CIP Blog

Knoxville's Newest Office Building

There is a PR saying that goes “All publicity is good publicity”.  Some believe it, some don’t.  I like to pick and choose the times to like it. 

Certainly anytime one of your brand new buildings is a lead in the Knoxville News Sentinel it can be a good thing…unless the topic is how empty it is.  That is what happened last Friday.

Center Court at Lonas is a 40,000sft Class-A office building near the intersection of Lonas and Weisgarber in West Knoxville.  It has everything going for it…

Location: two minutes to I-40, 8 minutes to Pellissippi Parkway, 10 minutes to downtown.

Construction: Brick with floor to ceiling windows and ample parking.

Lease Rate: $19.00psf (full service net of tenant utilities).  You will not find a lower lease rate for a new building in Knoxville. 

Neighbors:  Bush Brother’s Beans and Pilot Oil corporate headquarters, two of Knoxville’s most successful businesses (this area breed’s success). 

What it doesn’t have are tenants.  The building was completed last summer and has had lots of activity but we haven’t closed any deals. 

Much of this is due to the recession.  The economy has done lots of things to the office market.  For one it has forced businesses to table expansion plans; but another factor is many corporations have downsized and looked to sublease their left over space.  If you could find sublease space for your company in a Class-A building for $11.00psf you would jump at it.  This is happening all over Knoxville and the nation.  

Commercial & Investment Properties has developed many of the buildings in the Papermill/Weisgarber corridor; Bush Beans Headquarters (originally called Wimbledon Park), Pilot Oil HQ (named Central Park West) and the Atrium.  That is five buildings within a mile of each other and there is currently no space available in any of the five. 

 Center Court will soon join them.  As a glass half-full type guy I like to think the building is 100% available instead of 0% occupied.  It gives us lots of possibilities.

 If you read the article below you will see my quote about the wave and the ebb.  Ask any one in commercial real estate and they will tell you it is a real thing.  A good example is our development Century Park at Pellissippi. 

100% leased prior to completion.

When built in 2004, Century Park I was 100% leased prior to completion.  That never happens in multi-tenant buildings in Knoxville.  In fact, it’s the first time we had done it in 35 years of business.  A year later we built our second building in the development.  It took 11 months before it was even 40% leased.  The wave and the ebb. 

 Is there pain in commercial real estate?  Yep.  With the proper planning, experience and insight can you get through it?  Absolutely. 

 Feel free to contact me if you have any questions jcazana@ciprop.com.

 Enjoy Josh Flory’s article.

 http://www.knoxnews.com/news/2010/feb/18/pain-seen-local-commercial-real-estate/

If you’re looking for new office space, Center Court at Lonas has plenty of it.

Located in West Knoxville’s Weisgarber Road corridor, the two-floor, 40,000-square-foot building was completed last June — but so far it has no tenants.

That’s bad news for the developer but a good example of the pain that’s afflicting the commercial real estate industry locally and nationally.

As the economy continues to struggle, the pinch is being felt by owners of commercial property and the banks who gave them loans. Some observers are worried that the commercial mortgage industry is headed for a collapse similar to the residential meltdown, which sparked the recent recession.

The Center Court office building was launched by veteran development firm Commercial & Investment Properties, and leasing director Justin Cazana said Thursday that the company builds in contingencies to make sure it’s protected. “It’s a cycle that sometimes you catch the wave and sometimes you catch the ebb,” he said. “And we caught the ebb.”

Across the country, though, there is growing concern that some landlords are headed for a wipeout. Earlier this month, the Congressional Oversight Panel issued a report saying it was deeply concerned that commercial loan losses could jeopardize the stability of many banks, “and that as the damage spreads beyond individual banks … it will contribute to prolonged weakness throughout the economy.”

As the report noted, the financing strategy for commercial property owners is different than that used by the typical homeowner. Once a building is leased, for example, the amortization schedule on the commercial mortgage may stretch over 30 years, but the mortgage term is much shorter, meaning it must be refinanced anywhere from three to 10 years after it goes into effect.

The report said that between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms and nearly half are currently underwater, meaning the borrower owes more than the underlying property is worth. That means it could be very difficult for many of those property owners to get new financing.

“A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American,” the report said. “Empty office complexes, hotels and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment.”

East Tennessee won’t necessarily be spared from that impact. At a roundtable discussion Thursday, commercial broker Roger Moore, the president of Sperry Van Ness R.M. Moore, said that historically Knoxville has been more immune to recessions. “I think everybody understands we’re really part of this one,” said Moore.

Maribel Koella, principal of brokerage firm NAI Knoxville, said in an interview that asking prices for property are going down and that lease rates are going way down. “Landlords have figured it out,” she said. “In order to compete with the property down the street, they have got to lower rents.”

