6 Takeaways On The State Of Midwestern Office
It was a long but informative day Wednesday at Four40 South LaSalle during Bisnow's big Midwest office event. Industry experts discussed a wealth of information, from the suburban to downtown migration and office design trends to learning what tenants want in a lease, there was a lot of information to digest.
Following are six major takeaways from the event.
1. LaSalle Is Strategically Underweighted In Office
In his keynote address, LaSalle Investment Management CEO of the Americas Jason Kern said that of the $17.5B in assets under his firm's control in the U.S., Canada and Mexico, $7B is in office assets. It is the largest exposure of asset classes in LaSalle's portfolio, but Kern said it is also strategically underweight in order to remain diverse. The offices LaSalle controls are high-quality central business district assets in markets like Seattle, New York, Washington, D.C., San Francisco and Boston. When LaSalle has invested in suburban office, it has focused on medical offices. Tenants in these assets are tied to high-credit healthcare systems located close to their patient bases.
There are exceptions to the rule. LaSalle owns a portfolio of assets in suburban Indianapolis occupied by high-credit smaller tenants. Kern said the company bought this portfolio through its value-add fund and investors are seeing an 18% cash yield.
2. Suburban Migration Has Been Good For The CBD
Ivanhoé Cambridge Senior Vice President Jonathan Pearce said that Chicago is one of several markets that have benefited greatly from suburban companies relocating to downtown, a trend that is best reflected in the CBD vacancy rate. Pearce said that suburban to CBD relocation is responsible for a 350 basis point reduction in the CBD vacancy rate. Remove the migration pattern from the equation and Pearce believes the vacancy rate would be closer to 16%. The migration pattern is the main reason why Ivanhoé Cambridge is rotating its capital from the suburbs to the CBD.
3. Companies Are Reinventing Themselves With HQ Moves
Hickory Farms CEO Diane Pearse said her company decided to move from Toledo, Ohio, to 311 South Wacker as part of a corporate reinvention. Pearse said that Hickory Farms is a traditional retailer that lost its way while under the ownership of private equity, and she realized that the company needed to return to its roots as a retailer. The talent she needed to hire was not in Toledo.
Once the decision to relocate to Chicago was made, Pearse had to choose whether Hickory Farms would be in the CBD or the suburbs. A downtown address would help attract and retain the marketing talent necessary to turn the company around. It was the right decision: Pearse said that Hickory Farms has replaced 65% of its workforce since she took over, and she has not paid a dollar in recruitment costs.
4. Online Investors Are Growing And Knowledgeable
Origin Investments principal Dave Scherer said that his firm has taken advantage of new securities laws that allow investors to buy into real estate developments online, like the American Jobs Act of 2011. It raises the threshold of transparency on both sides; developers can now market a specific asset class or product, while potential investors must provide financial proof of their interest. Scherer said that this can be a game-changer for raising funds for savvy developers who are experts at marketing their assets.
And these new investors are asking the right questions about investing in real estate. They are sharing information with other investors. American Landmark Properties Senior Vice President Barbara Carley said her firm has 500 longtime investors who invest between $25K and $10M, and the children of those investors are now investing. This led American Landmark Properties to upgrade its online presence so that investors can keep tabs on their investments.
5. Tenants Want To Be Seen As More Than A Business Deal
For all the advancements in technology, real estate is still an industry rooted in forging solid relationships. Shoprunner CEO Sam Yagan said that he was shocked at how little landlords knew about a tenant's business when he started looking for office space. Yagan said that landlords did not know his name or his company's mission statement, and that is a deal-breaker.
It is a belief echoed by Kickstarter co-founder Charles Adler. Adler said that a lease is more than just a transactional relationship. Discussing lease terms is understandable, but he also wants to be able to have a relationship with a landlord away from the office.
6. Gateway Hub Markets Are Changing The Office Landscape
Covene CEO Ryan Simonetti said that while small and regional businesses are the anchors of a local economy, large companies are the linchpins of economic growth. With a younger, more educated workforce, Simonetti sees a major trend of large corporations demanding their HQs to be gateway hubs for attracting that talent. They are hubs of culture, innovation and knowledge that transfers between themselves and the customer base. Many companies are seeking locations in affordable markets with relatively high incomes pared against lower expenses. Simonetti said Goldman Sachs' Salt Lake City HQ is an example. Goldman went there with 300 people three years ago and when the lease was up, no one wanted to leave. Markets like Indianapolis and Milwaukee can be well-positioned for future growth, based on these factors.
