CIP Blog

There are literally dozens of variations of commercial leases; full service, gross, modified gross, NNN, NN, absolute NNN…you get the idea.  We will get into leases at a later date; but they are just one of the reasons you need to have a commercial real estate broker on your side when looking for space, negotiating a lease, or purchasing/selling commercial property.

Let me answer the first question most commercial realtors get asked when working with a client for the first time…“How do you (the realtor) get paid?”  While each case can be different, depending on the circumstances, in the Knoxville market it is standard business practice for the landlord to pay the commissions in a lease.  Hence, it doesn’t cost the realtor’s client (the tenant) a dime to look for space. 

Commissions for property sales are similar to residential practices in that they are negotiated in the sale contract.  

In the eyes of the state of Tennessee, and national groups like REALTOR, there is no difference between a commercial realtor and a residential realtor.  We all have the same licenses and took the same classes; it’s what we do with the license after it is earned that makes the difference.   Many commercial realtors earn designations that help educate them on marketing properties, helping clients make decisions on proper investments and the like.  Some you may have seen include CCIM (Certified Commercial Investment Manager, http://chapters.ccim.com/easttennessee); SIOR (Society of Industrial and Office Realtors, www.sior.com) and CPM (Certified Property Manager).  These realtors have spent hundreds of hours in courses, and years in the field, to prepare them to meet their client’s needs.

Two of the biggest reasons to use a commercial realtor are time and experience. 

Time is the one thing everyone has a shortage of.  Instead of spending your day driving around town looking for space that might be available (and hopefully in your price range) commercial realtors have market knowledge and multiple interactive data bases at their finger tips to steer you in the right direction.  Say you want office space in west Knoxville; within minutes a commercial realtor can tell you what is available in that area, what it costs and the type of development in which the office is located.  The same can be said for retail and industrial space.  This way you can spend 15 minutes narrowing the list of potential spaces instead of three hours just trying to find out what is available and tracking down phone numbers.  

Commercial realtor experience is what saves you money!  Any broker worth his salt will know the important details you need to help you make an informed decision.  Is this a new building?  If so, what kind of tenant improvement allowance will be included?  Is the rent abnormally high for the market and the economy (boy, does that really play a part now)?  What other kind of leasing incentives might the landlord provide? Should you lease or buy?

Commercial realtors will also have the experience to walk you though a lease (although most realtors are not lawyers and any lease should be reviewed by legal counsel prior to signing) to explain things like; force majeure, estoppel, operating expenses etc…

On the other side of the ledger, property owners can use the expertise of commercial realtors in much the same way.  Instead of spending your precious time looking for a tenant for your empty building a realtor does it for you.   Commercial realtors are able to market the space via local and national data bases (basically a commercial multiple listing service), they can market the space through signage on the property and most importantly they talk to other brokers every day.  It helps them keep the pulse of the market; who is looking and how much space are they looking for. 

Commercial realtors can also help keep you apprised of market conditions.  If several of the building around yours lease space for well below what you are asking the broker can determine if you are asking too much.  Commercial realtors are paid to know this information.   

Also important to owners is disposition of the property.  Better described as “what are you going to put in your pocket when you sell”.  There is an entire CCIM course related to these transactions.  How should you price your property?  What kind of capitalization rates (cap rate) can the market withstand? What tax implications do you have when you sell it?  Experienced commercial realtors can walk you thru all these steps.

There are many more details that we can get into regarding commercial brokers.  The items above are strong evidence that an experienced broker is imperative to the success of your property search or ownership.

Justin Cazana, CCIM

Commercial & Investment Properties Co.

Director of Leasing/Marketing

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.

While we have talked about the local market, and the effects the economy has had on it, we have not looked at a national picture.  Trust me, it is quite different.  As I stated in previous posts, Knoxville has been somewhat insulated from the harshest effects of the economy thanks to the large government influence in the city, along with UT.

There are dozens of facets that go into commercial real estate, maybe the biggest being financing, or loans.  Right now there are no loans available for developers to do commercial office, retail, and typically, industrial projects.  While pre-leasing (having leases signed before construction starts) can sometimes be a factor, banks got away from that trend in the past few years. 

