August 20th, 2015
Remember the hole in the ground at One Franklin Street that blotted Downtown Crossing for more than two years following the financial crisis? Of course you do. We all do. The crater was a visual reminder of an economy and real estate market gone haywire – how a project can build so much momentum and then stall out unexpectedly. With the ire of former Mayor Thomas Menino at its back, the property finally changed hands last year and the project became known as Millennium Tower – which, at its completion in 2016, will be Boston’s largest all-residential structure at 685 feet.
You may not remember, though, that in its previous iteration, the development was slated to include a huge commercial component, with Fish & Richardson as the anchor tenant. When the market went south, those plans went with it.
For all its fanfare, Millennium Tower is also a cautionary tale for commercial real estate developers regarding cycles and the sometimes narrow windows in which to build profitably.
Traditionally a supply-constrained office market with limited new construction, developers would almost always hesitate to break ground without an anchor tenant in place. In 2011, Wellington Management agreed to occupy 18 floors of Boston Properties’ new construction at Atlantic Wharf, while Vertex Pharmaceutical’s commitment to anchor 50 Northern Avenue made that build-to-suit possible in 2013. More recently, 101 Seaport Boulevard (PwC), 2 Harbor Shore Drive (Goodwin Procter), and 888 Boylston Street (Natixis) are all examples of projects where the developer had commitments from major tenants before shovels went in the ground.
And now, some developers — encouraged by robust leasing, limited large blocks of contiguous office space, and a string of successful projects — are putting shovel to ground without a tenant commitment. Speculative development is underway at two major sites in the Seaport: Tishman Speyer’s Pier 4 project (370,000 SF) and Skanska USA’s 121 Seaport Blvd. (400,000 SF). As these developers incur a certain level of risk, tenants will benefit from the addition of new inventory amid the perfect storm of dwindling options and consistently strong demand.
But developers and tenants should beware: the willingness of such developers to incur development risk, mitigated only by their perception of the market’s strength, may be a signal that we’re approaching the peak of the current cycle. In fact, Cresa believes we’re just 24-36 months from market peak.
Whatever the case, expect the ghosts of One Franklin – arguably one of the city’s most visible development mistakes in recent history – to be on everyone’s mind, and Cresa to have its ear to the ground for the trends and predictions in the Downtown market.
August 20th, 2015
Tenants are nervous. Rightly so, some say. Landlords appear to have much more of the upper-hand than they would have had a few years ago, able to lease available space with fewer concessions.
In a bullish Boston real estate market like the one we’re experiencing, it may be tempting for commercial tenants to throw their hands up in lease negotiations and take what they can get.
I’m here to tell you that tenants have more power than they think. No matter the strength or weakness of the market, there is always an opportunity for the tenant – a silver lining, if you will. Representing only the tenant, Cresa – with our methodical and time-tested process – utilizes several points of leverage to get the best deal possible.
Timing is everything – especially in real estate. In a landlord-oriented market, tenants with 12 months left on their lease may have an upper-hand on tenants with, say, 18-24 months left remaining. Here’s why: many landlords will view a potential tenant with less time remaining on their lease – we view 9-12 months as the sweet spot – as more motivated to make a deal than those who have more time to look around.
And for obvious reasons, landlords always want to start collecting rent checks sooner rather than later, again benefitting the potential tenant with a shorter timeline. (not that we won’t work with a tenant if their timeline for occupancy is on the longer end; a shorter timeline just gives us one more leverage point to exploit)
From a landlord’s perspective, the longer the lease term, typically the better. A tenant willing to sign a seven or 10-year lease on a space to which to relocate is in a better bargaining position with a landlord than one looking for a shorter lease term. This is because of the guaranteed rental income a tenant provides a landlord over that period, but also because stable, long-term tenants increase overall property values.
A third leverage point in any lease negotiation is a tenant’s credit-worthiness. An established firm with a strong track record and credit history can tout that in a negotiation with a landlord. Even a newer company can use its exciting story (funding, experienced management team, buzz, etc.) to its advantage.
As a tenant, it’s easy to agonize when you read a news story about the sizzling market, see cranes in the sky everywhere you look, or begin your hunt for a new space. Tenants can always be opportunistic, leveraging the best aspects of their situation into a great lease extension or relocation. Many times, identifying those leverage points and using them in negotiations requires the help of an experienced broker. In this market that may seem cloudy for a tenant, let Cresa be the silver lining.
