Downtown Frederick Co-Working Arrangement Proves Win-Win for Landlord and Tenants

I follow a number of commercial real estate bloggers, but Duke Long does it better than most.  I took inspiration from a recent video he posted for the topic of this post:  co-working spaces.

Co-working is essentially a group of small independent businesses or entrepreneurs pooling their resources to lease commercial real estate that they otherwise could not afford.

A perfect example of a co-working arrangement right here in downtown Frederick is the co-op of creative businesses leasing space together at 147 West Patrick Street.  The group includes Want 2 Grow?, Mary Kate McKenna Photography, and Think Baseline.

Amy Benton, “Master Cultivator” at Want2Grow, shared with Macro Report how this arrangement came to be and how it has benefited the parties involved:

“We met MK [Mary Kate McKenna] through Twitter and hired her to shoot photos for one of our clients, Rocky Mackintosh actually! Jenn Gerlock and I knew with our resources it would make sense to co-op with other people to afford the office space we wanted for the new businesses we were launching.

MK didn’t need a whole space, and she knew a creative graphic designer who could come in with us as well, Megan Mullaney of Think Baseline.  And so the Garden at 147 came to fruition, so to speak.

There is no overlap in our businesses, but they are very complimentary.  There has been a lot of synergy and we have all seen our businesses grow as a direct result of sharing space with each other.  We provide resources and advice to each other, as well as referrals. We like to joke that we have every decade represented:  20s, 30s, and 40s.  I can advise them from a business-management standpoint, regarding things like account bill collections and project proposals.  They help me a lot with advice on design and photography for my clients.

This has worked out so well that Megan Mullaney has seen her business double in size and she recently took bigger space in the building next door, which is owned by the same gentleman who owns the building we had been sharing space in.  Jenn and I have expanded our office space as well.

Looking back it was a really good way for all of us to begin, and it certainly has been an incubator for our businesses.  If we bring someone else in, we’ve discussed that a programmer or coder seems the logical choice.”

With local office vacancy rates hovering around 16%, and the number of self-employed entrepreneurs starting businesses out of their homes rising steadily, co-working is a concept that the players in Frederick’s commercial real estate market should look at closely.

For that matter, so should local corporations, many of which are leasing unoccupied or “shadow” space as a result of downsizing.  This could be a great way to sublet some of that excess space.  (For more information about shadow space, read our post “Have Office Vacancy Rates Peaked?”)

How does a landlord or prospective tenant find a co-working arrangement?  In our next post, we talk to Amy’s landlord for advice to businesses and landlords alike on making this happen.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

Zoning, title, deferred maintenance and NOI are among the many factors that influence real estate values 

Other than reviewing comparables and replacement costs, there are a number of major factors to consider when valuing a piece of non-residential real estate.

Whether it be raw development land, a shopping center, an industrial building or an office building, there are any number of factors that play into the complexity of valuing such properties.

Here are eight key considerations that a property owner and/or the commercial real estate agent should not overlook in the process.

1. Zoning – Some uses in the market are heavily restricted by certain zoning regulations.  In my community for instance there is a very limited supply of General Industrial (GI) zoned properties, which adds an extra boost to the demand factor.  On the other side of the coin there is a large supply of Limited Industrial (LI) Flex space, which far exceeds the current demand.
2. Title Issues — Consider such things as easements, covenants and deed restrictions that may encumber uses for the property beyond zoning.  Surprisingly this can happen more than one may think.
3. Physical Condition – Has the property been maintained well? Or have essential issues been deferred?  Buyers in today’s market are more cost conscience than ever – despite the fact that the contractor market is extremely competitive.  Bottom line is that the numbers to improve or develop a property have got to make sense.
4. Net Operating Income – Buyers are going to take a hard look at the leases and other revenue sources on an income property, but also related expenses.  Are the rates at market or is there room for improvement?  Are the leases full-service or triple net?  What expenses are controllable … utility and common areas costs that are not passed through to the tenants can be a real problem.
5. Tenant Mix – If this is an investment property, value will be seriously impacted by the stability of the tenants.  Vacancies in some sectors (as in the case of LI Flex) can really pull values down.  For the investor, it’s all about risk.
6. Development Costs – While contractor costs have become extremely competitive, it’s no longer just about getting a plat approved and then building roads and improvements.  Today’s regulatory environment has become more complex adding new requirements and increasing processing time. Consider issues like contaminated soils, the potential of archeological studies, forestation requirements and preservation of historical structures.
7. Financing – Yes, lenders are still extremely cautious about what kind of properties they will finance.  Consider that a low volume of real estate closings in a market can create challenges for appraisers to justify strong sales prices.  This may put the “fortunate” seller in the awkward situation of  having to renegotiate the price so as to make the loan and equity package work.
8. Resale value – While many purchasers are hung up about determining current market value, savvy investors and developers are also looking ahead to exit strategies.  In an unstable market sometimes that is anybody’s guess.

