategy.

How do investors determine if a sale-leaseback is a good deal?
For investors, a sale-leaseback is primarily a financial transaction based on cash flow. However, there have been times when a building owner has a 100,000-square-foot property that it leased back for $6.50 per square foot in a market that’s seeing $4.50 per square foot as average.

Investors see that rate and buy at an 8 percent capitalization rate, looking only at the cash flow and failing to take into account the intrinsic value of the real estate. The building owner gets an above market cash influx from the deal, then eventually files for bankruptcy and goes out of business. The investor is now sitting on an empty building and will inevitably take a major financial hit because it takes time to re-tenant at a fair market rate.

Sometimes investors are so eager to push their money out the door that they’ll actually gamble a little on the risk side, increase the capitalization rate and still get burned. Even when the lease is up, tenants often leave and they can’t replace that cash flow because the market is down and the rate was well above market.

Ultimately, the investor needs to understand the intrinsic value of the property, as well as local market conditions before investing.

What should get close attention as the parties structure a sale-leaseback?
A seller will be asked to maximize the property’s value by signing a 10- to 20-year lease. Before doing that, it’s important that they understand their company’s future growth potential, which will determine whether the property will meet the business’s needs for that duration.

Companies that are expecting to grow should plan for an expansion of the physical space. In that case, before making the deal, determine a formula for rent that accounts for the addition. If there is a realistic chance that the business is likely to contract, look into the rights to sublease, or include a cancellation clause as part of lease structure.

Who should companies work with to execute a sale-leaseback?
Logical team members include a trusted real estate consultant with experience in sale-leasebacks, a financial adviser to ensure the projection and assumption are correct, and a legal adviser with a specific focus in real estate.

Investors should also talk with ownership to understand their short- and long-term objectives. These deals can be a benefit to all parties involved, as long as both sides are open and honest about their intentions when negotiating terms.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Buyers should use the due diligence period to confirm their expectations

There’s a lot of discovery that takes place before buying a commercial property. Smart buyers and their brokers do their homework to understand as much as they can about their options before setting foot on a property.

Walkthroughs offer a chance to inspect for any issues that could affect their occupancy and operating requirements. But once a purchase agreement is signed and they enter the due diligence period, it’s their last chance to ensure they’re getting the right deal and not making a costly oversight.

“This is a buyer’s last chance to walk away,” says Simon Caplan, SIOR, a principal at Cushman & Wakefield/CRESCO Real Estate. “It’s a final opportunity to get up close, bring in experts and make absolutely certain the property best meets their needs.”

Smart Business spoke with Caplan about the due diligence period and how buyers can use it to protect their interests.

What should buyers understand before visiting a property?
Before going on location to inspect a building, talk with the real estate agent. He or she should have the fundamental property information, including a list of recent capital improvements.

Make sure it’s zoned for the type of use planned. If materials need to be stored outside, determine if that’s permitted. Many communities won’t allow that and it can be costly if other plans need to be made for a solution.

Check the access to roads and highways. If the company will rely on trucks to bring in or ship out goods, it’s important to understand if any restrictions exist, the direction trucks can travel on the roads that feed into and out of the property, and the proximity of highway entrances and exits.

Once at the property, what should buyers be sure to inspect?
During the initial visits, buyers should bring their internal experts to inspect the property to ensure it’s fit for their intent. Manufacturers, for example, will want their plant manager or engineer along to make sure the building has enough space and the right layout to accommodate the company’s requirements. They should also check that the building is equipped with enough electrical power to operate the equipment.

Prior to making an offer, they should approach a prospective property armed with a good idea of its condition, recent capital improvements and a sense of how much they’re willing to invest to fix existing issues and to set up for their own use.

Once the purchase agreement has been signed and the due diligence period officially begins, bring in professionals to take a closer look at any issues that were caught initially. For instance, bring in a roofing contractor to look at the condition of the roof, a building contractor to inspect any structural issues, and an HVAC contractor to check out the equipment.

An issue that’s recently become a sticking point is a building’s fire suppression sprinkler system. An update to the fire code a couple years back has meant that many buildings are no longer up to code. Bring in an expert, or a municipal representative, to look it over before moving forward with the purchase because the systems are expensive to replace.

How does a municipality’s zoning factor in to due diligence?
A municipality’s building and zoning codes play a big role in how a property is utilized. Invite municipal inspectors to walk through the building, regardless of whether it’s required, to check for code violations. It could save a lot of hassle later.

Additionally, look at zoning with an eye to the future. Explore whether any potential expansion of the physical building is allowed and to what extent.

At what point does an issue become a deal breaker?
If the costs of repairs or upgrades are significantly above the buyer’s reasonable expectations, provide the seller with a list of any major, unexpected issues found during inspection along with copies of quotes from contractors. It’s rare, but there is a chance the seller will either fix the problems or adjust the sale price to compensate.