At Thursday’s forum, Koella also echoed Moore’s point about pain being felt in the local market. According to NAI’s numbers, the total volume of commercial.

It’s a good time to be looking for office space.  It’s a good time to be looking for any type of space if you have decent credit, but office space in particular.

West Knoxville has been slightly over-built in the past few years.  Thankfully much of that surplus has been taken off the market thanks to Realty Investment Services and Blue Ridge Realty’s leasing of the former Goody’s HQ to South College.  Still, plenty of inventory remains.

Types of Office Space

There are three basic types of office space; Class-A, Class-B, and Flex Space.  Some markets have Class-C space but not many people in Knoxville classify buildings that way.   Office buildings are classified according to a combination of location and physical characteristics. Class B and Class C buildings are always defined in reference to the qualities of Class A buildings. There is no formula by which buildings can be placed into classes; judgment is always involved.  A building in downtown Knoxville that might be considered Class A would be a Class B building in Nashville or Atlanta. Also fair number of the Class C office spaces in the inventory are not truly office buildings but rather walk-up office spaces above retail or service businesses.

Class A Office Space

Class A Office Space describes the highest quality office space locally available. The architecture of Class A office structures usually prioritizes design and visual appeal over cost, (and sometimes over practicality).  In most areas, Class A office space is built in multi-story (usually 2 floors or more), multi-tenant buildings using structural steel and composite concrete construction.

The Urban Land Institute says the following about these classifications in its Office Development Handbook: “Class A space can be characterized as buildings that have excellent location and access, attract high quality tenants, and are managed professionally. Building materials are high quality and rents are competitive with other new buildings. Class B buildings have good locations, management, and construction, and tenant standards are high. Buildings should have very little functional obsolescence and deterioration.

Class A buildings are typically very functional.  They provide a strong parking ratio, lots of natural light on the interior of the building and are more energy efficient than their predecessors.

Good examples of Class-A space are the new developments at Century Park at Pellissippi, Lakeside Center off of Northshore and Brookview Town Center off of the Papermill exit.  Lease rates for Class-A space will vary from $17.50psf to $24.00psf in Knoxville.  Most all Class-A multi-tenant buildings will be full service or modified full service with the tenant paying for utilities.

Class B Office Space

Class B space can be found in a variety of areas around Knoxville.  Cedar Bluff has a plethora of Class B developments like Corporate Square and Executive Plaza.  Much of downtown would be considered Class-B space.  Typically, any building over 15 years old would be considered Class-B (but there are exceptions).  There is NOTHING wrong with being in Class-B space.  They are very practical and more economically viable for many businesses.  In fact, most Class-B buildings were once Class-A buildings that time has caught up with.

Class B space is ideal if you own a business that doesn’t require flash to show off to your clients and customers.  The only real difference in Class A and most of Class B is age and management.  They were designed and built in a different time. Instead of floor to ceiling windows you might get smaller four foot windows.  The HVAC units may be dated, or even residential units, that are not as efficient.  All that being said, if a building has the proper management over the years it’s Class-A status can be extended beyond 20 years. 

Lease rates for Class-B space start at about $12.00psf to $15.00psf in Knoxville.  The levels of service provided by the landlord can also vary from building to building and submarket to submarket.  

Flex space can also be considered office/warehouse.  The office-to-warehouse can be 10% office – 90% warehouse; 90% office – 10% warehouse; or anywhere in between.  It just depends on what you need. Buildings in the Baum Drive area or near Mabry Hood & Kingston Pike would also be called classified as flex space.

There is plenty of space to be found in Knoxville. A 2007 report from the Metropolitan Planning Commission (MPC) shows that Knoxville and Knox County have a total of nearly 19 million rentable square feet of office space, including 5 million feet downtown and 4.5 million in the Pellissippi Parkway submarket.  Those numbers have increased since additional buildings were completed in the Papermill/Weisgarber area and Pellissippi corridor. 

Center Court at Lonas

Commercial & Investment Properties has first generation space on two complete  floors at Center Court at Lonas (totaling 40,000sft) while Blue Ridge Realty has approximately 50,000sft of new space available at Brookview Town Center; and another 50,000sft of second generation space at Lakeside Center when Scripps moves into their new building off Sherrill Boulevard.

Your office needs to be in the location and environment that suits its business plan. 

If you often need to impress clients and customers in your office during  sales meetings Class A could be the way to go.  In fact, Class A building can be considered a monument and a testament to the success and power of its tenants.  That might be why Century Park, with four buildings all under five years old, has seven Fortune 500 companies as tenants.

If you rarely have customers in your office, Class B might be the way to go.  No reason to pay for flash if you don’t need it (unless you really want it).

