After years of austerity, commercial real estate expansion is back on the agenda for many corporations and investors amid an improving economy.
As more companies gain renewed optimism about the future of their commercial real estate investments, Real Property Tax Advisors (RPTA) spoke with Coy Davidson, a commercial real estate professional at the Houston office of Colliers International.
Davidson joined RPTA owner and CEO Anne Joyner Sheehan, CRE, MAI, to discuss the state of corporate real estate in 2015.Here’s a recap of their conversation.
Anne Sheehan: What’s your take on the status of commercial real estate in Houston, now that the economy has rebounded?
Coy Davidson: The 2008 recession did not hit Houston as hard as other cities around the U.S. It seemed like we were the last one in and the first one out. So the recession had a muted impact on Houston’s commercial real estate market. I’d say it’s been a little bit different here than in other parts of the country, but other places are now starting to catch up.
AS: What sort of trends are you seeing in commercial real estate today?
CD: In Houston and around the U.S., commercial real estate expansion is generally trending upward. In fact, the market may have already peaked in Houston, but other commercial real estate markets around country are still experiencing growth.
AS: What’s important to businesses as they seek new locations for strategic commercial real estate expansion?
CD: Of course cost is always a primary factor in any real estate acquisition. But it’s not the only element to consider. Today, labor markets are very important and the competition is stiff. Businesses are paying much closer attention to population demographics and the available labor pool when selecting a location for new real estate.
Location is playing a bigger role in recruiting top talent and may guide a business as it selects a site for expansion. The millennial generation is poised to overtake Baby Boomers to become the largest living generation and the largest demographic in the workforce. As this transition happens, the workplace (and office space especially) will become a strategic tool for recruiting, improving productivity while enhancing operations and the bottom line.
I’ll also add — and I might be in the minority here — that I don’t think millennials are that different from older generations; they’re not an entire generation dedicated to living in urban cores. They might seek the urban core when they’re single and not married, but many will eventually have families and move to the suburbs.
AS: Are you seeing a lot of commercial real estate expansion in the Houston suburbs?
CD: Yes. The Woodlands, a large planned community in north Houston, is a prime example of an attractive suburban location for commercial real estate expansion. The Woodlands functions as the kind of live-work-play space that companies are seeking to attract workers, young and old alike.
If you’re in a less desirable or older area of town, it’s going to be more difficult to recruit talent than if you’re in an area that’s more attractive to the workforce.
AS: Besides cost and location, what other factors drive decisions around new commercial real estate?
CD: Every situation is different, but factors like commuting time, traffic patterns, the proximity to clients and amenities (especially when you’re away from the urban core), energy costs (particularly for industrial and manufacturing companies), commercial property taxes … the list could get pretty long.
AS: Do you see any mistakes companies make when executing a commercial real estate expansion?
CD: The biggest mistake I see companies make is not having an exit strategy. Some companies don’t foresee the consequence of external market forces. For example, one firm here built a highly specialized office building that suited its unique needs, but when they went to sell the building no one wanted to buy it because it didn’t fit the “standard” formula for office space; the space didn’t have enough parking to make it an attractive option to buyers.
Buying or leasing too much space could also be a mistake. These days more people work from home and digital documents are eliminating the need to store volumes of paper records on-site. In reality, many businesses need less space to accommodate their employees than they did five or 10 years ago. Rent is probably the most difficult cost to negotiate. If you’re looking for savings opportunities, occupying less space overall will lead to greater savings than trying to reduce your rent on space you’re not using. It’s all about efficiency.
Even in the midst of a commercial real estate expansion, there are many cost-savings opportunities. As the availability of commercial space tightens, sellers start driving the market instead of buyers. Don’t panic and buy hastily if you find yourself up against a supply shortage; conduct the due diligence required for any new real estate acquisition. Do as much work on the front end as possible, including a thorough investigation of your needs and the associated costs.
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