OPTIMISM AND ITS EFFECTS ON THE MARKETS

What happens when landlords feel comfortable enough to shake up the occupancy status quo by introducing new square footage into the markets?

Ask several people if they are optimistic about the economic outlook in San Diego and you may get different answers. One group that seems very confident include some of the county’s most successful developers/landlords like, the Irvine Company, Kilroy Realty Corporation, and CM Management, Inc. These three companies have development projects currently under construction or proposed in the near future.

Landlords are confident the markets can absorb a large amount of new and expensive office space. Irvine Company’s speculative project, One La Jolla Center in UTC, is being built in part to disrupt the status quo of occupancy rates. The occupancy rates in their portfolio of 11 of the most prestigious addresses in UTC were very high. In order to promote movement within the market they chose to introduce One La Jolla Center, an approximately 305,000 sf class A office building. This will surely shake up the market as the project is completely modern, LEED certified and will be expensive, with rents above $4.00/sf. The Irvine Company is confident there are businesses in the area that are willing to pay a premium to be in the newest, most advanced building in the market. That is a strong vote of confidence for the area’s economy. Kilroy Realty Corporation has a large presence in Del Mar Heights. They are also backing their confidence in the economy by opening up their wallet. Currently under construction is the Heights Del Mar (building 3) an approximately 75,000 sf of class A office. Also on their books is the One Paseo project in Del Mar that will eventually add another approximately 450,000 sf of class A office space. One Paseo is currently mired in public debate so the commencement date of construction is questionable at this time. CM Management, Inc. is getting into the mix as well with MAKE in Carlsbad. The plan is to demolish an existing industrial building and construct a very modern 177,000 sf of class A office space along Avenida Encinas.

These projects take several years to complete which means landlords had the confidence and vision to pull the trigger years ago. They are making a bet on San Diego’s economy and future.

How does this optimism effect the markets? Picture a Christmas snow toy where when you shake it up the effect is of snow falling onto the scene in the ball. When you “shake-up” the market by adding large amounts of new square footage, tenants will begin to move around. The new space will also be the most expensive in the market which will eventually cause upward pressure on rents in all buildings in the same class. Successful high image companies will inevitably want to move into the “latest and greatest” space in the market even at premium rental rates. That leads to vacancies in the buildings they just left which may be high image but older. The older space is also cheaper relative to the new space. That provides an opportunity for another company to occupy high image space (albeit older) at relatively cheaper rents. As landlords lose tenants to newer buildings they may become more motivated to offer concessions to fill their new vacancies. Again this could benefit a company looking to upgrade their image. This movement theoretically ripples throughout the market as companies take advantage of upward migration throughout all classes of buildings and attempt to improve their office space.

If you’ve been thinking about upgrading your company’s image now is good time to look into a move. Botticelli Realty Advisors represents tenants only. We can help you understand market dynamics caused by new square footage on a market and help you take advantage of opportunities. If you would like to discuss your situation in more detail please feel free to contact me at 760-445-9908, or my partner Vince Botticelli at 619-851-3556.

Thank you and I look forward to speaking with you all soon.

Brian Lukacz

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SOME THINGS TO THINK ABOUT REGARDING THE RECENTLY PASSED COMMERCIAL REAL ESTATE AGENCY DISCLOSURE BILL (SB 1171)

Last month GlobeSt.com, a national real estate website, published an article by Carrie Rossenfeld discussing a recently passed California Bill regarding agency disclosure requirements for commercial real estate transactions. The premise of SB 1171 is as follows, “Effective January 1, 2015, commercial real estate salespersons and brokers will need to provide, in writing, their exact proposed agency role in the future transaction. In addition, this disclosure will need to be signed by the potential client prior to moving forward with any representation.”

How will this affect you as a tenant leasing space? Let’s answer that question using an hypothetical example. You’re current lease is a about to expire and you will probably stay at your current location, but you want to see what else might be available. What seems like the path of least resistance is to contact the agent whose name is all over your building, on a sign out front, on the lobby directory and maybe even in the elevator. That individual might have even contacted you recently to say your lease is expiring soon. This person is the listing agent who is hired by the owner of your building to market space and find tenants for their client (the building owner).

The new law will require that individual to state in writing their agency relationship with the landlord. They represent the landlord’s interests which is to get you to renew your lease at their building in order to maintain or increase occupancy. Let’s take the example a little further, say the listing agent is good and represents two more buildings in the area. Their contractual obligation is to find tenants for their landlord clients. In any of these scenarios it will be disclosed the agent’s relationship and fiduciary responsibility is to the landlord(s). As such it is difficult to imagine a situation where you as a tenant should feel comfortable that your best interests are the priority of that particular agent.

PERIODIC REVIEW OF YOUR LEASE IS A PRUDENT MOVE

Thankfully the fires from a few weeks ago are out but I fear it’s going to be a long fire season. Take a look at the accompanying picture I took of a building along Palomar Airport Road in Carlsbad damaged by the fire. Clients in that area who witnessed the fire commented on how awe inspiring and destructive the power of nature can be.Why am I showing you a fire damaged building? Events of this type should make us pause and reflect on how prepared our businesses are to handle catastrophes. As it relates to your commercial lease it’s a good idea to periodically review the document for two reasons; one, make sure you have the appropriate level of insurance protection, and two, compare your situation to the current market conditions to see if there are areas to potentially reduce occupancy costs.