July 9th, 2015
When evaluating a real estate decision, many tenants naturally gravitate toward focusing on the rental rate. The lease rate is important but it’s not everything. Tenants contemplating a move should consider the many build-out costs – and even potential financial pitfalls – associated with relocating.
While some commercial tenants lease new space as-is, the vast majority of spaces will require at least some improvements or build-out. But before setting up shop in a new space, it’s important for the tenant to review their current lease to understand what, if any, obligations they have to their current landlord. Upon vacating, installed systems furniture, flooring and IT cabling might have to be removed from the space. This is called decommissioning, and it costs money.
Then there are the costs associated with improvements in the new facility: there are hard construction costs (materials, labor, etc.), soft costs (architectural and, project management fees, etc.) and miscellaneous costs that landlords typically won’t touch, such as cabling and security.
The landlord may provide the tenant funds to make some of these improvements in the form of a Tenant Improvement Allowance (TIA). Agreement over the TIA should be a part of any preliminary negotiations between a landlord and a tenant, but to know how much of an allowance is required (or desired) requires an understanding of roughly how much the proposed improvements will cost. Tenants can get this estimate by engaging an architect and a contractor early in the process, all of which can be facilitated by a dedicated project manager. The landlord will sometimes make this connection, but having your own objective resources is preferred.
There may be limits, however, on how a tenant can spend its Tenant Improvement Allowance. A landlord may allow a small portion of the TIA to go toward soft costs, but will want most of those funds spent on hard improvements.
Finally, tenants should also consider furniture, which can be an expensive line item, into their relocation budget.
In summary, relocating tenants need to understand (1) the full scope of the project (hard costs, soft costs, furniture, relocation costs, etc.), as well as (2) how much TIA the landlord will provide (and how it can be spent). An independent advocate can help tenants navigate these sometimes tricky waters. As part of its pure tenant rep platform, Cresa helps tenants in planning their real estate and build-out needs, while negotiating with the landlord to achieve the most favorable agreement. We’re here to help keep the tenants’ moving costs as low as possible!
June 26th, 2015
Real estate brokerage isn’t what it used to be.
In the past, possessing a good knowledge of the market (what’s available and where) and avoiding conflicts of interest could make someone a pretty good commercial broker. This is no longer the case. Increased client expectations and technological changes are raising the bar for what it takes to be a trusted advisor. First off: technology. Mobile and the Internet make it much easier for anyone to locate properties that meet a client’s requirements. Information is increasingly ubiquitous and accessible, which inherently makes it less valuable. Today’s clients pay their broker for conscientious counsel, the ability to create competition for their tenancy and ensure as seamless a process as possible.
Second: client expectations have evolved. Mobile and the Internet have made all business-to-business relationships – not just between brokers and clients – more 24/7 in nature. Clients expect brokers to be available and responsive at all times, including nights and weekends. The days of having 24 hours to get back to a senior executive with a real estate question are over. Availability, quick response and speedy turnaround on deliverables are must-haves in today’s marketplace. Having multiple people involved with the client is essential in order to provide the level of service required to meet the client’s expectations.
Third: working with a strong team that understands the pressures and demands that a corporate real estate executive is under is crucial to a successful partnership. Brokers who have been (or can imagine being) in their client’s shoes, and can anticipate what they will need to be successful, separate themselves from the rest of the pack. A broker should view himself or herself as a member of the client’s company, and their advice and service should reflect that. Working with a team is essential—gone are the days of the “lone wolf,” as successful brokers recognize their own strengths and surround themselves with others who provide complementary value.
Finally: experience remains vital to success in real estate brokerage. Today’s corporate client expects that the real estate firm they hire has enough experience to understand what’s most important to the client and how to achieve that result. As such, recruiting and retaining talent is as important as it has ever been in this competitive environment. This is the kind of experience Cresa brings to the marketplace. In its tireless advocacy for commercial tenants, Cresa’s brokers stay current on the ever-changing landscape and will not only match a company with the ideal building and location, but will achieve the best possible outcome – every time.
May 27th, 2015
Looking around the room at a gathering of my colleagues recently, I was struck by the fact that, 25 years ago, many of our positions wouldn’t exist. We’re project managers, representing small and large firms that specialize in specific client types and those covering a broad range. The small group of highly functioning professionals has built strong reputations among tenants, architects and contractors over decades of combined experience. We had come together to discuss the opportunities and challenges facing a profession that was rare just a quarter-century ago.
Today, a project manager (PM) can define success for the tenant, the project team and the project itself. But as we discussed the current state of our profession, one thing became clear: from project manager to project manager; performance quality can vary wildly. There are a number of reasons for this. There are no established criteria for what it takes to become a PM and no minimum educational or professional standards. There’s no standard of professional care or code of ethics to guide PMs. Essentially, the profession is untamed country where anyone can hang out a shingle and call themselves a PM— and many do.
Firms, the success of whose real estate projects hangs in the balance, are often putting these projects in the hands of managers who are not ready. We have seen this turn out very badly for owners, tenants and project partners.
What’s the solution? We’re looking into forming a professional association that caters to PMs or tapping into resources available with other existing associations serving designers and builders. Ultimately, what is needed are standards – such as baseline training and education; proper certification; and the adoption of baseline ethical standards – that will govern admittance to the project management profession. Standards should also include skills such as project management, understanding of processes and procedures, and consensus-building and conflict resolution, as well as a strong understanding of business topics like liability insurance, contracts, staff training, marketing, compensation, and managing growth.
What’s next? We’ll be tackling these issues one by one, while bringing more PMs into a conversation that will include project partners like owners, designers and builders. Additionally, several of us are finalizing a white paper on PMs that will delve into the challenges and opportunities more thoroughly. Stay tuned, and please be in touch with any thoughts or experiences!
Principal, Project Management
May 12th, 2015
If Cambridge, the Route 128 corridor and Seaport District are the beautiful and upwardly mobile stepsisters of Greater Boston commercial real estate, the South Shore is Cinderella – perpetually scorned and left out of the party.
It has many of the required amenities to be a thriving commercial office region: parking, public transportation, an educated workforce, the Logan Express, vibrant residential communities and beautiful shorelines – in addition to plenty of land and older buildings available for development or redevelopment. Oh, and the commute is much more bearable, traffic-wise, for both those living in the city and south of it.
Again, I ask, why not the South Shore?
Well, it may be Cinderella’s time to shine. Prior to 2000, the South Shore had not had nearly as well developed a suburb and retail boom as parts north. But this has changed significantly over the past decade. From the Comcast Center (formerly the Tweeter Center and Great Woods) to the Wrentham outlets, to an influx of big box retail, this area has some of the greatest growth potential in Greater Boston.
Biotech giant Haemonetics recognized this. After management considered taking the company out of Braintree, they have recently decided to stay put, purchase another building adjacent to its current facility and investing $10 million to officially make Braintree its global headquarters.
Other signs point to a commercial real estate renaissance on the South Shore. While 35 percent of Braintree’s population is over 65, the age demographics are poised to shift as communities plan residential units catering specifically to the aging population – making room for younger families to find homes. For example, Braintree Landing will offer 136 apartment units, while the Southfield project in South Weymouth seems to have be reenergized with the report of a new developer – LStar Management, LLC – stepping in. This new group is planning a mixed-use commercial and residential development that will further enhance the appeal of the South Shore.
Educational opportunities are expanding as well, which should appeal to a younger workforce. The Kindred School, a Newton-based British preparatory school for international students, is preparing to open a new campus on the grounds of the former Norfolk County Hospital in the Braintree Highlands. The school plans to invest $20 million to $25 million building new dormitories, sports fields and a gymnasium next to now-vacant hospital buildings on nearly 20 acres off Washington Street and expects welcome “a couple hundred students” onto its new Braintree campus by the fall of 2015.
And lastly, let’s not forget the new trend in Boston: empty nesters selling their home in the ’burbs and moving into the city. Now you’re looking at a reverse commute on I-93 and no traffic. You can even take the MBTA Red Line south, which is not an option going north.
For all these reasons and more, it’s the South Shore’s time. Let’s make it happen.
