CIP Blog

Knoxville, Tennessee

We take a reprieve from looking at the details of a lease to look at the market update for Knoxville. 

Since our last market update (a month ago), I am happy to say that things have certainly improved in the prospect area.   The phone is ringing more often, retailers are starting to talk about expansion and corporate users are looking for office space.

Retail Growth

Retail:   We manage/broker four different retail properties in Knoxville and the activity at all the centers has picked up.  CIP has done about 11,000sft of retail leasing in the last six weeks (our first retail leases of the year).   Other retailers are moving into the area.  West Town is getting the tea boutique Teavana and a Tommy Hilfiger.  There is a new Brazilian restaurant moving into the former Amerigo’s and the former Boater’s World location across from the mall will soon be home to Nicola’s Fine Furniture and Aspen Dental.   And lets not forget that Sullivan’s will open another west Knoxville location in the old Italian Market at Franklin Square.

Office space is starting to move again

On the office side activity has increased although not many deals have been closed.  Most of the leases are for tenants relocating, not necessarily expanding.  From the deals CIP is working on you can notice that most of the tenants looking to move are corporate groups.  Most locally owned companies are staying put. 

The big office news is still technically a rumor.    Shopper-News reported earlier this month that Powell-based medical products manufacturer DeRoyal Industries is negotiating to buy the JCPenney Building, on Gay Street, as a possible new corporate HQ. 

The story gave few details and company president Bill Pittman this morning said that “We have no plans to move downtown.”

Knoxville Industrial vacancy has risen 3% in the last two years.

The negative news is on the industrial side.  According to an MPC report, the vacancy rate grew from 11.1 percent in the fourth quarter of 2007 to 14.1 percent in the fourth quarter of 2009.  That is a pretty significant jump.

Four notable industrial properties were vacated since 2007 adding a combined 1,137,825 square feet to the market and making up 33 percent of the area’s vacant space.  That does not include an additional 102,000sft that has gone vacant since this report was completed. Vacancies also continued to grow at the national level, with the national vacancy rate registering 13.2 percent availability in the fourth quarter of 2009. 

Reading real estate is like reading tea leaves…tough to do and can leave a bitter taste in your mouth.  Things do look better as a whole but the market is still volatile. 

As always, if you have any questions please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Justin Cazana, CCIM

Surely paying rent is easy, right?  All you do is write a check at the first of every month.  Piece of cake.   Yes it is easy. 

Rent:

In most leases, rent is paid to the landlord on the first of every month.  The language is very specific in the lease document as to how it is paid, when it is paid, to whom it is paid and what happens when you don’t pay it.   To make sure you don’t forget to pay your rent many landlords suggest, or require, automatic draft of all payments from your account. 

A couple of things to watch for…

• When you are starting a new lease make sure the rent commencement date is negotiated.  Rent rarely starts the day you sign the lease.  Do your best to make sure that rent does not start until you open for business or until your construction is complete.  Nothing can put a crimp in a business plan like paying for construction and rent at the same time.
• Negotiate free rent periods.  In this economy many landlords are giving incentives. Free rent is one of them.  Two to three months of free rent is not uncommon.
• Pay attention to late fees.  Rent is due the first but most late fees are not charged until the 5th of the month.  This is not a hard and fast rule but something to watch for.  Also, late fees can be as much as $25 per day. Those can add up quickly. 
• Load factor:  You may notice you pay rent based on “Rentable Square Feet”.  This is based on the amount of “Usable Square Feet” you occupy, multiplied by the load factor.  This is the percentage of the building taken up by the common area (restrooms, hallways, lobby etc…).  This varies from 0% to 20% depending on the building.  Learn your buildings load factor before signing the lease to make sure the rent is properly calculated.

 Operating Expenses:

These costs are defined as the amounts paid to maintain property, such as property taxes, utilities, insurance, repairs, maintenance, legal fees etc…These have more than a dozen names.  They can be referred to as CAM (Common Area Maintenance), NNN charges (known as triple net), operating expenses, pass throughs…you get the idea.  They are handled differently depending on the type of lease but to simplify the process we will look at basic retail and office leases.

Admiral Pointe-Common Areas

Office Operating Expenses:  In typical Class-A office leases the tenant pays a full-service rent.  The tenant writes one check each month to cover rent, utilities, CAM, etc…However, in the lease there will be what is called a “Base Year” or “Expenses Stop”.  This defines the amount of annual payments that goes towards operating expenses.  For example, if you pay $20.00 per square foot in rent in a full service lease your “expense stop/base year” may be $6.00psf.  At the end of the fiscal year the landlord will reconcile all the operating expenses.  If the operating expenses exceed $6.00psf the tenant will be required to cover the difference (Example: if it ends up at $6.05psf, the tenant will have to pay $0.05psf to reimburse the landlord).  But it goes both ways, if costs come in under your expense stop/base year the landlord is sometimes forced to writes the tenant a check for the difference.   

