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Chapter 6 Office & Industrial Property

Chapter 6 Office & Industrial Property. Major Topics. Office Property Defining office space quality The demand drivers for office space Translating employment growth to office space demand The trends that shape the amount of space required per worker Industrial Property

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Chapter 6 Office & Industrial Property

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  1. Chapter 6Office & Industrial Property

  2. Major Topics Office Property • Defining office space quality • The demand drivers for office space • Translating employment growth to office space demand • The trends that shape the amount of space required per worker Industrial Property • The demand drivers for Industrial property • Factors driving the location decisions • Affect of e-commerce “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

  3. Reasons for cyclic Real Estate market • Competition and Lead time factor • Inconsistent capital flows • Lease terms Expansion Phase: Rising occupancy and Rents, increased construction rates Mature phase: increased vacancy, construction still on going Recovery Phase: Excess supply keeps rent low, little or no construction, demand picks up Correction phase: rents declining, minimum new construction Typical Cycle “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

  4. Office Property Definitions • Occupancy (Vacancy) rate -- % of total square footage of leaseable space that is occupied (vacant) • (Net) Absorption -- net change in space available for lease between two dates

  5. Texas Market Reports • http://recenter.tamu.edu/mreports/

  6. Austin Office Space – 1/2005

  7. Austin Office Space – 1/2005

  8. Austin Office Space – 1/2005

  9. Office Property Definitions • Class A • Excellent location and accessibility • Rent rates in upper 33% of total office market range • Class B • Good location and access • Rent rates in upper 60% of market sector’s range • Class C • Buildings generally more than 15 years old • Rent rates in lower 40%

  10. Rental Rates/SF/Year

  11. Office Property Definitions • Net Usable or Leaseable Area • The actual area of a floor or an office suite that can be occupied • Efficiency Ratio • The percentage of total usable space to the total gross space in the building. • Load Factor • The percentage of space on a floor that is not usable

  12. Office Market Demand Analysis • Employment trends • Net new demand = expected new employees * avg space required • Space Required • Archiving, telecommuting and hotelling • Types of businesses • Location • Impact of local taxes

  13. Location • Actual rate of absorption is almost always biased towards the suburbs • Over 2/3 of the office space in the last 10 years in the largest U.S. cities has been absorbed in the suburbs • Tax benefits, enterprise zones “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

  14. National Office Market Trends • Increase in office hotelling and hence decrease in per employee space requirement • Increase in telecommuting and office sharing • Suburban office markets have fared better than CBDs • City governments in turn have increased incentives to keep major employers in the city

  15. Introduction to Industrial Property • Industrial property is of two types: • Manufacturing (Heavy and Light) property • Distribution Warehouse property • “Flex space”  both on property • “Build-to-Suit” properties • Impact on own vs. lease decision?

  16. Six-Month Absorption -- Austin-RR

  17. Office/Manufacturing/Warehouse

  18. Flex Space

  19. Factors Influencing Location Decisions • Labor Cost, Labor Climate and Skills • Proximity to Suppliers • Access to Transportation Facilities • Quality of Life • Utilities, Taxes, Insurance, Unemployment and other Real Estate costs • Environmental regulations

  20. Distribution Warehouse Property • Demand is driven by the location of inventory requirements • Criteria of location selection for warehouse are • Price/Weight ratio of product • Minimization of transportation cost • Speed of delivery

  21. END “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

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