As always, Commercial & Investment Properties can help you find the space that best suits your needs.  You can reach us at 865-584-3967 or jcazana@ciprop.com.  Check out our available properties at www.ciprop.com.

 Justin Cazana, CCIM

My apologies for the late posting of this blog…I got bit by the stomach bug.

Today’s focus is on types of leases…and let me tell you there are dozens!

Full service, gross, modified gross, NNN, NN, ground lease…there are many variations.  Today we will talk about the most popular current forms of lease.

Leases have developed over time from verbal or handshake agreements to documents that can exceed 100 pages.  Today’s leases are legal documents and should be reviewed by experienced legal counsel prior to being signed (that is my disclaimer. Get used to it, it will probably pop up every week).

Warning:  I will use the words “typically” and “usually” a lot in this blog because every lease is different.

Full Service Lease:  Typically a full service lease would be found in an office building lease.  Its name says it all…Full Service.  The building landlord provides all services to the tenant for the price of the rent.  This includes: utilities, janitorial service, property taxes, trash removal, building insurance etc…There are some building that also provide telephone service and cable TV but they are the exception rather than the rule.  In these leases the landlord is also responsible for repairs to the building or the tenant’s space, like the HVAC system, replacing light bulbs or repairing roof leaks.  

 Important to note: These leases typically have a “Base Year” or “Expense Stop”.  This is meant to protect the landlord from increases in operating expenses (the cost of janitorial, utilities, insurance etc…).  Example, if Joe is leasing space in a new Knoxville building  for $20.00psf per year his Base Year/Expense Stop would be around $6.00psf per year.  The $6.00 is the amount the landlord had budgeting for operating expenses the year the lease is signed.  At the end of the year the landlord reconciles all their operating expenses.  If the operating expenses exceed $6.00psf Joe has to pay the landlord the difference. If it ends up at $6.04psf Joe has to write a check for $0.04psf.   This is a standard practice in Knoxville real estate.

 Gross Lease:   Probably the most common of commercial leases, although less common in new, Class-A buildings.   A gross lease is very similar to a full service lease because the landlord still provides all the services needed for the tenant, only without a Base Year/Expense Stop.   Instead of a Base Year/Expense Stop typically there is a larger than standard annual increase in lease rent rates.

 These leases are popular for a variety of reasons:

1. It makes accounting for the landlord much easier
2. The tenant doesn’t have to worry about writing an unexpected check at the end of the year.

 Some would say both the landlord and tenant are taking chances with this type of lease.  For the landlord the risk is greater, if operating expenses go up significantly (such as the building being reassessed for tax purposes) the increase in lease rent rate may not cover the difference.  For the tenant, there is a chance that they will pay slightly more for rent than is needed, but in this age of rising costs it’s probably a safe play.

Both Gross and Full Service leases typically require high levels of property management to make sure the properties and tenants are serviced correctly and that the end or year accounting is properly calculated.

 Modified Gross Lease:  Just like it says, it’s a gross lease with slight modifications.  The rent the tenant pays will cover most operating expenses but the tenant will be responsible for one or more of the cost, usually janitorial service or utilities. In most cases the landlord is still responsible for repairs in the office space.

 NNN or NN Lease:  These are known as “triple-net” leases and are usually found in retail or industrial leases.  The N’s stand for common area maintenance (or CAM), property taxes and building insurance.  For reasons of simplicity these are referred to as CAM.

The precise items that are to be paid by the tenant are specified in the lease. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are “passed through” to the tenants are usually prorated among the tenants based on the size (square footage) of the area occupied by each tenant.

In most NNN, the landlord is responsible for the building and the common areas.  They repair the roof, structural problems, sidewalks and parking lot.  The tenant is responsible for any internal repairs like plumbing, replacing lights or HVAC repairs. 

The difference between a NNN and NN lease is the common area maintenance is not included (usually).  This is common in industrial property and single tenant buildings like a restaurant or other retailer no in a shopping center.  Single tenant buildings can also have an “Absolute Net” lease.  This means they pay the landlord rent and also are responsible for all upkeep of the building, landscaping, property taxes and insurance.       

Ground Lease:  Just like it says, the tenant is leasing the ground.  The most common on these are found with drug stores like CVS and Walgreens.   These companies lease the land for 10 to 50 years, build a building and operate their business.  They write a check to the landlord every month, or every year.  That is all there is to the landlord/tenant relationship.  At the end of the lease the tenant can leave the building or tear it down, depending on what the lease says.  The tenant is responsible for all aspects of the building, the land and any repair that is required.  

As you can see the variations in leases can be immense and some what confusing.  If you are looking around and have questions contact a commercial broker (such as Justin Cazana at Commercial & Investment Properties; jcazaan@ciprop.com .  Brokers can walk you through the details you need to make your lease work for you.

