Browse Category: Office

Downtown Cleveland’s Key Center Sells For $268M: What’s The Market Like?

Key Tower in downtown Cleveland, Ohio
Key Tower in downtown Cleveland, Ohio (Photo credit: Wikipedia)

The cornerstone of Cleveland’s skyline has sold this week for $268M to a local owner.  What does it mean for the local office market?

The Key Center, a 1.3M SF office tower sporting 57 stories and Class A status has been sold by national office REIT Columbia Property Trust to a Cleveland-based multifamily property and development firm. Built in 1991, the Key Center anchors a deal that includes a nearly 1,000-space parking garage as well as a ten-story bank building.

The anchor tenant in the tower is a regional banking power. KeyCorp, a holding company that owns the 18th largest bank in the US, lends a significant chunk to the tower’s 95% occupancy at sale time. The new owner, Ohio’s Millennia Companies – a group of real estate operations and development firms – intends to move operations into the tower, further bolstering the Cleveland CBD strong net absorption numbers, reported in Xceligent’s 4Q2016  Cleveland Market Report as the city’s leading absorption submarket with over 75KSF absorbed.

A Peek Around The Neighborhood

The deal takes place against Cleveland’s backdrop of declining office vacancy and modest levels of new construction. From Xceligent’s most recent Market Report:

  • During the 4Q 2016 the Cleveland office market has absorbed 104,105 square feet (sf) of space.
  • At 12.0% the regional vacancy rate has continued to decline, showing improvements from the 4Q 2015 at 13.1%.
  • The Cleveland CBD submarket observed the greatest positive net absorption totaling 75,222 sf during the 4Q 2016.
  • The Cleveland Office development pipeline had 67,000 sf under construction during the fourth quarter

Cleveland, In Fact, Rocks

If nothing else, the Key Center deal is a strong show of local commercial confidence in the face of a city’s commercial history that has suffered from capital flight, at times resulting in “rust belt” perception. It’s the duty of CRE professionals to look past such cliches, however. Industry players who might shadow the principals in this deal — such as financial support services or real estate service companies who have or seek profiles in the Midwest — can indulge their interest in low-barrier office markets such as Cleveland’s with a quick and easy look at Cleveland CBD’s comparable and nearby office properties.  To view a live query at CommercialSearch of office properties listed for lease or sale in the shadow of the Key Center,  click here.

Get Xceligent’s 4Q Cleveland Office Market Report

To get your own copy of Xceligent’s latest (4Q2016) Market Report on the Cleveland Office Market, click here to drop us a note today.

McDonald’s HQ Set To Return To Downtown Chicago — On The Site of Oprah’s Studio

Harpo Studios, headquarters of talk show host ...

Crains Chicago Business reports that McDonald’s corporate HQ is bugging out from its sprawling suburban Oakbrook, IL campus back to a locale it once called home — downtown Chicago.  The reasons seem to stem from the classic reverse-migration of white collar workforces from suburban enclaves to metropolitan districts. Beyond that, the fast-foot behemoth’s business woes might play a role in the decision as well. From the Ryan Ori and Peter Frost piece in Crain’s:

McDonald’s is in advanced negotiations with Sterling Bay to move its headquarters to well over 300,000 square feet in a structure the Chicago developer plans to build on Randolph Street, according to people familiar with the deal.

The office development is planned on Oprah Winfrey’s former Harpo Studios campus, which Sterling Bay bought for $30.5 million in 2014.

[…]

The deal comes about nine months after McDonald’s backed out in the final stages of a deal for more than 350,000 square feet at One Prudential Plaza near Millennium Park.

McDonald’s is believed to have considered several existing office buildings as well as potential new projects before settling on Sterling Bay’s redevelopment west of the Loop and the Kennedy Expressway in the northwestern edge of the West Loop.

After former Harpo buildings are demolished, construction of the new office building McDonald’s will occupy is expected to be completed by 2018.

Back For More CBD Magic

The McDonalds HQ move would mark a return to downtown, as the company headquarters once called home the 1930 LaSalle-Wacker building at 221 N. LaSalle, growing to occupy eight floors before moving to Oakbrook in the 1980s.

Super (Down)size?