In the last 10 years developing almost became too easy thanks to questionable lending practices.  Developers could go to a bank and get a loan for 100% of a speculative project, sometimes even more than 100%.  Now some banks require a 65% loan to value (LTV).  If a deal is expected to cost $10 million a bank will now only loan $6.5 million.  I am being very general but you get the idea.  Basically in the last 3 years we have been on both sides of the extreme and we need to find a place in the middle.

These financial issues will not only effect developers but property owners.  If you need to refinance your shopping center it will be much more difficult to do, and you could find youself in an upside down position.

Nationally, the third quarter of 2009 brought signs of relief. Most measures of economic activity moved in upward trends—gross domestic product turned positive after four quarters of decline; industrial production gained; stock market indices have been surging.

However, commercial real estate did not find its footing.  Transactions were slow. Demand for commercial properties continued trended down, adding pressure on prices and rents. As a result, vacancy rates have been rising and the number of distressed (defaulting on loans) properties has grown.

The next quarters will likely push toward stabilization. It will probably not be spread evenly across property types or geographical markets.

In tandem with the decline in demand, available space is growing across all property types. Vacancy rates for the fourth quarter are expected to hit 17.0% for office properties, 14.2% for the industrial sector, 12.6% for retail and 7.8% for multi-family. In order to attract or retain tenants, landlords are reducing rents. By the end of 2009, rent rates are expected to be down 12.1% for office properties, 10.8% for industrial, 1.3% for retail and 4.1% for apartments.

Supisingly, the commercial mortgage backed securities (CMBS) market regained a pulse around midyear.  This area could be the next spark in continuing the recession.

Much of this information was gleened from George Ratiu, National Association of Realtors Research Economist.  You can find more detailed analysis at http://www.realtor.org/research/economists_outlook/commentaries/creoq309

 Thursday I am going to hear Dr. Tony Spiva, a renounded UT economist, speak on the state of the recession.  I will post a bit of what he says.

Where to start?   The Knoxville market is about as diverse (regarding locations) as you can get for a community this size.  

If you are not familiar with Knoxville it is broken down into several submarkets: 

1. Downtown/UT-includes the downtown buildings, courthouses etc…as well as the University of Tennessee.

2.  West Knoxville-where most of the large scale growth is taking place and includes everything from the Bearden area to Farragut (which is becoming a submarket in itself)

3. North Knoxville (including Clinton Hwy area)-quite a bit of retail development going on in this area and a resurgence in general.

4.  South Knoxville-popular area for commercial & residential growth/redevelopment being pushed by municipal governments.

There are several other submarkets that are players as well that we won’t cover in detail:

a. Maryville/Alcoa-home to the region’s airport, Ruby Tuesday HQ, Alcoa Aluminum.  Very quaint area with some growing retail areas and some new office buildings.

b. Sevier County-home of tourism and retail located about 25 minutes east of Knoxville

c.  Oak Ridge-a city built by the government (originally) and home too many Department of Energy offices and related contractors.  Billions of federal dollars are poured in to this area every year.  Only 25 minutes from downtown Knoxville.

Knoxville has been lucky to avoid the harshest lashes of this recession because of a strong employment base.  Federal groups, like the Department of Energy and TVA, are two of the largest employers in the area.  The University of Tennessee employs almost 9,000 people and the top four hospital/health groups employ almost 20,000.   Still Knoxville has dealt with some of the effects of the recession that has affected real estate and development. 

 Downtown the growth has been in residential condo’s and some street front retail, the latter pushed by local governments. 

Most of the class-A office is limited to five buildings, Riverview Tower, First Tennessee Plaza, the Bank of America building and One & Two Centre Square.  It has been almost 20 years since a Class-A building was developed in the downtown market, and without something new it will be difficult for downtown to thrive.  Two large projects are on the drawing board, Sentinel Tower and Metropolitan Plaza, but both are on hold (mostly because of the lack of funding available for projects like these).  There is a shortage of available Class-A space because of this, although there are several thousand square feet of sub-lease space on the market because of large corporations downsizing.

Downtown is becoming a vibrant place thanks to efforts on Gay Street and Market Square to increase retail and entertainment in the area.   Once the current financial climate changes expect to see lots of growth in this area.