With a market that is more price sensitive than ever it is incumbent on the owner and the commercial real estate broker use all the above information to construct a profile of the ideal purchaser for the property.

Throw all this into the mix with comparable sales and active inventory to price the property accordingly.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board.  He also writes for TheTentacle.com and Want2Dish.com.

What has made the difference in the marketing of Land and Commercial Real Estate over the last 40 years?

As the use of the World Wide Web has evolved, the process of marketing land and commercial real estate has changed dramatically.

With that said what should a real estate owner look for when planning to place a property up for sale?

Having spent the last 38 years peddling dirt, sticks and bricks, I’ve experienced this evolution first hand.

Back then there were three basic marketing tools that a land and commercial real estate broker had available:  telephone, typewriter and automobile.  Yep, it was the pre-fax era, and machines that made multiple copies were just making their debut.

But there were those other intangible tools that separated the average broker from the successful one:  personal drive to network and bring a motivated buyer and seller together, and knowing the product and all the trends and issues that influence its value.

How I remember sitting at my desk making cold calls from the list of names I had organized on my 3” x 5” index cards … and then there were the afternoons of door knocking and attending events with business cards in hand.

Signs and an occasional ad in the local newspaper were essential components that rounded out the complete Marketeer.

There were no multiple listing services for commercial real estate.  Most listings were held very close to the vest. It was an age when the typical land and commercial broker rarely cooperated with another real estate agent from another firm.

That’s how it was done … and property owners accepted the process because they trusted their broker.

Today one web tool has redefined marketing by literally turning the definition of marketing as we knew it completely on its ear!

Up until just a few years ago, the accepted method of marketing real estate like so many other products was to take it “to the consumer.”

On its ear, you say?

Yes, with the maturity of Google and other search engines, it is more so about “being found by the consumers” than “interrupting” them and getting in their faces.

Consider how consumers shop for just about any major purchase now.  While they will often seek out someone they trust, they will also do research on the web … if they don’t have a trusted adviser for that product they will seek out assistance and references on the web as well!

This alone is the core concept that today’s real estate Marketeer totally understands.   The idea of  “being found” is called “inbound marketing.”

These simple two words sum up a very complex world of internet interconnectivity and integration that has evolved out of the consumers’ desire to find what they want by typing in a few words on Google and then being a few clicks away from their desired results.

Externally the tried and true uses of signs and direct mail (email and USPS) are essential parts of that integrated marketing effort … all of which leads the consumer to a website.

For the land and commercial real estate broker it’s about understanding key words and search engine optimization – just to name a few.  It’s not about getting in the face of the consumer, it’s about building trust by sharing market knowledge and being transparent about who you really are and what you do.

In a sense it’s an extension and reflection of who you are and the reputation you have earned in your community.  In the World Wide Web there’s no hiding a bad reputation.

While the old days of marketing may be passé, those essential intangible skills of personal drive and product knowledge are just as important as ever.  They were the skills that set the pace of the market then and remain the fuel for today’s successful land and commercial real estate broker.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board.  He also writes for TheTentacle.com and Want2Dish.com.

Investigating the layers of a full service lease in a commercial real estate transaction

Earlier this year, I went through the process of selling an office building that had become too big for my now “right-sized” business. Once that commitment was secured, I began the effort to seek out new office space.

My decision was to lease versus purchase, due to what many consider a “Tenants’ Market” — a clear advantage with hundreds of thousands of vacant square feet available in and around the Frederick County, Maryland area.

Not unlike clicking on an alluring link in an email or on Facebook or Twitter, there are a number of incentives that landlords may offer to attract tenants to their properties. Some of these just may be too good to be true.