Having visited the truly huge Oakbrook McDonalds HQ complex many times, what struck me immediately about the deal was its potential to represent a backdoor real estate downsizing for the company. To speculate: if the company moves 100% from its campus, currently arrayed around a four-story, 700,000 sqaure foot building, nothing in today’s news item suggests more than 300,000 square feet for the new location. That’s a haircut on space of more than 57%, which, if pulled off, should please shareholders on its face, as the burger giant faces strong headwinds globally and peak profits are well in its rearview mirror. All that said, the company’s full relocation plans, future employment levels and ultimate disposition of the Oakbrook campus are unknown at this time. It’s a story to follow for sure.

Exec: Renters Avoiding Buildout Costs In California Office Market

Downtown LA's office skyscrapers. Including th...
Downtown LA’s office skyscrapers. Including the Wells Fargo Center and California Plaza Towers. (Photo credit: Wikipedia)

The imposition of energy efficiency standards for new and altered commercial buildings in California is helping to stoke the fires of a hot landlord’s market in offices, says one Los Angeles-based property exec.

At issue is the 1978 California law called Title 24, which aims to decrease the environmental impact of buildings. The law’s requirements impose costs on buildout and tenant improvement plans to the point that, according to Jim Proel, EVP of PM Realty Group, office tenants facing sub-10% vacancy rates are increasingly going the other way — toward longer lease terms with somewhat stiffer annual rent escalations than would be popular in a different market.

GlobeSt.com: Which barriers do you see worsening?

Proehl: The cost to build out tenant improvements will continue to escalate, which makes lease deals more expensive and requires higher rental rates and longer terms. Parking barriers will worsen as tenants go to more open space plans where the per-square-foot per employee continues to decrease. 

GlobeSt.com: Are tenants continuing to shift their space needs down, or do you expect this trend to reverse itself at all in 2016?

Proehl: Most tenants do not want to take a step down since their largest operating cost is the cost of their staff. Tenants will try to get more creative with more open space to reduce their square feet while still maintaining the same quality of office space in the same quality location. There will be some tenants in low-margin businesses that will need to move down a class of building or relocation to a cheaper submarket to stay in the same quality of building. For tenants who signed their leases five years ago, they can expect a 50% increase in their rent, which is very significant.

GlobeSt.com: How optimistic are landlords about the office sector for this year?

Proehl: Landlords have not been this optimistic since 2006-07. Vacancy should drop below 10% in 2016, and rental rates will achieve double-digit increases. Landlords now have multiple tenants vying for good suites. Due to Title 24 raising the cost to build out suites, tenants are now signing five-to-seven-year leases with 3% to 3.5% annual bumps. 2016 will be a banner year for office landlords.

Detroit Shifts Gears To Technology

A pair of articles today explain a new renaissance in Motor City commercial property and infrastructure centered on technology business expansion. Together they point out how this isn’t the economic and cultural stretch one might think for the town that so famously put its industrial eggs into one auto-making basket – and saw globalization and capital flight devastate its fabric when that industry chose foreign labor.

In Dan Rafter’s piece at REJournals.com Detroit A Tech Hub? You Bet the report mentions the recent Jones Lang Lasalle’s US Technology Office Outlook report that ranks Detroit among the top 30 in the US for total leases to the technology business.

You might be surprised to learn that Detroit has become a top target for tech start-ups. JLL in its U.S. Technology Office Outlook report ranked the city as among the top 30 in the nation for total tech leasing. What makes Detroit so appealing for tech firms? JLL pointed to low real estate costs, an affordable cost of living and a competitive pool of talented employees.

These factors are inspiring technology start-ups to open their doors in the Motor City. According to JLL’s research, the Detroit market is now supporting 50,796 tech jobs. JLL says, too, that Detroit’s high-tech employment rate is growing 4.3 percent each year.

The Detroit market has been home to some significant tech lease transactions. Griffels recently renewed its lease of 67,934 square feet in the Mars Corporate Center in Southfield, while Logicalis took out a 40,500-square-foot lease at 2600 Telegraph Road in Bloomfield Hills. Lochbridge recently took out a 29,000-square-foot lease at 150 W. Jefferson Avenue in Detroit’s CBD.

Electric Cars And A Fiber Freeway

Adding to the resurgence is more technology, both in infrastructure and in manufacturing target. Ford Motors has recently decided to invest $4.5 billion in the manufacture of electric and hybrid cars by 2020, which adds to the tech resurgence.  As reported in GlobeSt. by Brian Rogal:

“One of the things that people don’t realize about Detroit is that the auto industry is heavily dependent on the high-tech sector,” Dave MacDonald, an executive vice president ofJLL, tells GlobeSt.com. And the recent decision by Ford to invest billions in electric vehicles will further boost the need for tech workers.