The due diligence period is not a time to renegotiate the deal terms, but it is a critical time for buyers to uncover costly surprises. A little homework goes a long way toward getting the best deal. If a resolution can’t be made, the buyer has the choice to walk away.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

How to breathe new life into abandoned retail spaces

The growth of e-commerce in the past decade has put big box retailers in a tough spot.

Those who have been able to transform their business models to meet evolving consumer demands have stayed afloat. The ones who can’t change have either gone out of business or significantly downsized their retail space.

In either case, the large physical structures that gave big box retailers their name are quickly becoming the white elephants of the real estate world, says Eliot Kijewski, Senior Vice President at Cushman & Wakefield/CRESCO Real Estate.

“The big question is what do owners and communities do with these buildings?” Kijewski says. “How do they reposition and market these structures not as a stale mall or a vacant building, but as a valuable piece of property? There is a lot of cooperation that needs to take place between community, developer, owner and seller in order to find solutions.”

Smart Business spoke with Kijewski about what communities can do to breathe new life into these abandoned big box retail spaces.

What percentage of retail sales now occur online?
E-commerce sales during the first quarter of 2017 accounted for 8.5 percent of total retail sales, according to the U.S. Department of Commerce. That is up from 3.6 percent in the fourth quarter of 2008. E-commerce sales totaled $33 billion at the end of 2008 compared to $105.7 billion during the first quarter of 2017, per the same report.

Are indoor shopping malls likely to become extinct?
There are examples of indoor shopping malls that continue to do well. Great Lakes Mall in Mentor is losing Sears, but the mall itself is not anywhere near being on its last legs. The company that owns it recently announced a new entertainment center that will open up in the mall.

It’s in a middle-class to upper middle-class community, the economy is decent and people are going to the mall and spending money. Beachwood Mall is probably in good shape.

But other indoor malls in the area have lost most, if not all of their key tenants. Randall Park Mall is currently being demolished, Midway Mall in Elyria was recently sold at auction and Parmatown Mall has been converted to an outdoor shopping facility. If the indoor shopping mall as we know it is going to stay, it depends on the demographics and the anchor stores that are there. Unfortunately, in too many cases, those anchor stores are closing.

What can be done to salvage big box retail spaces that are no longer being used?
Communities need to look at these spaces and think about what their people would like to see. Ohio Technical College has taken space at the old Randall Park Mall formerly occupied by J.C. Penney and converted it into a college. It has big square footage and is wide enough to create a faux store that includes classrooms.

This is a concept used by motorcycle and watercraft dealers whereby students learn how to use the computers and tools utilized to fix dealer-specific equipment.

At Richmond Mall, a deal is in the works to bring a packaging company to the former Sears location.
Other potential uses for these buildings include call centers, indoor entertainment facilities, assisted living communities, libraries or light assembly uses.

How difficult would it be to open for business in these spaces?
In most cases, these buildings have decent highway access since they were built to serve a retail clientele. There is an abundance of rooftops, public transportation and parking. You’re not starting from scratch. The sites also have electricity, water and restrooms.

If the buildings haven’t been used for some time, there are likely repairs that need to be made, particularly with the rooftops, but the repairs are manageable.

Zoning is also a consideration. Developers looking to revitalize a former big box space need to consult with that community’s zoning board to determine if there’s a fit, or a likelihood that zoning could be changed to accommodate the new use.

The reality is that empty buildings are doing nothing for a community or its economy. If they can be purchased for another use, and be revived or repositioned, it can be a win for everyone.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate.

Due diligence can really pay off for companies entering a new market

Companies looking to expand into a new market typically have conducted an initial thorough round of internal research and due diligence into what a particular market has to offer, says George J. Pofok, CCIM, SIOR, senior vice president at Cushman & Wakefield/CRESCO Real Estate. The next step is finding the right location within the market to open up for business.

“The ability to identify the right location often comes down to timing, which can be unpredictable,” Pofok says. “Each business must work within the existing opportunities. If the timing doesn’t work out, the company may not get the top destination on its wish list.”

While bad timing can preclude a company from landing its destination of choice, there are steps that can be taken to identify a location that still fits with the existing growth strategy.

Smart Business spoke with Pofok about best practices when looking to expand a business into a new market.

What considerations are key when studying a new market?
When a company is examining the potential entry into a new market, the likelihood is that it already has an existing customer base within that market. The next step is to perform an analytical survey to determine where customers are located and where the competition is set up.

Company leaders can lay these points out on a map and study where their business model would be the best fit. More often than not, businesses like to be in close proximity to their competition or to other companies that are in a similar type of industry.

The home improvement sector is a good example. In Bedford Heights, the intersection of Miles and Richmond has been identified as Contractors’ Row. It includes window, siding and roofing suppliers, bathroom and kitchen stores and tile companies, among others.