Also See: 5 Reasons You Should Relocate to Quincy
April 27th, 2015
If you caught even a few games of March Madness, you’ll understand that in a close contest, the winning team is usually the one that has managed the clock to their advantage down the stretch. Knowing that it can quickly lose a lead late in the game, the leading team will slow down the pace of play, working to capitalize on each possession. Conversely, a trailing team will attempt to keep as many seconds on the clock as possible between shots, rolling the ball inbounds to delay the start of the clock and attacking the rim quickly each possession. If it can put six or eight points on the board quickly – with a three-pointer or two thrown in there, perhaps – they’re right back in it.
Clock management is just as important in commercial real estate: for tenants looking to renew their lease or relocate, time management equals leverage in lease negotiations. Knowing when to engage the marketplace is essential in obtaining favorable lease terms.
Start the process too many months ahead of your lease expiration date, and the marketplace will not take your requirement serious. Start the process too close to your lease expiration date, and your landlord will know you do not have time to move.
The latter scenario essentially removes your leverage in negotiations, resulting in decreased landlord concessions. Deleveraging yourself can also result in an above-market rent structure, failure to receive updated real estate tax and operating base years, and minimal lease flexibility — meaning the ability to terminate or extend your lease or flexibility in the contract premises.
As a general rule, the size of the tenant will dictate how far out from the existing lease expiration date the tenant should engage the existing landlord and competing landlords. For example:
- Small tenants occupying less than 10,000 square feet should plan on starting process 6-10 months prior to their lease ending
- Medium-sized tenants occupying more than 10,000 square feet but less then 50,000 square feet should plan on starting process 10-18 months prior to their lease expiration date
- Larger tenants (more than 50,000 square feet) should plan to start the renegotiation process at least 18 months prior to expiration
Whether the tenant’s objective is to renew or relocate, in order to obtain the most favorable lease terms they must be willing to walk away from their existing landlord (and communicate that during negotiations). Using time effectively will make the existing landlord compete for your tenancy, ultimately leading to a more favorable lease structure for the tenant.
The fine print: Each market and tenant is different, and certain circumstances may force a tenant to engage the market place sooner rather than later. That’s why these are general rules. That’s where a tenant-focused broker like Cresa comes in handy, helping tenants determine their company’s real estate needs, interpreting their specific lease scenario, and helping them through the negotiations. Like a good coach, we help tenants work the clock and get the best deal possible – every time.
April 8th, 2015
Like lunar positions and Boston sports championships, commercial real estate is cyclical. After bottoming out in 2009, the greater Boston commercial market has been trending upward ever since, with demand increasing steadily since 2010. (yet with little new supply being added) As a result, in just the last two years, most submarkets have seen asking rents increase significantly — some by more than 40 percent. Many landlords will continue to raise asking rents throughout 2015 as demand remains strong and most new supply is just hitting (or about to hit) the market. Looking further down the road, however, the last three commercial real estate cycles have lasted from six to nine years, meaning we could see rents continue to rise for years to come.
If you’re currently weighing a long- versus a short-term lease, this should give you pause. No broker can tell you with 100 percent certainty what rents will be in three years, but by committing to a long-term lease of 7 to 10 years today, you may be locking in at the pinnacle of this real estate cycle. Given our current market, it may make sense to consider a two- to three-year lease if it corresponds with your business plans. (Landlords will likely extract a 10-15 percent rent premium for this flexibility, but this may come back to you in rent savings over a 10-year period)
It may still make sense to consider a long-term lease, however, if you:
• want or need to have new construction
• need to make a significant capital investment in infrastructure
• don’t want to spend the capital on funding construction improvements that a landlord won’t fully fund on a shorter term deal
• are in an extremely competitive submarket with little or no large blocks of contiguous space. In this case, competition for space may force you to consider a long-term lease.
If you do go the long-term route, be sure you negotiate as much flexibility into the lease as possible — rights to terminate early, option to give back space, option to sublease, etc. This underscores the importance of hiring a trusted real estate broker to form a plan based on your business needs and advocate for you with prospective landlords. Because especially when the market is at a hot point in the cycle, you don’t want to get stuck in a money pit that gets deeper with each passing year.