In my search, I came across new shell space in a terrific location that I just could not resist. I went as far as entering into a temporary lease and occupying interim space in that building while the landlord and I attempted to hammer out a permanent deal under the following terms:

1. Full service lease that included all utilities, Landlord’s Annual Operating Costs and CAM (Common Area Maintenance) at under $20 per square foot
2. No rent at all (no utilities and no CAM either!) for one year
3. Landlord will foot the bill for a build-out of the new space at over $55 per square foot!

In the end, there were so many strings attached to the terms of the permanent lease that our negotiations broke down and I left for greener pastures.

Out of fairness to that landlord and their efforts to lease the building, I will not reveal the name or location. The intention here is to point out a lesson or two from this experience for would be tenants to use in their own lease negotiations.

So here’s the question for this post:

Is a full service lease really a full service lease?

Answer:   Well, sometimes, but often “not exactly.”

A traditional full service lease is typically understood to mean that everything is included in the tenant’s lease payment to the landlord – rent, electricity, gas, oil, water, sewer, real estate tax and insurance pass-throughs, snow removal, lawn, HVAC system maintenance, landlord overhead, management, security, replacement reserve … and sometimes even depreciation … you get the picture.

One check does it all!

Within the terms of the full service lease there is often an annual escalator that is set at some index, like the CPI or fixed to a certain percentage like 3%, which seems to be the current acceptable norm that is offered.

This escalator will give the landlord an annual increase on all those items listed above.

Here’s what to look out for: a clause that is often entitled “INCREASES IN ANNUAL OPERATING COSTS”. Its purpose is to define the specific common area operating costs (as noted above) and then provide one or more formulas for how these can be increased on an annual basis. In some cases, the landlord may put a cap on a maximum annual increase. However, very often there is no cap — just based upon actual costs. Consider, for example, snow removal costs over the last few years.

Common area management, property management, administrative and overhead fees are also often outlined within this clause. Among other approaches, check into whether these fees are based upon a percentage of expenses. Dig into the terms and find out if each of these are defined separately or rolled all into one. Administrative fees alone could be as high as 15% or more of budgeted expenses.

A clause like this is typical whenever there is more than one tenant in a building and the landlord accepts some responsibility for maintenance and oversight.

With that stated, if you are entering into a true full service lease, it really should not matter to the tenant once the lease is executed, because all of these costs are covered as a portion of the rent… and the lease terms should reflect that.

What I found within the “full service lease” proposal presented to me was such a clause with similar formulas for annual increases.  In other words that portion of the rent that is attributed to all those operating expenses can change annually, even though it is called a full service lease.  At the same time, once this portion of the rent is re-set each year, it is then increased again by that 3% escalator noted above.

Great deal for the landlord … but not so good for the tenant.  I think that’s called double dipping.

This is one of several issues that I’ll touch on in future posts that caused me to move on to my next and final destination.

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board.  He also writes for TheTentacle.com and Want2Dish.com.

On the hunt for a land and commercial real estate marketing professional.

Last week I officially launched a search for a new position within MacRo, Ltd. It’s been about six years since I actually hired a new employee.  Knowing how much the business landscape has changed not only economically, but also communicatively, I thought that I’d put much of our search focus through the web.

The position that we have created is one for an energetic, highly motivated professional to manage and further develop our firm-wide marketing efforts.

It has been just less than a year since we launched our revamped website and blog.  What a terrific journey it has been.  The response has been overwhelming to say the least.  Over this same period of time business has picked up considerably for this local land and commercial real estate broker … and while I can’t say that all this activity is a direct result of our web work, I know that it has had a big impact.

One component of our movement into the world of the new-media, has been the MacRo Report Blog.  The focus of this effort is to seek out and provide our readers with timely information regarding issues and trends that influence the value of land and commercial real estate in the Mid Maryland region.   We have developed a very nice following of subscribers by offering a variety of writers and opinions on a multitude of related topics.  It is great fun!

But the business of blogging takes up a lot of time.  And it is only a fraction of what we hope to develop into a fully integrated inbound and outbound web based marketing program.  As more and more of the population embrace social media and other online networking and entertainment sites, even those big city “sophisticated” commercial real estate brokerage houses will be forced to find their way into this world.