Another big factor bolstering technology companies here is the presence of Quicken Loans and its family of companies, which have bought up more than 80 downtown properties, many of them 75 to 100 years old, the type of structure most favored by tech-savvy millennials. “Quicken is really a tech company,” MacDonald says, and it has filled these buildings with about 13,000 workers, helping to send the CBD’s vacancy rate into a historic plunge.

And last month Rocket Fiber, a Detroit-based fiber-optic provider that is part of Quicken’s family of companies, has just activated an internet fiber ring for the city’s downtown that at an affordable price offers connections 1,000 times faster, MacDonald says. In its latest report on the US technolgy sector, US Technology Office Outlook, JLL compares it to “the Google Fiber model that spurred business and startup activity when it deployed in Kansas City.”

Affordable commercial property options and 21st century infrastructure in a great American central business district is the kind of news Detroit – and office tenants eyeing it – can surely use.

Humor From McSweeney’s: Let’s Take This Open Floor Plan to the Next Level

There’s something of a trend war going on today in office layout. Tenants of course want the most from their expensive space, but what does “most” really mean?  Before the rise of the Silicon Valley-style open floor plan layout craze inspired by Google and the like, getting the most from office square footage meant cramming as many cubicles as possible near traditional conference rooms and corner offices with doors.

But cubicles are no longer vogue and doors are often enough seen as hindrances to “collaboration”.  Some workflows in some industries do benefit from a layout that encourages semi-random encounters between teams, but others — perhaps those not quite as high-tech — suffer. In a digitally-enabled world where even law offices are rethinking what it means to have floor space — and taking up less of it with giant law libraries of “dead tree” (paper) — to where do all these rethink sessions point?

I’m pretty sure it’s not in this direction…thankfully!.  Enjoy this satire of an announcement memo from an office re-layout project gone awry, courtesy of Kelsey Rexroat at upscale humor site McSweeney’s. NOTE: Don’t drink coffee while reading. It’s funny enough that you might accidentally spew on your monitor.

  • You will no longer have access to instant messaging, which leads to private, non-collaborative conversations. If you need to communicate with another employee without leaving your workstation, stand up and address them with your supplied megaphone.

Read the whole thing at McSweeney’s Internet Tendency: Let’s Take This Open Floor Plan to the Next Level..

CBRE: Technology Workforce Hiring Boosts US Office Leasing

Technology workers are directly related to a national surge in office leasing according to a new CBRE research report, “Scoring Tech Talent”. In this report, the national commercial real estate firm CBRE ranks the top 50 U.S. markets and their ability to attract tech talent.

Large and small markets are seeing a boost in their leasing, says Colin Yasukochi, director of research and analysis for CBRE. In a press release by CBRE this month, Mr. Yasukochi states, “Tech talent growth rates are the best indicator of labor pool momentum and it’s easily quantifiable to identify the markets where demand for tech workers has surged.”

According to the report, established technology markets like Seattle and Washington, D.C. still dominate the top of the list, but several smaller markets dubbed “momentum markets” — Oklahoma City and Nashville are two — had a technology talent growth of 39% between 2010 and 2013. This comes in at a percentage point higher than Seattle’s and just below the growth in San Francisco for the same time frame. Both Charlotte, NC and Portland, OR saw growth rates of 28% which outpaced Silicon Valley itself by almost 8%.

Although tech talent only comprises 3.4% of the total U.S. workforce, its growth has outpaced other markets for both 2013 and 2014, according to the report.

The Technology Workforce Is Decentralized

In the same press release, Mr. Yasukochi goes on: “Though highly concentrated within the high-tech services industry, tech talent is not limited to any one type of company and can be found across all industry sectors. In fact, more than 60 percent of tech talent jobs are located outside of the core high-tech industry and these workers help generate innovation and advances that can boost the commercial real estate sector.

The full report is available from CBRE here. Please note: free registration with CBRE is required to obtain the report.

While I’m not in the business of endorsing CBRE or their content, I do have to say that it’s refreshing and important to be reminded that technology jobs are in no way limited to traditional tech enclaves. Far from it: wherever business does business, tech is there, and in increasing numbers.