March 26th, 2015
If you haven’t been immediately south of Boston recently, the city of Quincy is poised to undergo something of a renaissance. Led by Mayor Thomas Koch, the city is pouring millions of dollars into a revitalization of the downtown area, with attracting commercial businesses and their employees as a huge part of their long term plan. After the previous $1.6 billion redevelopment plan on 55 acres downtown fell apart last year, a new developer stepped in last November with a plan for 160 units of new housing and 12,000 square feet of retail space. Despite the downsized immediate plans, the business climate in Quincy is optimistic and ripe for your company.
1. Convenient to Boston Quincy is a city next to THE city. Quincy’s four MBTA Red Line stops cover the entire length of the city’s borders. Split by I-93, your employees who live in Boston would enjoy a short (about five miles) and breezy reverse commute, and have ample places to park for cheap or free once they’re there.
2. Affordability and amenities It’s no secret that the cost to headquarter a business in Boston and Cambridge is out of reach for many. Many companies simply elect not to put capital towards the high rents that landlords in downtown Boston and in Kendall Square now demand. South Shore commercial property owners know this and can offer average rents approximately half those in Boston and sweeten the deal with modern renovations and building amenities like in-building cafeterias, gyms and mini-marts.
3. Business-friendliness As I’ve already mentioned, Quincy’s city government is aggressively building an environment that is conducive to new businesses through redevelopment, but also through the city’s “streamlined permitting process, open access to government agencies, and in special cases, property tax incentives that spur investment and job creation.” (download the Quincy Chamber of Commerce’s Business Guide) This should come as no surprise, however: both Howard Johnson’s and Dunkin’ Donuts got their start in the City of Presidents.
4. The size of office space inventory Consider the total of approximately three million rentable square feet of office space located within a 10 minute walk of each of the four MBTA Red Line stops in Quincy. Of that square footage, roughly 750,000 square feet is currently available for lease.
5. Live-work-play Plenty of residential opportunities exist in Quincy as well. The city is finally now developing into a live, work, play area that is popular with the younger workforce. There are numerous apartment communities to choose from, three golf courses, marinas, parks and various retail amenities. With regards to new development, the plans for Quincy Center’s West of Chestnut redevelopment were unveiled in November 2014. These plans include 160 new housing units and 12,000 square feet of new retail space. As Boston and Cambridge continues to be a hot (and expensive) place for the best companies in the world to have their offices, we’re going to see commercial real estate in communities like Quincy heat up as well. Give me a call if I can show or tell you more about Quincy’s potential to house your company!
March 26th, 2015
It’s no secret Boston is experiencing an historic building boom that will, according to the Boston Globe, alter the skyline for a third time in the modern history of the city. Periods of heavy building have occurred before, but none rival the volume of the boom we’re in now, reports have shown. It is, in many obvious ways, a great time to be a business operating in the Hub, as we seldom see the quality of commercial space we’re seeing now.
But having worked in project management and the design and construction of commercial office space with Cresa for many years, I’ve observed a significant downside to the boom that I predict will only worsen. We’re on the cusp of a major construction labor shortage – a high volume of work with not enough workers – that will disproportionately affect the union-heavy downtown market. (this is being projected for Chicago as well) For instance, as many of these large buildings come online, they’re going to need manpower to install mechanical, plumbing, electrical and other internal systems. Large contractors will be absorbing much of the labor pool, increasing the cost of tenant fit-out work and adversely affecting project schedules.
In just the last 10 months or so, I’ve begun to see this playing out in the project budgeting I do for my clients. If I get a budget from a contractor for construction on an upcoming tenant fit-out project and the work is not scheduled to start for six or seven months, it’s not unusual of late to see my previous budget increase by as much as 10 percent.
Busy contractors are also beginning to increase their schedule durations as the sub-contractor market tightens.
As a tenant, here’s what this means for you:
1. It’s more important than ever to hire project management assistance (like me) – someone who knows the market, the contractors and the landlords, and who will lock you into the most budget-friendly project available.
2. Start early. Labor shortages often mean longer project schedules. The earlier you involve a broker and project manager in the process, the higher the likelihood you’ll remain on-time and on-budget.
Principal, Project Management
Barry Dubé, an award-winning Cresa principal who heads local project management services in the Boston office, has more than 25 years of experience in the commercial real estate, including project management, development, relocation planning, design, construction, and facilities management. Cresa Boston’s Project Management team is one of the largest such groups in the Boston area, providing integrated, start-to-finish services with Cresa’s brokers for Transaction Management.