Being the always anxious entrepreneur that I am,  it is clear to me that the “great equalizer” that the web has been called, is where the future is for business growth.  At MacRo, we know we are only scratching the surface, and see now as the time to broaden our horizons in selling our services and promoting our services through such avenues as direct messaging, audio, video, live streaming and online interaction.  The web abounds with pertinent real estate information, but pulling it all together for use by our readers is a task.

Marketing 101 teaches that the key to a successful program is to take a multi-media approach to sending a consistent recognizable message to a target audience.  So the hope is also to use our web efforts to strengthen the tried and true traditional methods of marketing:  face to face networking, hard copy advertising, brochures, newsletters, signage and other media.

While the current economic climate have created serious difficulties for many, the successful business people among us learn to adapt to the changing winds in the market place, and dive in with vigor!

These are very exciting times we live in, and we’re hoping that we can find that one right person to assist MacRo, Ltd. in taking us to the next level.

If you happen to know someone who you think would be interested in the position, please ask him or her to contact me at rocky@macroltd.com.

Thanks!

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland.

That is the question, as asking prices for real estate sink along with rents

By H. LEE MURPHY / Crain’s Chicago Business / October 25, 2010

When the recession hit, Jay Goltz took a long look at his various businesses, ranging from picture framing to garden furniture. Operating costs were rising. Real estate, he soon decided, was the main culprit.

Goltz Group had operated in various buildings along Chicago’s Clybourn and Elston avenues that were both leased and wholly owned, with costs zooming as the surrounding neighborhood gentrified. He had started out paying $1 a square foot to rent a small space on Cly- bourn in the 1980s and saw his leases climb to $4 and then $6 and finally $10 a square foot as groceries and gift shops took over surrounding warehouses. Property taxes tripled at another Goltz location on Elston and Webster Street after a Kohl’s moved in across the street on what had been an empty lot.

Hoping to put a clamp on his real estate costs, Mr. Goltz last summer paid a little over $2 million for an aged, 85,000-square-foot industrial building at 701 N. Albany St. in what is still a factory district. He reduced his overall occupancy costs from an average $10 a square foot to about $3, taxes included, he calculates. Real estate once equaled nearly 10% of his $13 million in annual sales. Today it’s closer to 7%.

“Buying my own building has turned out to be very affordable for me,” Mr. Goltz, 54, says. “With my real estate costs down, I can be much more competitive in the marketplace while holding onto my profit margins.”

The answer to the age-old commercial real estate question “Should I rent or buy?” rarely presents such a black-and-white resolution. Mr. Goltz acquired his plant, an 1880s structure where cast-iron stoves were made, at nearly half the price it would have fetched a few years ago. Asset prices have fallen all over the Chicago area, making purchasing an attractive option.

On the other hand, lease prices are down, too, and with the economy still in the doldrums many business owners are reluctant to try to forecast their space needs five or 10 years into the future. Many would find mortgages difficult to finance anyway. For these businesses, leasing is still the best option.

“Strictly looking at the cost of mortgages and the prices of buildings, this is a favorable time to be purchasing real estate,” says Jeff Liljeberg, a managing director at Jones Lang LaSalle Inc. in Chicago. “But many businesses are looking at the bigger picture. They want to be flexible in the space they put their people in. They also want to be able to exit a space down the road if their needs change.”

Leases do look cheap now. Around O’Hare International Airport, industrial buildings that were renting on a net basis at $7 to $9 a square foot three years ago are now available for as little as $5, says Keith Stauber, another Jones Lang managing director who works in the suburbs. He says there is no consensus on the buying vs. leasing.

“Lease prices are very low for companies doing simple warehousing. But heavy manufacturers who are likely to need more specialized facilities are also finding that asset prices are down 10% and more off their highs,” Mr. Stauber says. “Tenants with lots of cash and a strong balance sheet will be tempted to buy. Companies that are growing and expanding may see more advantage in investing cash in machinery and people, and not real estate.”

BUILD TO SUIT

When Astellas Pharma US Inc. began to run out of space at its leased 300,000-square-foot North American headquarters in Deerfield after a major acquisition, management started looking for another building to rent. Things quickly got complicated.

“We wanted a place along an expressway where we could raise our public profile with a sign and also offer easy commuting for our 900 local employees,” says Collette Taylor, senior vice-president of human resources and corporate administration at Astellas. “We also needed a place with convenient expansion opportunities. We were in a building where we had grown over the years and people were stuck in odd pockets of office space that weren’t contiguous.”