There are some leases that do not have operating expense stops; these are typically called Gross Leases.  There is no year end charge to the tenant; however, these leases typically include annual rent increases to cover the increase costs of services.

The Gallery on Kingston Pike

Retail Operating Expenses: In most retail leases these are called NNN pass through or Triple Net Charges.  It is the same scenario as offices lease only the rent and NNN charges are broken down into separate categories.  The tenant usually rights only one check per month for rent/NNN but the NNN charges are more volatile and fluctuate more year to year than an office lease.  Remember the retail leases often don’t include things like janitorial service, HVAC repair or light bulb replacement that you might find in office lease.

Protect yourself:  There are ways both the tenant and landlord can protect themselves from outrageous increases in operating expenses in both office and retail leases.  

• Put a cap on controllable expenses:  Landlords have the ability to bid out many of these services, landscaping, janitorial, insurance etc…this allows them to keep operating expenses lower.  In your lease try to negotiate a cap on year to year increases.  Most landlords can agree to around 7% per year.  Note:  Landlords can not control some expenses like taxes and utilities so these are excluded from this type of cap.
• Carefully read the section of your lease regarding operating expenses (it may be called Additional Rent, Operating Expenses, Rental Adjustments or Excess Operating Costs).  Some landlords reserve the right to charge administrative fees on top of the operating costs.  Try and negotiate these out of the deal if you can (its tough).
• Make sure the landlord provides you with a reconciled record of the operating expenses for each year and review it.  If expenses went up 10% make sure there is a reason for it.  
• Negotiate the ability to audit the landlord’s records, but be reasonable about it.  The tenant is paying the rent and the operating expenses so they deserve the right to review the costs.  This is done at the landlord’s or managing group’s office during normal business hours.  Depending on the way the audit rights are negotiated, if the operating expenses are incorrect the tenant can be reimbursed for the excess cost as well as the cost of the audit.

You might have noticed I used the words “typically” and “usually” often in this blog, this is because every lease is different.  Just about everything in a real estate lease is negotiable, these factors are no different.

Be diligent when reviewing these sections of the lease.  A property negotiated lease can save your business thousands of dollars per year.

As always, if you have questions please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

Justin Cazana, CCIM

Knoxville Real Estate

The Knoxville market has been an interesting place the last couple of months.   I just returned from the Knoxville Area Association of Realtors (KAAR) Trade Show and found many residential realtors content with the market’s direction, not thrilled just content.  Of course they are residential realtors, not commercial.  Commercial tends to lag about 12 to 18 months behind the residential market.  That is what happened on the way down, will it happen on the way up?

There is good news from the lenders side.  From several developers and mortgage brokers I have talked to institutional lenders are loosening the strings and getting more aggressive.  Most of that is for permenant financing.  Banks however are very tight fisted with the money on commercial deals and that may not change anytime soon.

On the leasing and sales side of the market it really depends on who you talk too.  Many brokers say they are working hard and showing space but not many deals are closing.  

If you talk to Spery Van Ness/RM Moore you will get a different story.  In today’s Property Scope put out by the Knoxville News Sentinel you can read about the success RM Moore has had in the first quarter of 2010. 

http://blogs.knoxnews.com/flory/2010/04/local_brokerage_sees_jump_in_c.html

Looking for some good news in commercial real estate? Sperry Van Ness/R.M. Moore is happy to oblige.

The local brokerage firm said this week that its sales and leasing transactions were up 450 percent in the first quarter, compared to the same period in 2009, while volume was up 863 percent.

“We feel it is a great sign of the economy recovering and heading in the right direction,” firm president Roger Moore said in a news release. “Our leasing activity in both retail and office has been excellent in the first quarter with over 150,000 square feet leased.”

As far as businesses coming to Knoxville, the city contiues to be one of the top locations for business, although the city did call a few spots in the release of yesterday’ s Forbes Best Places for Business and Careers. 

From the Knoxville News Sentinel:

Metropolitan Knoxville dropped to No. 56 on Forbes’ 2010 list of the Best Places for Business and Careers.

That’s down from No. 43 on the 2009 list and a high-riding No. 10 in 2008.

Plummeting 46 spots in two years, that’s the bad news. The good news is that Knoxville still ranks higher than 144 of the 200 largest metros in the country.

It’s all relative.

Forbes considered a dozen metrics for its 12th annual rankings, including the cost of doing business, projected job growth, cost of living, income growth, educational attainment, crime and others.