Anatomy Of A 90% LTV Office Deal

Logo der Fernsehserie Leverage

I think it’s fair to characterize the following transaction as a symbol of our current national office market boom. Gone, gone, gone are the days when lenders’ hands were tied and 30-40% minimum cash on the barrelhead was a necessity to get a deal done for an office building in a primary market. Today, leverage is back in a big way — at least in one such deal in Los Angeles reported by Globe St’s Kelsi Maree Borland.

In “Office Property Lands 90% LTV Financing”, we learn of a $21.6 million deal for an eight-story office building and parking garage financed with a mix of SBA 504 guarantee and very favorable underwriting from another lender at a rate of 200 basis points over treasuries at 90% leverage. The unnamed owner-user and their team at Sequoia Commercial Lending have put together a deal emblematic of a Los Angeles office market not only in recovery, but in bona fide expansion.

“Typically banks will only provide this type of leverage for SBA deals, therefore we approached the SBA about a 504 loan, and secured a pre-approval allowing for 85% leverage,” Christopher Farlow, a partner at Sequoia Commercial Lending, tells GlobeSt.com. “We then leveraged the SBA’s pre-approval with two banks, who were willing to provide more than 75% LTV on a conventional basis. Both of the banks have SBA divisions, so if they couldn’t do the deals conventionally at 85%, we still had the SBA 504 as a backup. Once the final underwriting was done, one of the lenders came back and asked what would win the deal. We requested 90% leverage, with a rate that was 2% over the 10-year UST, and a 0.00% loan fee from the bank. The bank agreed and allowed us to lock the rate without a deposit fee.” Farlow and his colleague Brett Twente, a partner at Sequoia Commercial, secured the financing on behalf of the borrower, and declined to name the lender for confidentiality purposes.

The loan has a 25-year amortization period with a step-down prepayment schedule. Farlow has worked with this lender in the past, and has seen them provide leverage has high as 85%; however, he was even surprised by their willingness to reach 90% leverage. When asked if leveraging a loan this high was dangerous, Farlow says, “Yes, there is obviously danger in providing this type of leverage. However, the borrowers provided personal guarantees. Their business is going to occupy the majority of the building, and the businesses are guarantors. The EBITDAR from the businesses covers the proposed debt service several times over and once the building is leased up, the value should increase by more than 25%.”

That said, deal principal and Sequoia partner Christopher Farlow caution that high leverage isn’t a trend across the capital markets, and that 90% LTV are more “one-off” deals.

It’s just that such deals seemed unthinkable not terribly long ago.

Read the entire Globe St. article here.

Willis Tower in Chicago May Be Up For A Record Sale

Chicago’s own Willis Tower (formerly Sears Tower), the second-tallest building in the United States behind One World Trade Center, may be up for a record sale. As reported by the Chicago Sun Times yesterday, Willis Tower could be sold for as much as $1.5 billion. This eye-popping price is a clear signal for just how hot the Chicago downtown market is in 2015.

The Sears Tower was built in 1970 by once-iconic Sears Roebuck Company, the largest retailer in the United States with about 350,000 employees at its peak. The tower was built to serve as a central office space for Sears. Designed by famed Skidmore, Owings and Merrill architects, it took 12,000 construction workers three years  to build.

The building, owned by Joseph Chetrit, American Landmark Properties and developer Joseph Moinian, is currently about 85% leased.  From the Sun-Times:

In 1988, Sears Roebuck and Company sold and moved out of the building, but the Sears Tower name remained the same. It was renamed Willis Tower in 2009 after the Willis Group Holdings, the global insurance broker who calls the Tower its Midwest home.

In July 2009, U.S. Equities led the design and construction of a multi-million dollar renovation of Skydeck Chicago, including the development of The Ledge, a series of glass bays on the 103rd floor that extend from the building providing visitors with unobstructed views of Chicago through the windows and glass floors – 1,353 feet straight down. In addition to The Ledge, the new Skydeck visitor center features museum-quality interactive exhibits. The opening of The Ledge has provided the Skydeck with record-breaking visitor counts consistently since its debut.

High Numbers

Such a giant project would defy simple calculation at sale time, but I can’t resist one simple crunch of the numbers: Assuming a typical 6% broker fee on the sale of a $1.5B property, the fee comes in at $90 million. That’s a figure that will give anybody vertigo.