It’s a one-stop shop for consumers, whether they are homeowners or businesses, to get materials for home improvement work. If a designer has a customer in the car to talk about a project, he or she can travel from one store to the next to put together an overall fit plan.

This type of setup is particularly attractive to a national company that is looking to open up in a new market. These types of businesses aren’t as interested in taking risks and would rather come into an established market where their name brand will enable them to rise above the crowd and generate plenty of traffic.

How important are demographics when in the market assessment?
Market household income and demographics can play a role, as well as geography in certain cities. In Cleveland, there are eastsiders and westsiders, and there seems to be an imaginary line between the two that people don’t like to cross.

This will often lead companies to open up two operations, one on the eastside and the other on the westside. Others will try to locate in and around the intersection of Interstates 480 and 77 to get the best of both worlds. When businesses are prospecting for a new location, this type of knowledge about a market can be important factor in their ultimate decision.

Do long distances make this process more difficult, despite the available tools and resources?
Identifying the right market to enter into should be the main component driving the decision. The real estate is the easy part. Still, there are considerations that need to be made. Companies coming to a new region are often more cautious since they don’t know where sales will end up.

They may lease a smaller space and then all of a sudden, business is booming and they need to expand and/or relocate. Reliable forecasting can provide a better sense of a company’s performance and instill confidence to pursue a larger location, if the projections indicate success is likely.

Timing, once again, is also important. Right now, the market is extremely tight and the number of quality options is limited. Landlords are now looking to ink deals between five to 10 years. Taking the time to work with a professional real estate expert that has knowledge of the market and its attributes can pay big dividends and give companies a better chance to succeed in their new location.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Commercial real estate values are on the rise in Cleveland

Downtown Cleveland’s commercial real estate market has come alive in the last five years with renovation and new construction projects taking place across the city, says Joseph V. Barna, SIOR, Principal at Cushman & Wakefield/CRESCO Real Estate.

“The economy has turned,” Barna says. “The buzz of what’s going on in Northeast Ohio, specifically in Cleveland, has caught the attention of real estate investors from all over the country. People want to be here.”

Commercial real estate value is up across the board, both on the sales and leasing side, and in both the office and industrial sectors. In addition, land values have begun to rise as investors as well as users are more willing to put shovels in the ground and begin new rather than take on a property that has significant flaws. As the vacancy rate for the industrial market has dropped from more than 10 percent in 2008 and 2009 to 4.6 percent today, many of the more desirable buildings have come off the market.

“What you have are older multi-story structures and buildings that have been expanded several times and lack open contiguous space,” Barna says. “They simply are not functional.”

Smart Business spoke with Barna about the best strategy to follow in a growing real estate market.

What are some important tips for entering the real estate market?

It’s important to understand that you make money in real estate when you buy, not when you sell. Make an informed decision and don’t overpay. If you’re buying an older piece of real estate, understand the structure of the building and the mechanical components. How long will it be before the property becomes obsolete? What limitations does the space have that could hamper your growth plans as well as exit strategy? If you’re not experienced in real estate, these are things you may not think to consider. It’s critical to have a knowledgeable team that can walk you through the steps. Have a good real estate consultant, financial adviser, attorney, environmental specialist and a contractor all of whom understand commercial real estate. Surround yourself with a team of consultants that can lead you to a smart decision. So many people who have found success in business think they can easily transition into real estate. You need to look beyond the sales price, however, and think about total operating expenses. Additionally, if your plan is to have tenants, consider the cost of adapting the space to a tenant’s unique requirements.

How important is planning when entering a new market?

The planning process is critical both from the developer and user side. When you come into a market, you need to understand the trends and the characteristics of that specific location. There are certain sectors of Greater Cleveland and Northeast Ohio that are much more desirable for redevelopment or new development. When it comes to speculative construction, you need to be in the right place. Development firms utilize “feet on the ground” local experts to ensure their decisions are based on real-time market knowledge and guidance.

If you’re a user, there are limited choices in the market and your planning needs to be ahead of the curve. Assemble that team and make sure you are truly exposed to all the alternatives. On the leasing side, lease terms are longer today. People know that inventory is tight and they want to lock up functional space long-term, especially if it includes expansion and contraction rights.

Conversely, if you own a building, it may be a good time to sell because values are higher than they have ever been, demand is high and the supply is low. It’s also a good time to liquidate because there are a lot of buyers with cash looking to come into this market. The more qualified buyers you have interested in acquiring your property, the greater the likelihood of bidding up the price.

How do you deal with economic uncertainty?

The world of real estate, like most things, is always in a state of constant change. Change also brings opportunity and you just need to stay ahead of the trends and understand where is the opportunity. Technology has provided potential investors and users with so many sources of information, it can be overwhelming. Don’t make a rash decision. Rather, be willing to take a step back and think before you act.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate