Categories Narrative, Office Market

Q4 2013 Office Market Report

Our fourth quarter 2013 Office market absorption numbers came out last week. A short summary: We are making progress but absorption fell below expectations. We concluded the year just under 1.3 million SF of net (not gross) absorption. Net absorption is the true measure of a market’s performance. The net absorption in 2013 was down 36% from 2012, however, we beat the 1 million SF benchmark figure showing we are growing but at an anemic pace.

Here is a link to the Q4 2013 Office Market Report. These are my top four takeaways:

1.       Vacancy STILL stands at 23.2%, down only 80 basis points from 2012’s year end mark. As long as vacancy is thishigh, there is a drag on the overall market.

2.       There is 643,000 SF of office product under construction (SkySong 3, Allred Park Place, Go Daddy and General Motors). This time last year we only had 68,000 SF under construction. All of these projects had preleasing or were single tenant build-to-suit.

3.       Aside from select submarkets like Tempe, Downtown Phoenix, South Scottsdale and Chandler, rental rates remain flat and competition for tenants remains fierce. Once our market-wide vacancy dips below 20%, the playing field will begin to change.

4.       Office Sales Volume for Q3 and Q4 was four times larger than the consideration in the first half of the year. Sales prices continue to range all over the board due to product type and rent roll. Our Q4 report shows average sales price/SF is down, but this simply reflects more class B properties sold versus class A. We are seeing values generally increase in each class. Craig and I have a good pulse on the sales market after negotiating the largest sale transaction of the year when SkySong I&II traded back in August. Call us anytime to discuss cap rates and deals in the market.

With some wind (net absorption) at its back, Phoenix will, hopefully, get closer to that 20% vacancy mark in 2014. The buzz created in 2013 by major companies like State Farm, GoDaddy, Webfilings, InfustionSoft, and General Motors help give me a positive outlook for this year.

Andrew
602.954.3769
acheney@leearizona.com

P.S. I just got the below from Elliott Pollack and thought you should see it. Until we see robust job growth and strong in migration, we will continue to have slower than normal office absorption.

The Census Bureau released population data for the year ending July 1st.  It shows what most people already intuitively knew.  Population flows are anemic.  Arizona population was up 1.2% or 75,475 for the year.  Indeed, population flows have been weak for the past 6 years (see attached table). Slow population growth means fewer than normal housing starts.  Over time, population will grow again.  But, as of now, even though Arizona is the 3rd most popular destination for domestic migrants and 18th for international migrants, the total number of people moving nationally and internationally to the U. S. is about half of what it was at the peak. – Elliott D Pollack & Company, January 6, 2014

Q4 2013 Office Absorption Chart

Q4 2013 Office Vacancy Chart

Categories Narrative

5 Years After The Crisis, Big Banks Are Bigger Than Ever

First, a disclaimer: I am a capitalist. I believe free enterprise is flawed, but that it is, by far, the best system to create wealth and operate a country.

Below are two articles that show what is happening with banking in the US. First is a graph and quick article comparing the four largest banks in 2008 vs. 2013.  The US government has created an environment where the biggest banks are getting bigger. Try going beyond the top four banks. If you look at the top six banks, they now control 58 percent of all assets as a percentage of GDP. The big are getting bigger.

On the other side, the small are shrinking. The second article shows the incredible decline in community banking. Today there are now less than 7,000 banks in the US. This is the lowest since the Great Depression. AND they continue to shrink. We have lost over 10,000 banks and we will see more losses in the coming year. Guess how many new banks have been created since 2010? One. It’s a specialty bank that will service the Amish community. It looks like there will be one more trying to open in the near future—In American Samoa.

I’m not sure this is not good nor healthy. In Phoenix, on Camelback road, the street where a majority of banks had a branch, there were 10 empty branches 18 months ago. Some have been filled by other banks, some by alternative uses but there are still five spaces available. These are examples of on the street indicators of the below trends.

5 Years After The Crisis, Big Banks Are Bigger Than Ever

By: Mark Gongloff, Jan Diehm, Katy Hall
September 10, 2013
Huffington Post Article_Too Big To Fail 2

Five years ago, the biggest U.S. banks were so terrifyingly big that they had to be bailed out by the U.S. government in order to survive a financial crisis, lest they obliterate the global financial system.

Today they are even bigger.

The four biggest U.S. banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — today have about $7.8 trillion in assets, or about 47 percent of U.S. gross domestic product, up from $6.4 trillion, or 43 percent of GDP, at the time of the crisis in 2008. The six biggest banks, a group that now includes Goldman Sachs and Morgan Stanley, now have $9.6 trillion in assets, or nearly 58 percent of GDP.

Of the Big Four, only Citigroup has spent the years since the crisis trimming assets — which, in the world of bank accounting, are generally considered risks. The others have bulked up, partly because they absorbed other banks during the crisis.

Bank regulators have spent the interim trying to find ways to avoid having to bail out banks in the next crisis. Some even claim the mission has been accomplished. In their view, the Dodd-Frank financial-reform act created a way for regulators, known as “resolution authority,” to safely wind down a big bank that gets into trouble.

But some critics say resolution authority is just a bailout by another name. And others, including even some bankers, worry that resolution authority still hasn’t solved the problem of banks being too big to fail.

But however you feel about the big banks, there’s no denying they’re bigger than ever.

Update: Hamilton Place Strategies partner Tony Fratto, a former Treasury official and deputy press secretary under President George W. Bush, and an avowed lover of big banks, denies the big banks are bigger than ever, actually. He argues that smaller banks are growing more quickly than big banks. He also says that, as a percentage of GDP, the Big Four’s assets are down from 2012. And indeed they are, by that measure, but just a tiny bit. And total assets for the biggest banks are at an all-time high. So these banks are still getting bigger, but at a slower pace. Adjust your comfort levels accordingly.

Tally of U.S. Banks Sinks to Record Low
Small Lenders Are Having the Hardest Time With New Rules, Weak Economy and Low Interest Rates

WSJ

By: Ryan Tracy
December 3, 2013

WSJ Article_Getting Bigger_banks

The number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll on the sector.

The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

The decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. More than 10,000 banks left the industry during that period as a result of mergers, consolidations or failures, FDIC data show. About 17% of the banks collapsed.

The consolidation could help alleviate concerns that the abundance of U.S. banks leads to difficulties in oversight or a less-efficient financial system. Meanwhile, overall bank deposits and assets have grown, despite the drop in institutions.

“Seven thousand is still an awful lot of banks,” particularly in an era where brick-and-mortar branches are becoming less profitable, said David Kemper, chief executive of Commerce Bancshares Inc., a regional bank based in Missouri. “There’s no reason why we need that many banks, especially if those smaller banks have a much lower return on capital. The small banks’ bread and butter is just not there anymore.”

Still, the falloff is raising alarms among boosters of community banks, who say such lenders—which represent the vast majority of U.S. banks—are critical to the economy because they are more likely to make small-business loans. The number of physical bank branches in the U.S. is also shrinking. From the end of 2009 through June 30 of this year, the total number of branches dropped 3.2%, according to FDIC data.

“All too often, the large banks use their models and their algorithms, and if you don’t fit in their boxes, you don’t get the loan,” said Sheila Bair, the former FDIC chairman who is now a policy adviser at the Pew Charitable Trusts think tank.

Unlike before the financial crisis, new startup banks aren’t rushing to take the place of exiting institutions. Every year from 1934 to 2009, investors in the U.S. chartered at least a few and sometimes hundreds of new banks, according to the FDIC data. The Bank of Bird-in-Hand opened in Bird-in-Hand, Pa., on Monday—it was the first new bank startup in the U.S. since December 2010.

The reticence stems from slim profits and rising regulatory costs as Washington tries to ensure banks won’t fail en masse as they did during and after the 2008 financial crisis, bankers and industry consultants say.

SNL Financial, a firm that tracks bank data, said the median loan-growth rate for banks with less than $100 million in assets was about 2% during the year ending Sept. 30, well behind the roughly 3.4%-to-7% rate for midsize banks, or those with assets as high as $10 billion.

FDIC researchers, in a study of community banks released in December 2012, found that, as net interest margins—the difference between the interest charged on loans and that paid on deposits—declined across the industry in recent years as interest rates dropped, community banks suffered more than other banks. That is because their business models—traditional lending and deposit gathering—generally rely more on interest income.

And one way small banks grow, by buying branches from other banks, is also slipping. Through mid-November, there had been only 89 sales of branches this year, down 25% from the same 2012 period, according to SNL Financial. The main reason for the drop, industry experts said, is consumers’ increasing reliance on mobile banking and automated teller machines.

The question for community banks is, “Can you be too small to succeed?” said Dorothy Saverese, chief executive of the Cape Cod Five Cent Savings Bank in Massachusetts, who also advises the FDIC on community-banking issues.

Last week, the Bank of Bird-in-Hand bucked the trend, announcing it had secured FDIC approval and would become the first federally approved startup bank in nearly three years. The challenges the bank faced in winning that approval help explain why many investors are opting not to charter new banks.

To convince regulators of their viability, the backers behind the Bird-in-Hand group raised about $17 million from investors. Brent Peters, chief executive of the Bank of Bird-in-Hand, estimated the group spent about $800,000 in preparing its application for a new charter, including consulting and legal fees, rent on a temporary office during the roughly seven-month application process and the salaries of top managers, four of whom were on the payroll one month before the bank won FDIC approval.

In its application, the bank had to lay out internal policies and procedures in detail and specify the systems in place to, for example, guard against cyber-attacks. Paid consultants analyzed the local lending market and the feasibility of opening a bank there. The FDIC interviewed senior management and contacted banks competing nearby.

“You are talking perhaps anywhere from 8 to 16 inches of paper,” the bank’s attorney, Nick Bybel, said of the application.

Mr. Peters, who helped found another Pennsylvania bank in the early 1990s, said the application process this time was much more intense. “I’ve done this before, and it’s a lot different this time around,” said Mr. Peters.

Even before the financial crisis, the FDIC had begun to step up its analysis of bank applications, including testing to see how an institution would likely fare in its early years. In 2009, the agency lengthened to seven years from three years the period during which the banks it oversees face higher capital requirements and heightened scrutiny of business-plan changes.

FDIC officials say the agency’s process has always been rigorous and that it has received few applications in recent years as the economy has struggled. The lack of new banks forming is similar to “a pattern we’ve seen following previous financial crises and the recoveries that followed,” FDIC Chairman Martin Gruenberg said during a news conference last week. “We would expect to be seeing additional applications as the environment improves, and we expect to be approving them.”

David Baris, a partner at law firm BuckleySandler LLP who said he has advised more than 30 new bank startups over his career, said he has been steering clients away from starting a bank. “As a result of the FDIC’s policy, a [new] bank becomes a much-less-attractive investment, and it will be difficult to find sufficient capital.”

Even existing small banks also report higher operational costs in the post-crisis era. Expenses include investments in cyber-security and staffing to ensure compliance with new federal rules on mortgage lending and other matters.

United Southern Bank in Kentucky is about the same size it was in 2009, but bank President Todd Mansfield said he has hired about 15 back-office workers since then to help process loans, ensure compliance with regulations and deploy information technology. “We are literally running out of space. Probably we needed to add a few [more] people, but you know labor is the most-expensive item we have on the books,” he said.

Mr. Peters said he and his partners felt starting a bank in this climate could still be profitable, in large part because the Bird-in-Hand bank will cater to a population they feel is underserved: the Amish community. The area around Bird-in-Hand, a village squeezed between farm fields in Lancaster County, Pa., had a locally owned bank in recent years, but it was snapped up by a larger competitor in 2003. Bank of Bird-in-Hand’s owners think they can provide banking services that are better tailored to the community.

While the new bank will offer online deposits and target local customers who aren’t Amish, it will also operate a courier service to accommodate customers who might not be able to drive up or log on—a nod to the fact many Amish don’t use cars or computers. The drive-through window of the bank’s one branch accommodates a horse and buggy, and there is a shelter in the parking lot to shield horses from rain.

There is now one community-bank application pending in the U.S., according to the FDIC. It is for an institution in American Samoa.

Categories Design, Narrative

The Slow Death of the Private Office

I continue to track the development of the new, collaborative office place including the new headquarters of some of the biggest companies in the world. But, there is starting to be increasing backlash against the open office space. I came across the article below in Fortune that details some of the negatives of having an open work space. Certain companies rely on having privacy, and in fact, many employees prefer having a closed space to do their work. Noise, lack of privacy, and crammed offices are just some of the issues that these new collaborative work areas face. As you’ll read in the article, some companies take precautions against such complaints, but are they enough to eliminate private spaces for good?

I will be following these developments to see which companies have had success and which haven’t. In the meantime, consider: Is an open collaborative space right for your company?

Craig
602.954.3762
ccoppola@leearizona.com

P.S. We are beginning the year with some cool additions for you to take advantage of. On the top right, you can now click on our Facebook page (please like us). This is not an ordinary run-of-the-mill boring corporate page. We post our narratives AND other articles that do not make the cut here. I am confident you will like what you see if you are a Facebook activist. If you follow Twitter, you can now follow us. We have a cool aphorism of the week we send out on Mondays and at least two other interesting tweets per week. Google+ is now becoming more user-friendly. We have our page fully operational and easy to use. We spent the last year filling our pages with interesting, cool and informative stuff. Take a look.

 

The Slow Death of the Private Office

As the per-person square footage in offices continues to shrink, many workers — and managers — are beginning to wonder whether we’ve reached the limit.

Fortune

By: Katherine Reynolds Lewis
September 23, 2013

Slow Death of the Private OfficeFORTUNE — So much for having your own little corner at work. For two decades, companies have been shifting to open workspace designs and eliminating dedicated offices in a twin effort to reduce real estate costs and encourage collaboration between colleagues. But as the per-person square footage of the typical workplace continues to shrink, many workers — and managers — are beginning to wonder whether we’ve reached the limit.

“In open workspaces, it’s hard for people to get their work done if it requires uninterrupted concentration and focus,” says Cali Williams Yost, a flexible workplace strategist and author of Tweak It: Make What Matters to You Happen Every Day. “People who have jobs that require private conversations or uninterrupted thinking really struggle.”

A majority of employers allocate 150 square feet or less per worker, down dramatically from 225 square feet in 2010, according to a recent survey by CoreNet Global, a professional association for corporate real estate managers. Space per person is likely to continue to shrink, with 58% of companies expecting to increase employment in the next year. A whopping 81% of companies surveyed have already adopted an open-space floor plan.

Assigned space is unused 50% of the time, says Richard Kadzis, CoreNet’s vice president for strategic communications. And cutting out that space can benefit a company’s balance sheet.

AT&T (T) eliminated offices and consolidated workspace with savings of $3,000 per office for a total of $550 million per year, according to a General Services Administration report. Nortel’s (NTL) telecommuting program saves $20 million a year in real estate, the equivalent of two 20-story office buildings with 40,000 square feet per floor.

But creating a decent workspace isn’t as simple as tearing out office doors and putting in long rows of benches where employees can connect laptops, or putting in place a hoteling system for people to reserve space on an as-needed basis. Done right, an open floor-plan office will include strategically placed quiet rooms for “heads down” work, huddle rooms for small meetings or impromptu discussions, larger conference rooms, and social areas where all that collaboration and innovation can take place. There should also be access to plants and natural light, whether through windows, skylights or creative use of atriums.

Noise is often the most ignored factor in open design, says Kadzis. Acoustical engineers can do remarkable things with white noise and noise-absorbing materials, but they must be part of the design team. That group should also include executives from technology, environmental sustainability, human resources, and facilities management.

When editor Susan R. Paisner worked for a Washington, D.C. trade association, only 10 directors had dedicated offices, and the remaining 80 staffers shared one big open space divided into cubicles. “It was difficult for me because I was frequently being told to be quieter,” Paisner recalls. “It was a very frustrating, difficult environment to work in.”

There were a few small conference rooms in the office, but they were often booked. Once, a challenging issue arose, and she wanted to immediately sit down and speak privately with her staff, but they had to check every private space on the floor before finding one that was available.

Employers also need to integrate telecommuting and flexible work programs when they open these new workspaces, so managers and employees can match the type of work that needs to happen with the spaces and times that are available. For instance, someone who needs to concentrate on a large project should be able to shift her hours to come in before the office is noisy or work from home until she’s met her deadline, Yost says. And employees need training to learn to manage where, when, and how they should work.

For anyone thinking that the challenges are greater than the benefits of open workspaces, you’ve got plenty of company. Even some real estate professionals believe that companies are over-building collaborative space at the expense of privacy and focus work — 31% agreed with that statement in CoreNet’s survey. But the cost savings are quite powerful.

“Open workspaces are not going away,” predicts Yost. “Companies are going to take this as far as they can to save the overhead.”

Categories Narrative

Top 20 Most Unusual, Unique And Exotic Buildings of the World

Valued Customer–In my pursuit to provide the most informative narrative of office buildings, space, representation, and in general, interesting articles, I never thought I would be sending something with buildings in the shape of a shoe, a piano, and a picnic basket. Well, I am and here they are below – the “Top 20 Most Unusual, Unique and Exotic Buildings of the World.” This is just a fun scroll-down. Be sure to go to the bottom, because if you’re like me, I had never seen The Library in Kansas City. As always, you get my favorite: Museo Guggenheim in Spain. WOW.

We are beginning the year with some cool additions for you to take advantage of. On the top right, you can now click on our Facebook page (please “Like” us). This is not a boring, run-of-the-mill corporate page. We post our narratives AND other articles that do not make the cut here. I am confident you will like what you see if you are a Facebook activist. If you follow Twitter, you can now follow us. We have a cool Aphorism of the Week we send out on Mondays and at least two other interesting tweets per week. Google+ is now becoming more user-friendly. We have our page fully operational and easy to use. We spent the last year filling our pages with interesting and informative material. Take a look.

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