Astellas could not find exactly what it wanted, despite an office vacancy rate exceeding 27% in the northern suburbs. So the company, whose parent is based in Tokyo, is building two towers encompassing 425,000 square feet on eight acres that were once the site of the Culligan International Co. headquarters. Construction, at a cost of $150 million, started in June and the buildings will be ready for occupancy by spring 2012.

Even smaller companies are opting to own their buildings. Jayant Shah, CEO of RPT Toner LLC in Bensenville, which reconditions printer toners, recently decided to leave a leased warehouse for a nearby 50,000-square-foot vacant building that he acquired for $2.75 million. The company plans to move by December.

“I wanted to own. It feels good to own. It allows me to build equity,” Mr. Shah says.

He started the company four years ago with a handful of employees in a 2,500-square-foot space and eventually moved up to the 23,000-square-foot one he will give up in a few months.

“We had 30 employees a year ago and now we have 55. A year from now we hope to have 100,” says Mr. Shah, who is getting an 80% mortgage from a local bank to finance his acquisition. “The new place we’re buying has the capacity for a workforce of 150. So I think it will allow us to keep growing for a while yet.”

Dimitrios “Jimmy” Bousis, owner of Cicero-based Cermak Produce Inc., operates nine stores, the majority in buildings he owns. He opened a 30,000-square-foot store in June at Cicero Avenue and 72nd Street in a former Wickes Furniture outlet that he bought for $4.4 million, financing the purchase with a 3.9% mortgage from J. P. Morgan Chase & Co.

“The mortgage terms on that purchase are the best ever for me. I used to pay 6% on loans from Chase three years ago,” Mr. Bousis says.

And yet his biggest store, 90,000 square feet in a former Kmart in Aurora, is leased. The rent is $2 a square foot, plus another $1.25 a foot in property taxes. “You can’t get warehouse space that cheap, so why buy it?”

This article reprinted with the express permission of Reis, Inc. a commercial real estate reporting service.  Copyright 2010 Crain Communication/All Rights Reserved.

Six months ago we launched our new fully redesigned website for MacRo, Ltd., and introduced the MacRo Report Blog.  The response has been terrific, and we thank our long time customers and new subscribers for your interest in our firm and the services we offer. 

In today’s world of “inbound marketing” via the Internet, we have found that integrating tried-and-true traditional marketing methods with cutting edge web-based technologies has given our clients an advantage that is producing great results in getting their properties sold and/or leased.

With well over 100 article posts on the MacRo Report Blog, several hundred comments, and now seven committed article contributors, we have amassed more than 3,000 followers who receive a weekly email update of our recent posts.  Our goal has never been to overwhelm our subscribers with a lot of unwanted messages that fill their inboxes.  The articles that I write, as well as those by our contributors, are focused on current news, commentary and timely issues that impact the land and commercial real estate market in our region.

Since land and commercial real estate is highly influenced by government policy and regulation, we have rendered our opinion on state and local government actions, including an opinion or two on the local elections.

So, if you haven’t joined our growing family of followers, we invite you to find your way to the MacRo Report Blog and see for yourself what it’s all about.  If you like what you read, click the SIGN UP tab and you’re on your way!

Click here to download a PDF version of the MacRo Report Fall 2010 Edition.

Just a few weeks ago Rocky Mackintosh, president and broker of MacRo, Ltd. in Frederick, Maryland was a guest on the 270 inc Business Magazine Radio Show with hosts & publishers Pattee Brown and Harby Tran on WTHU Radio 1450 and 1520 AM.  Topics covered: Growing a Business in a Down Market, The Current Climate of the Real Estate Market, as well as the Pressing Issues with Local Government.  There was some very lively conversation! 

 To listen to each segment of the show, pick and click on a topic below:

Part 1 — Introduction: Rocky’s background and career (12:11)

Part 2 — Taking advantage of a down market to grow your business (12:01)

Part 3 — Real Estate Blogging and government’s impact on property values (12:15)

Part 4 — Local Politics, the issues and government policies (8:03)

Many thanks to Pattee and Harby for the opportunity to share the MacRo views on the local issues surrounding the land and commercial real estate market!