As you might guess, recently we've been much more active on both sides of subleasing transactions.  Almost every market search includes a sublease option or two, perhaps more.  If you are looking for space, should you bite?  They may not be worth the trouble.  Read on.

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Recession, recession, recession!  There, I said it.  We're in one.  Don't let the government or the landlord reps mislead you.

It doesn't effect all business directly, and is certainly selective in its targeting of particular industries.  Anyone with interests related to residential real estate is getting hammered, and the trickle-down effect is reaching out to financial markets, retailers, and distributors.  The government is trying to bolster home prices and lessen the effects of oil inflation, and the jury is still out on the long term forecast. 

Here's what I like about it:

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In his recent book,The Age of Turbulence, Alan Greenspan compares capitalism to collectivism by remembering a drive that he had in the Moscow countryside in 1989, just before the fall of the Berlin Wall.  There he saw a 1920's steam tractor, which might have been in a museum in the U.S., clanking and belching through a field under a local farmer.  "Why do you suppose they still use that?, Greenspan asked his security man.  "Because it still works?", the man replied.

It is easy to fall into a "real estate rut" just like that farmer.  Are you using your facility the same way a businessperson might have used a similar property in the 1920's?  Perhaps it is time to scrap your steam-engine equivalent and gain some efficiency.

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The world is experiencing rapid globalization and merging of economies and cultures.  In his book, The World is Flat, Thomas Friedman discusses how the internet, modern travel, and communications are commoditizing just about everything.  Where globalization is not happening quite so quickly is in real estate which is still, very much, a local business.  As citizens of the United States, we take property rights for granted.  Ownership is black and white - you either own something or you don't, right?  Well, not necessarily once you leave our borders.

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 For 31 years, public companies have used a rule known as FAS 13 to classify most real estate lease transactions (virtually all leases 15 years or less) as Operating Leases.  Unlike a Capital Lease, the Operating Lease does not appear on the company's balance sheet.

The governing Federal Accounting Standards Board, affectionately known as FASB (pronounced Faz-bee), is currently in the process of scuttling this provision in favor of a new Sarbox-friendly full disclosure plan that will eliminate or greatly reduce the qualifications for Operating Lease classification.

I can see many of the non-accountants out there falling asleep.  So what, right?  WAKE UP!  This is a big deal.

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Whenever I have speaking engagements, I always end with a Q&A session and inevitably someone will ask, "How will the merger between CBRE and Trammell Crow impact the industry?"  My response is usually, "Which part of the industry?"  I'd like to address it here in the hopes that the next person who might ask will read it and save me the time of repeating myself. 

The impact to real estate development and investment segments will be significant in that CBRE now has the development resources to support the supply of investment capital that it has raised, and they've moved into position as one of the top ten owners (not just third-party landlords - actual owners) of office properties.

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An article in the April 2007 issue of CFO Magazine titled "Cleaning up Carbon" addresses the pressure that most corporate users will soon have to face regarding CO₂ emissions.  Peter Breitstone, the CEO of insurance giant AON's Environmental Services Group, says "Each company is going to have to deal with some sort of [CO₂] regulation.  We know that it is coming."  The Investor Network, a coalition of enviro-friendly investors with more than $200 billion in assets recently published a list of 10 major offenders.  The list includes the usual energy company suspects, plus a few you might not expect such as Wells Fargo (the group says that unlike JP Morgan and Bank of America, WF hasn't come up with a plan to reduce carbon emissions from their everyday business practices), and Bed, Bath, and Beyond (Investor Network says the retailer hasn't disclosed its strategies on how to improve energy efficiency).  So has YOUR firm disclosed your strategies on how to improve energy efficiency?  No?  Read on.

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Not too long ago, almost all of my high tech clients would build a server room with raised flooring, Liebert (another client) 24 hour air conditioning, and UPS systems the size of a Hummer.  More often that not, those build outs now look as dated as a wood-paneled earth-toned space with 8' ceilings.  Computing is getting faster, cooler, and frequently, remote.  And the absolute best remote data storage service that I've seen is a simple service called...Mozy.

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Spalding Sports is the largest producer of basketballs in the world.  A few years ago, they asked us to help them expand their west coast distribution center.  At the time, Spalding had 180,000 SQFT of space and estimated that they needed about 40K more for a total of 220K SQFT.  We asked a question:  Why?

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What is as large as four shopping malls, has 17 miles of paved roadway, and is 75' below the ground?  The Underground Business Center in Louisville, KY is a warehouse and storage facility with almost four million square feet housed in a former limestone mine.

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When Albert Einstein was a child, he read a book that described the experience of sitting on a train and watching another train moving outside the window. You may have had this experience yourself. If the other train is moving and yours is still, or vice versa, it is very difficult to tell which is the moving train because the appearance is based upon your perspective.

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It is a rare exception for any business to be able to accurately forecast space requirements more than three years out.  So why are there so many ten year leases?  Well, the first reason is that landlords like them.  What would the tenant really like?

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Corporate real estate executives face many challenges in the constant quest to create efficiency in their business use of property.  According to a study done by Boston Consulting Group earlier this year, at the top of the list: 1.  Business Unit issues, 2. Flexibility, and 3. Service Providers.  For anyone in the trenches, there's no big surprise there.

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Nowhere is it tougher to justify real estate costs than in high end retail stores, and few places on our planet offer real estate costs higher than that of retail property on Fifth Avenue in New York.  How about a Fifth Avenue location at Central Park, across from the Plaza Hotel?  That is where FAO Schwarz is reinventing its brand of quality toy experiences.

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There are literally billions of dollars of corporate excess to be trimmed from our economy. Entrepreneurial start-up companies force established firms to continually re-evaluate both operations and product offerings. Sometimes though, the pressure comes less from competitors than from technology.

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Eric Bowles, director of global research at CoreNet Global says, "We've seen the average amount of space per worker drop over the past few years ... from an average of 250 SQFT/Worker to 175 SQFT/Worker."  That is a huge reduction with important ramifications.

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Face it, using a Request for Proposal to select a real estate partner can be painful. On one hand, you need an unbiased evaluation process to detail service offerings and competitive pricing. On the other hand, much of the evaluation is often based upon issues other than the critical one: How will your firm reduce our operating costs, and how do you intend to prove it?

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How do you value quality against quantity (low price) in real estate? In a globalized, internet-empowered world, more and more products are becoming commodities, and profit margins are squeezed thinner and thinner. Common sense would dictate that facility costs be driven to the absolute lowest possible threshold, so that the cost to deliver the goods or services to the customer can likewise be provided at the lowest possible cost . Right?

Well, not always.

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Imagine that you run an airline and that maintenance costs are spiraling out of control. Would the solution be to cut your maintenance staff by 50%? Not likely.

So what do you do?

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Here’s an example of how Reptron Electronics was able to use real estate as a competitive advantage.

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