At Botticelli Realty Advisors we provide lease review services whether you are an existing client or not, and it is free of charge. This is a good idea to do if you’re more than half way through a long term lease, and definitely after an event like the recent fires.

How many of you remember the insurance clause in your lease stating the type of coverage you need to carry during the term? Usually right after the insurance clause is the section addressing damage or destruction of the property. This clause describes what happens in the event of destruction of premises by fire (or other cause) and details what happens to the lease if a certain percentage of the premises has been destroyed or is not habitable.

THE CHANGING OFFICE ENVIRONMENT

I recently read an article on the real estate website, GlobeSt.com, written by John Salustri. In it, he discusses the changing office environment. There were several points made in the article I felt would be good for you to know. Commercial space is trending away from the traditional office environment to more open, collaborative work spaces. This phenomena is not necessarily just in the tech world either, many types of businesses seem to moving in this direction. Are you thinking about changing your office space with your next lease? Do you want to try something different to increase productivity or just to modernize the feel of your work environment? If so, here are a few key points from the article to keep in mind as you think about the best work space for your company:

• think ahead; build as much future-tech into your space as possible, including a technological backbone that allows maximum flexibility for future adaptation

• even though telecommuting is still in vogue, a trend is for employees to come back to the office environment, balancing the ability to work remotely with the greater need for collaboration and interaction

• think about the various departments in your company, do some want a more open collaborative environment, and do others still look for a more traditional space? Some businesses may need both

• the office footprint per employee continues to shrink, instead being replaced by larger, more open space

• changing demographics of the work force; the millennials are more willing to embrace technology and have no frame of reference for the traditional status of the private office, whereas the older workforce may still be more comfortable with an office

It is definitely an interesting read that will get you thinking about how you want to conduct your business in the future, and how that will impact your office environment. Click on the link below to read the entire article. As usual, if you have questions about your current office lease or would like to discuss how to make yours a more productive office environment, please do not hesitate to contact me at 760-445-9908760-445-9908.

Thank you,

Brian Lukacz

A DISCUSSION ON TENANT IMPROVEMENTS

Have you ever walked into an office and were immediately impressed? The image of the space; the floors, ceilings, lights, reception area and maybe a glass walled conference room…what about a great looking restaurant or high end warehouse showroom? Tenant improvements (TI’s) play an important part in establishing a company’s image. They’re also one of the most important terms to be negotiated in a lease transaction. Why is that? Primarily because TI’s can be expensive so, who pays for them? Also, the construction phase can be time consuming and potentially impacts lease commencement dates. Whether it’s an office, retail shop or industrial building the costs of construction may be different but discussion about what TI’s are and how much they cost are the same.

What are tenant improvements and how much do they cost?

Tenant improvements can be as minor as new paint and carpet, all the way to constructing a brand new office suite. Design styles and materials vary greatly in price as does the cost of construction from builder to builder. Typically when discussing TI’s the cost is stated in a per square foot basis. For example, someone is getting $20 per square foot of TI allowance for a 2,000 square foot office suite, would have an allowance equaling $40,000. A clean, rather generic office space with basic materials will cost much less than a high image law firm or doctor’s office which may require well above $100/sf.

Knowing roughly your design requirements and having an initial cost estimate is important because who pays the cost of the TI’s comes up very early in the lease negotiation. Generally speaking the TI’s can be paid by the landlord, by the tenant, or a combination of both, so let’s briefly discuss all three

Landlord pays for the improvements

Landlords can do this two ways; one, build the space out themselves, per a mutually agreed to space plan, and provide the tenant with a “turn-key” space, meaning the landlord is responsible for the entire construction project and once complete gives the keys to the tenant to move in.

WHAT’S IN STORE FOR THE REST OF 2014

Well we are just over seven weeks into the new year and I hope your business is off to a great start.  My post today is to pass on what I see happening in the commercial real estate market moving forward this year.  Before we move forward, however, let’s look back over our shoulder at the landscape of the 2013 year end trends.

By the numbers, the average vacancy rates for office space in San Diego County were as follows; Class A office 10.7% vacancy, Class B office 14.4% vacancy, and Class C office 7.7% vacancy.  The overall trend in all three categories was a slight decrease in vacancy during the course of the year and is one that has remained in place for the last few years.

SportRX is one of Botticelli Realty Advisors’ most recent clients

Friends,

I would like to introduce Dan Bruton, the President of SportRX, one our most  recent clients.  I worked with Dan to help them find new, updated space for their sales and marketing offices here in San Diego.  SportRX is the leader in sports prescription eye wear.  They will take any prescription and specially manufacture the lenses in their Los Angeles facility.  The lenses can be for any type and brand of eye wear; and I mean any…from everyday glasses, to cycling or golf sunglasses, scuba diving masks, motorcycle goggles, just to name a few.

Dan was kind enough to say a few words about the work we did for SportRX, and I invite you to watch the video.  Dan knows exactly where he wants to take his company and I’m glad Botticelli Realty Advisors was able to play a part in realizing that vision.

Thank you,

Brian Lukacz

Plan Ahead for Success in 2014

Plan ahead for a successful 2014

Happy New Year everyone!  I hope you enjoyed the holidays and are excited about the prospects of the new year.  Like most people, I spent these last few weeks planning the things I hope to accomplish in 2014. Planning ahead is critical to any successful endeavor.  If your company’s lease is expiring in the second half of 2014, now is the time to plan ahead, even if you know you want to stay in your current location!