Three Walls: You’ll Never Think About The Cubicle The Same Way Again

three walls

As a researcher in commercial real estate, it’s not often I find a documentary film director turning their camera to an everyday interior feature of our industry to tell a compelling story, but that’s exactly what Three Walls delivers. It’s a Canadian filmmaker’s look at the birth, growth and journey of that building block of the modern office layout: the cubicle. Watch the 25-minute film here.

Its blurb reads:

With equal doses of deadpan humour and historical insight, the Canadian filmmaker Zaheed Mawani tackles the rise of the cubicle and the matter of why its inventor, the US designer Robert Propst, came to hate its implementation. Along the way, we hear office workers who spend their days fantasising about breaking free from their three-walled lives, cultural critics who lament the soullessness of the modern office, and even a few cubicle defenders.

The short film is a well-made, balanced and very watchable surprise, even managing to be poignant about the topic. While often overlooked, or assumed as a permanent fixture of the office, the cubicle can inflame passions these days as information technology, desuburbanization, and millennial worker demographics are all conspiring to reshape the office layout, and with it the expectations of its workers and managers. It’s not just tech companies that advocate for “openness” as a basic expectation, running counter to cubicles. But something like a backlash against that trend has been forming for some time now, with advocates for more enclosed workspaces saying that worker collaboration is less valuable than worker concentration.

No matter which side of the debate you end up on, Three Walls will make you think about cubicles in a whole new way.

Tech Office Layout Blowback: Partitions Weren’t So Bad After All

English: The RedBalloon office - an example of...

In a refreshing push-back against all things currently trendy in office layout, ad agency creative Lindsey Kaufman takes to the pages of the Washington Post today to rail against the now-popular “open office” design.  Inspired by the tech industry, the open office configuration takes away partitions and emphasizes shared space for a whole host of now-familiar reasons. Kaufman writes:

Despite its obvious problems, the open-office model has continued to encroach on workers across the country. Now, about 70 percent of U.S. offices have no or low partitions, according to the International Facility Management Association. Silicon Valley has been the leader in bringing down the dividers. Google, Yahoo, eBay, Goldman Sachs and American Express are all adherents.  Facebook CEO Mark Zuckerberg enlisted famed architect Frank Gehry to design the largest open floor plan in the world, housing nearly 3,000 engineers. And as a businessman, Michael Bloomberg was an early adopter of the open-space trend, saying it promoted transparency and fairness. He famously carried the model into city hall when he became mayor of New York,  making “the Bullpen” a symbol of open communication and accessibility to the city’s chief.

Calling out the “false sense of improved productivity” that bosses take away from office layouts lacking dividers and partitions, Kaufman cites a study published last year in the Journal of Environmental Psychology that finds nearly half of all office workers attribute lack of sound privacy to frustrating distractions leading to poorer performance.

Further, the study finds that the open office provides a solution to a problem that basically nobody ever had — ease of interaction with colleagues. As anybody who’s heard the pitch on the open office layout can recall, office layouts that divide workspaces with walls or partitions tend to interfere with “collaboration” and “the free exchange of information and ideas” about the workplace mission.  Hogwash, says Kaufman:

The New Yorker, in a review of research on this nouveau workplace design, determined that the benefits in building camaraderie simply mask the negative effects on work performance. While employees feel like they’re part of a laid-back, innovative enterprise, the environment ultimately damages workers’ attention spans, productivity, creative thinking, and satisfaction.  Furthermore, a sense of privacy boosts job performance, while the opposite can cause feelings of helplessness. In addition to the distractions, my colleagues and I have been more vulnerable to illness. Last flu season took down a succession of my co-workers like dominoes.

As the new space intended, I’ve formed interesting, unexpected bonds with my cohorts. But my personal performance at work has hit an all-time low. Each day, my associates and I are seated at a table staring at each other, having an ongoing 12-person conversation from 9 a.m. to 5 p.m.  It’s like being in middle school with a bunch of adults. Those who have worked in private offices for decades have proven to be the most vociferous and rowdy. They haven’t had to consider how their loud habits affect others, so they shout ideas at each other across the table and rehash jokes of yore. As a result, I can only work effectively during times when no one else is around, or if I isolate myself in one of the small, constantly sought-after, glass-windowed meeting rooms around the perimeter.

Adjust your noise-cancelling headphones and read Kaufaman’s entire piece here.

Photo credit: Wikipedia