West Knoxville is the site of most of the growth in the office sector, as has been the trend for the past 20+ years.  In fact, in the last three years, I am not aware of any multi-tenant office developments in north, south or east Knoxville that exceed 25,000sft (but don’t take that as fact, I am just not aware of them). 

Large, new developments have taken hold in west Knoxville; some of the largest being Century Park at Pellissippi (developed by Commercial & Investment Properties), Parkside Plaza I &II (developed by Partners Development), Lakeside Center and Brookview Town Centre (developed by Blue Ridge Development).  These projects combine for almost 500,000sft of office space in west Knoxville in the last 7 years.  The result has been high-levels of supply with lagging demand thanks to the economic down turn.  The hottest area in the past two years has been Dowdell Springs off Middlebrook Pike.  Three new medical facilities have opened their in the past 6 months with 100,000sft FBI building coming on line in 2010.

Retail has been dominant in this area as well.  Turkey Creek is Knoxville’s first lifestyle center.  All the national big boxes are there, with more on the way.  Even in this economic environment smaller stores, some locally owned, are surviving (I don’t know about thriving, but surviving).  There has been some turnover; mainly in restaurants, of which there is an over abundance.

One retail facet that is suffering is new, unanchored strip centers.  These centers, which range from 10,000 to 40,000sft, require relatively high lease rates because they are new construction, but without a national tenant to draw constant foot traffic, are having difficulty filling spaces.  These are most prevalent in the Middlebrook and Hardin Valley areas.  These areas will improve but it will take an upswing in the economy and more rooftops in these areas.

City and County governments are pushing for development of the South Waterfront.  This area has had an industrial and commercial base for decades but holds some of the finest property in Knoxville.  On the south shore of the Tennessee River this area has views of UT and downtown.  For more about the potential developments click on the logo below. http://www.ci.knoxville.tn.us/southwaterfront/

Plans are for more parks and mixed-use development along the waterfront.  Deeper into south Knoxville is Chapman Highway.  It is a hodge podge of aging retail, commercial and residential.  The only real growth is near the interchange of Chapman Hwy and John Sevier Hwy with a large retail center.

Clinton Highway has been a site of substantial retail growth in the past five years.  At the junction with Callahan Road several big boxes have popped up, along with associated shadow centers.  Traffic counts in this area have jumped from 15,000 cars per day to 20,000 cars per day in the last four years according to MPC.

In the industrial market things are always adjusting.  The information below is based on an MPC report from 2007.   Knoxville’s industrial market showed great improvement as availability dropped 190 basis points since 2005 to 11.1 percent in 2007. Total square footage was down from 33.2 million square feet in 2005 to 32.1 million square feet in 2007, while the number of buildings fell to 605.

Knoxville is generally thought of as having a lack of supply in the industrial sector.

So there you go a basic look at the market.  Of course we could go in to more detail but that would take a long time, and I’ve got properties to show.

I’ll be happy to go in to more detail.  Feel free to contact me at 865-584-3967 or jcazana@ciprop.com

On occasion we will post stories from the Knoxville News-Sentinel (or other publications) related to Knoxville commercial real estate or Commercial & Investment Properties (CIP).   This one happened to come out today.

Josh Flory did a masterful job breaking down the last few hours of negotiations and deal making that went into a closing of this magnitude (during the holidays, no less).  

This was a project that literally started years ago and continued with hundreds of man-hours over the past six months.  Everything from negotiating the sale price, to financing, to determining construction costs for the improvements were detailed.

Here is a link to the story as well. http://blogs.knoxnews.com/flory/2010/01/hotel_deal_included_meetings_o.html

With his deal for the downtown Holiday Inn Select on the line, Nick Cazana got an unpleasant surprise a few weeks ago: one of the banks that was supposed to provide financing had dropped out.

So what did the developer do? He called Jim Clayton.

“Jim put me on hold and about two minutes later (he) had his executive lending team on the line with me,” Cazana recalled in an interview on Tuesday.

The call paid off. Clayton Bank & Trust stepped in to provide half of the bank financing for a deal that Cazana calls the most complicated of his career.

