The starting point for the services provided by real estate brokers to their clients is an understanding of the property market’s operating characteristics. One element of this broad grasp involves knowledge of space availability options. The emergence of open listing systems like Co-Star and LoopNet has helped brokers acquire a cursory assessment of available space. However, there is still no substitute for putting in the legwork to canvass the market, making sure that the broker’s knowledge of available space is up-to-date and complete. These space surveys, however, are just snapshots of current supply/demand conditions and lack the full context of the situation that is needed to assure clients that they are making the correct occupancy decision.
Below are the activities that a broker should undertake to develop the knowledge and expertise about the full set of dynamics that drive property market conditions.
Understand the Industries that Drive the Region’s Economy
To quantify the demand for real estate space, one must start by knowing and understanding which industries are the leading stimulators of business activity in the designated regional economy. For example, historically New York City’s economy was driven by large financial institutions; principally commercial and investment banks, plus insurance companies. The economic activity generated by these companies creates huge demands for legal services. While companies in these sectors still occupy about one-third of all the office space in New York City; other sectors of the economy have stimulated the growth in demand over the last decade.
The digital revolution has given new life to the advertising, media, technology, and information industries. The lackadaisical recovery in finance and law has muted the rebound in the Midtown North property market; while the demand for space in the Midtown South market – home to many of these digital companies – has flourished. In past recoveries, the Midtown North market always led the parade. This time the Midtown South market has been out front. Without an appreciation of the underlying forces at play in the economy; this shift in demand is difficult to understand.
Be Familiar with the Current Trends in the Market
It is important to have a strong grasp on the historical trends in the market. Brokers should constantly update themselves on current rental rates as well as the fluctuation of these rates over time. For example, in 2010 the asking rent for high floors in Midtown North Class A buildings was in the range of $80 to $90 per rentable square foot. Today, in these same buildings and for the same floors, the asking rents are between $150 and $300 per rentable square foot. The New York office property market typically has had large fluctuations in rental rates. Other regional markets tend to have smaller swings in rents with new construction offsetting the growth in demand. Assembling land and getting the required permits is a more protracted process in New York City; with the result that rising demand can push rents up quickly and dramatically. Also important is the need to remain abreast of any new building developments. This new supply can have a significant impact on the office market’s availability rate and rent level.
Understand the Supply of Office Product
As indicated above, knowing about new space coming to the market can provide very important market information that a broker must have to give the best advice to clients. A broker should always be up to date on what the total supply of office space is on the market. In New York City, for the first time in several decades, substantial development of new office space is underway. New developments like the rebuilt World Trade Center and the new submarket of Hudson Yards on New York City’s West Side are adding millions of rentable square feet to the market at above average rental rates. Having this information, allows a broker to understand the level of scarcity in the market and convey effectively to clients the opportunities and difficulties of accommodating their space needs. Furthermore, the broker should also know:
- the vacancy rate in various submarkets so that the client’s near term occupancy needs can be met
- what spaces are available now and spaces coming available in the near future
- how long does it take the landlord to lease space
- what is the average size of a deal
Recognize how Deals are Structured
To truly understand a market, a broker can’t rely solely on the most recent comps to understand the true cost of space. It is important to reach out to agency brokers to get an understanding of how they negotiate their deals and where they predict their building and the office market in general is going.
Key pieces of information to inquire about when speaking with landlord reps, include:
- average size of tenants in the building (will the landlord split floors or are they looking for full floor and larger tenants);
- what is average length/term of deals in the building (gives you an insight into the long term plans for the building);
- what is the rent level at which the landlord will cover the operating costs of the building, thereby breaking even,
- what are the profit centers in the building (i.e. electric, overtime HVAC, and cleaning charges, for example.), and also
- what concessions are being offered in terms of free rent and tenant improvement allowance
Know the Different Types of Landlords
Finally, it is important to know what types of landlords are represented in the ownership of the buildings:
Private Owner: Often family owned and they hold real estate for the long term. They care about the types of tenants in the building and making deals that ensure their ability to continue to operate their buildings. Normally they hire a management company to run their buildings.
REIT: Real Estate Investment Trusts are risk adverse landlords that tend to hold large and diverse portfolios of stable real estate assets. They care about providing consistent long term rates of return for their investors.
Institutional: These are comprised mostly of, insurance companies, private equity firms, pension plans, and private investment funds. Aside from insurance companies, institutional owners are interested in achieving the highest rents possible to ensure that the building has greater property value for an eventual sale. In many cases, institutional owners will allow their spaces to be vacant rather than close a deal at a lower rent.
Using these tools and approachs, brokers can truly educate themselves about the market, giving themselves an advantage over their competition; but more importantly, allowing them to provide the most value possible to their clients, which, at the end of the day, is reason for hiring a broker.