 The leaders on the metro list are mostly “Midwestern and Western cities, areas with reasonable business costs, strong economic outlooks and a solid quality of life,” the Forbes story says.

Des Moines, Iowa is No. 1, followed by Provo, Utah; Raleigh, N.C.; Fort Collins, Colo.; and Lincoln, Neb.

Knoxville’s overall ranking was hurt by lower rankings in the cost of doing business, income growth and job growth categories. The sharpest decline was in income growth, falling to No. 193 from No. 142 in 2009.

The cost of doing business (labor, energy, taxes and office space) ranking in 2010 is No. 27, compared to No. 19 last year. The job growth ranking (five-year annualized figures) for this year is No. 116 compared to No. 92 in 2009.

As I mentioned, the news wasn’t all bad. Knoxville showed improvement in some metrics. The city’s ranking for educational attainment (share of population with a bachelor’s degree or higher) rose 11 spots to No. 84 from No. 95 on the 2009 list.

Metro Knoxville’s crime rate, sensational crime stories notwithstanding, also is better. Knoxville’s ranking (crimes per 100,000 people) improved to No. 117 from No. 126 last year.

The Knoxville area’s cost of living ranking (based on cost of housing, utilities, transportation and other costs) also improved, rising to No. 76 this year from No. 83 in 2009.

And, finally, Forbes expects Knoxville to generate more jobs than it did last year. The city’s projected job growth ranking rose to No. 126 from No. 142.

I think Roger Harris put it best when he writes is all about your perspective.   Being one of the top 60 cities in the country for business is a great accomplishment.  Also, these surveys can be cyclical.  If Tennessee or Knoxville has a bad year in recruitment or another rated metric it can significantly effect the rankings.

Knoxville is still getting shots a quite a few big projects.  From what I have been told the Knoxville Area Chamber Partnership has been inundated with requests for information from major companies.  And I expect to see the trend continuing in the near future. 

If you have any questions pleaes feel free to contact me at 865-584-3967 or jcazana@ciprop.com.

www.ciprop.com

This morning, Dr. Tony Spiva (UT’s economics professor emeritus) spoke to a joint breakfast of IREM and CCIM abou the economy, its recovery and some what to look for over the next few years.

Was it uplifting?  No!  Was it better than last year’s outlook? Yes.

About this time last year Dr. Spiva gave the same group a glimpse of what was to come.  I don’t remember all the details of the meeting but I do remember him stating that we would start to see the light at the end of the tunnel around the 4^th of July…2010!  At that point most of the developers in the room were looking for a way to open Club LeConte’s windows to take the 28 story plunge.

As we all know, 2009 was a disaster.  Based on phone calls, inquiries, incoming e-mails and prospects to my office over the past two months (which of course has no actually scientific viability) I’d say we have turned the corner.  Dr. Spiva agrees and expects the Sixth Federal Reserve District to soon determine the “trough” of the recession was sometime in November.

Dr. Spiva spent a lot of time talking about the past, comparing this recession to past recessions.  The U.S. has had 11 recessions since World War II, none of them as bad as this one.  Most past events have been tempered because other portions of the world, Europe, Asia, etc…have remained strong and helped carry us through.  That is not the case this time.

Many comparisons were made regarding employment.  Graphs Dr. Spiva provided (I will send them to you if you like, jcazana@ciprop.com) showed comparisons to the seven downturns since 1970.  A trend is developing showing that in each recession the percentage change in unemployment goes deeper and recovery takes longer for each period that comes up.   Example, 1974-76: Employment fell 2.75% and took about 20 months to recover; 1981-83: Employment fell 3% and took about 27 months to recover.  Since 2007 employment has fallen 5.1% and is not on the way up, and we are at 22 months.  His prediction is for jobs to not fully recover until 2015, that would be 80+ months.

Another concern is the stimulus bill.  Dr. Spiva’s opinion is that the $800 billion wasn’t nearly enough.  $1.3 trillion would have been more helpful but the Republican’s in congress would not allow President Obama to go that high.

He expects congress to put together an additional stimulus package later this year but expects it to be as big a disaster as the current package (that is his comment on the incompetency of congress, not what effects the stimulus could have).

Pressure is also on the Federal Reserve to make sure they handle the recovery carefully.  Increasing interest rates to quickly, or too soon, could cause inflation; not doing it quickly enough could ruin the recovery.  Dr. Spiva says we are in a very fragile state of recovery now things could go either way.

How does this effect commercial real estate?  Well until banks get comfortable lending money real estate can’t expand. 

It was an interesting talk.  Dr. Spiva always provides strong insight it to what is going on.  My apologies to Dr. Spiva if I flipped some of his comments or made factually incorrect statements.  I will be happy to retract them if you point them out.