The sale of the downtown Holiday Inn at 525 Henley Street was finalized on the last day of 2009, but details of the transaction have become more clear this week. A deed on file with Knox County showed that Cazana’s group paid $8.5 million to buy the hotel from a group led by Chattanooga developer Franklin Haney .

Cazana said Tuesday that Harrogate-based Commercial Bank — which has offices in Knox County — is lead lender on a $10 million financing package that was split equally with Clayton Bank.

According to Cazana’s attorney, Commercial Bank is the holder of tax-exempt bonds that were issued by the Knoxville Industrial Development Board, with Clayton Bank buying an interest in the bonds. Knoxville City Council last year approved the bond issue under the federal Empowerment Zone program, although no public money is to be used to pay off the bonds.

Cazana has outlined a renovation plan for the hotel worth more than $4.5 million and said a private investment group is putting $4 million into the deal. He declined to identify the investors, but said they are individuals who already have a substantial financial interest in Knoxville.

Asked Tuesday about his bank’s participation in the hotel deal, Clayton, the bank’s CEO and founder of Clayton Homes Inc., cited the nearby Knoxville Convention Center, saying the Holiday Inn seemed like the last easy, quick opportunity to have a first-class lodging facility adjacent to the meeting facility.

Clayton also indicated that the quick work highlights the advantage of local banks.

“If we had had board committees and credit committees across the plateau or across the mountains, it’d have been impossible,” he said. “But we got together in the conference room, you see, and brought in a couple of board members and we had the deal done.”

Clem Renfro, regional executive officer for Commercial Bank, said his bank has a long-standing relationship with the developer.

“We became involved (in the project) because Nick’s our customer and we have extremely high confidence in he and his staff and his team,” the banker said.

Cazana said he never spoke with Haney during the negotiations, but that an important role was played by Tom Ingram, the former chief executive of the Knoxville Area Chamber Partnership who is now a key strategist for Knoxville Mayor Bill Haslam’s gubernatorial campaign. Cazana said Ingram contacted him in midsummer, indicating that Haney wanted to work out a deal.

But while the hotel sale has been finalized, the negotiating isn’t over completely. The Holiday Inn building is connected to a city-owned common area and mechanical rooms, and to meeting spaces one floor down from the hotel lobby. Cazana’s group is hoping to acquire the city-owned space, although his attorney, Culver Schmid, emphasized that the state also has an interest in the property and would have the ultimate say in such a deal.

Cazana said Tuesday that his group is assuming the lease for the common area, under which the city is paid $100,000 a year. The city, he said, spends about $125,000 a year on maintenance for the space. Cazana is hoping for a deal in which his group would take ownership of the space in exchange for assuming the maintenance costs and investing $250,000 to $350,000 in renovations.

Bill Lyons, the city’s senior director of policy and communications, said the issue won’t come up at the next couple of city council meetings, but said that “we have no reason to believe that (it) won’t all work.”

At any rate, renovations have already begun at the Holiday Inn. On Tuesday, Cazana showed the building, where a worker on stilts was removing ceiling tiles from the dingy back-office area, and many of the wall coverings had already been torn off.

Later, he walked through the guest area of the hotel, highlighting a red-patterned hallway carpet which had already been removed from the lobby — “early Tijuana” was his description of the style — and showing where workers had already torn into a bathroom to determine what was behind the walls.

And despite the challenges, the hotel project also has been unique in a positive way. As he walked back through the lobby, the developer said the deal is “the only project I’ve done in 40 years (that) has 99 percent … support.”

——More from the Property Scope Blog———–

This morning’s KNS has an interesting story about how the downtown Holiday Inn sale came together:

With his deal for the downtown Holiday Inn Select on the line, Nick Cazana got an unpleasant surprise a few weeks ago: one of the banks that was supposed to provide financing had dropped out.
So what did the developer do? He called Jim Clayton.

“Jim put me on hold and about two minutes later (he) had his executive lending team on the line with me,” Cazana recalled in an interview on Tuesday.

The Scope also had to leave some interesting details on the cutting room floor, such as this comment from Cazana:

“I was concerned the whole time that this transaction would not close.”

The developer said the deal had to be finished by the end of the year because of a deadline related to the Empowerment Zone bonds. As a result, his team had to put the pedal to the metal in the last couple of weeks.

Cazana said his CFO talked to Clayton at 7:30 on Christmas Eve morning, and that a group including himself and Clayton met for more than two hours later in the morning.

Cazana said the closing started at 10 a.m. on New Year’s Eve, and didn’t wrap up until around 4 p.m.

Thanks for reading

Welcome to the inaugural edition of the Commercial & Investment Properties (CIP) blog! 

Our plans are to have weekly (Wednesday) posts on the blog to discuss everything in commercial real estate, but mostly focusing on the Knoxville market.  We will post more often, when something big happens in the market (like the purchase of the Holiday Inn-World’s Fair Park last week).

This will not only be a place to learn about CIP, but to learn about commercial real estate in general.  We will talk about market trends, types of leases, legal points to consider (although I am not an attorney and recommend that you do seek legal counsel prior to signing any lease), why you should have a broker, etc…

First of all, a little bit about Commercial & Investment Properties (www.ciprop.com).  CIP has been around for almost forty years.  Started by Nicholas G. Cazana in the early 1970’s, CIP has been one of the market leaders in commercial development, management and leasing for more than 20 years.  

CIP has grown from its early stages of leasing and brokerage of investment properties to a stable platform with management of more than 1.2 million square feet of retail, office and industrial space.

DEVELOPMENT

CIP is best known for the development of some of the finest office buildings in Knoxville.  At the top of the list is the Atrium (1225 E. Weisgarber Road).  This 83,000sft building was completed in 1998 and has been wildly popular since opening (it’s been 100% leased for the past three years). 

CIP’s biggest project to date is Century Park at Pellissippi.  This 80-acre office development continues to expand in the heart of Knoxville’s high growth area, Pellissippi Parkway.  So far, four buildings have been complete at Century Park with more on the way.  The quality of the tenants in Century Park is a sign of the level of development.  Six Fortune 500 companies currently have offices at Century Park, including Sprint/Nextel, Nationwide, Wells Fargo and TDS.  Next on the plate at Century Park is an 81,000sft multi-tenant building built to LEED specifications, one of the first in Knoxville.

The next big project, along with Century Park, will be Metropolitan Plaza.  This will be downtown Knoxville’s largest private project to date.  It will include a 200 room boutique hotel, condominiums, a 400+ space parking garage, and a 120,000sft office building.  The project is located on the site of the former Tennessee Supreme Court building on Henley Street.  As soon as banks start lending again we will get started.

CIP has also developed Admiral Pointe, The Gallery Shopping Center, Center Court at Lonas, the current corporate headquarters for both Pilot Travel Centers and Bush Beans, as well as other locations.

MANAGEMENT 

CIP is also known for some of the best property management in the market.  With more than 1.2 million square feet in its portfolio, CIP handles more than 150 tenants daily. 

CIP’s property management team focuses in keeping properties at their highest standards while keeping operating expenses low.

One of CIP’s brightest moments came in December when it attained the highly-coveted Energy Star® rating for Two Centre Square downtown.  It is only the second multi-tenant building in east Tennessee to earn this designation.

In addition to the properties CIP has developed, we also manage Two Centre Square, DCP Warehouses, The Shops at Western Plaza, Melrose Place, and Corporate Square.

BROKERAGE/LEASING 

CIP’s leasing staff spends its days marketing properties that CIP represents as well as finding properties for clients looking for office space or a potential investment.

CIP has three licensed brokers on staff with more than 70 years of combined experience.  We have worked with some of the biggest players in business…AT&T, SunTrust, LBMC, CH Robinson, Brinkers Corporation, FedEx, just to name a few.

CIP’s marketing and leasing efforts have been at the forefront of the Knoxville market for several years.  CIP was the first Knoxville brokerage house to market properties via e-mail.  CIP has also led the way through social marketing; with the first Facebook and Twitter  pages dedicated to listing properties.   This blog is the next step. 

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Check back with us often for more updates on CIP and the Knoxville real estate market.  And if you are looking for office, retail or industrial space, contact me at jcazana@ciprop.com or call 865-584-3967. 

Next edition…the Knoxville market overview.