Justin Cazana, CCIM

Director of Leasing/Marketing

Commercial & Investment Properties

www.ciprop.com

Let’s cut to the chase…when should you start looking for a new office?  Most brokers will tell you at least one year before your current lease is set to expire.

While all situations are different and factors regarding location, cost, size and type of space will play a factor, one year out is a good time to start.

It seems like a long time, but it can go by quickly.  Let’s put together a timeline for Joe’s Insurance.  Joe is looking for 6,000 square feet for his business.  He would like to be downtown or west Knoxville, in nice space.  It doesn’t have to be Class-A space, but pretty close.

Step 1-Find a broker, of course.  Depending on how much time Joe has to devote to the process this could take a day or a month.

Step 2-Joe sits down with his broker.  He needs to know what part of town Joe needs to be in? How much can Joe spend per month?  Does Joe need a space with a lot of offices or can an open floor plan work?  Other details include; parking requirements, hours of operation, length of lease etc…

Step 3-Property Search:  The broker performs a search through the commercial MLS , talks to other brokers, and relies on their basic knowledge about what is available.  This will provide an initial list for Joe to review.  Some properties will be deleted, others may be added, all based on cost, location and the type of building.  This will allow Joe to tour the spaces he is interested in without wasting vast amounts of  time.  Hopefully after the tour Joe will have narrowed his list to 2 or 3 spaces.  This entire process can take a week or three months.  It all depends on how quickly of a move is required and what is available.

Step 4-Here is where is gets tricky…determining where Joe really wants to go.  Some times it is easy, there is one place you want to go, everything is perfect.  More often than not there are multiple locations that would work.  In a situation like this an Request for Proposal (RFP) or Letter of Intent (LOI) is effective in determining exactly what you expect from the Landlord and what he expects from the tenant.  Typically an LOI or RFP will spell out the length of the term, the lease rate, and tenant improvements that the landlord will provide.  They can also get VERY detailed.  I’ve had LOI’s that are 1 page long and I’ve had LOI’s that are 35 pages long.  This process can take anywhere from 1 week to 2 months depending on how firm either party wants to stand on a specific issue.  With the LOI/RFP in place you can determine what is best for an office based on actual comparisons of rates, tenant improvements etc…   If you would like more information about LOI’s/RFP’s let me know jcazana@ciprop.com.

Step 5-Lease Review.  Once Joe has made his decision on the space he wants the landlord will (typically) provide a lease for the space.   The lease should include all the information that was negotiated in the LOI/RFP as well as MUCH more.  You will become familiar with words like default, estoppel, force majeure and many others.  While brokers can provide basic insight in the lease it is imperative that an attorney review this document.  Leases are legally binding and if you don’t understand the details it can get you in a lot of trouble if you default on the lease.  How long will lease review take?  One week to a year!  It just depends.  My favorite story about negotiating a lease was just a few months ago.  On my first conference call with the tenant’s attorney she told me she had just found out she was pregnant.  At the time of our last conference call to seal the deal her baby was 4 weeks old!  That is an extreme but it happens (especially with corporations).

There are many other details that are some times worked in to the process. 

• Space Planning: If a tenant is moving into brand new space (which has never been built out), or a significant amount of construction is required to prepare the space for occupancy, a space plan from an architect should be considered.  This will allow the tenant to determine how much space they really need.  How many offices fit in the space, the most efficient use of cubicle space, where the conference room should go etc…This takes anywhere from a week to a month depending on the size of the space.
• Construction Estimates:  The space plan will allow the tenant or landlord to determine how much construction will cost.  The last thing you want to have happen is to budget construction costs at $10,000 and it ends up being $50,000.  I’ve seen it happen.  This should take less than 10 days.
• Construction:  Again, depending on the size of the of the office and what is involved construction typically takes between 60-90 days.  That includes construction documents, permitting and actual construction.

So there you go, a “looking for space timeline” in a nutshell.   If you need to find space in 2010 its time to start looking.

You can reach Commercial & Investment Properties if you have any questions about property searches.  865-584-3967 or jcazana@ciprop.com

Given this weekend’s weather I thought it would be an appropriate for a brief chat about property management.  Certainly if you own one 5,000sft building property management is not an investment you would spend much time considering.  But if you own multiple buildings, in multiple locations, or perhaps in an area that can have difficult weather, it needs to be an option. 

The staff at Commercial & Investment Properties spent much of the weekend on our retail properties making sure sidewalks and driveways were clear of ice, scraping walkways and spreading ice-melt. 

Thursday and Friday were spent planning for the weather.  How bad will the weather be? Where to start?  Who needs to go where?  Do we have enough ice-melt?  All these factors are part of the decision-making process.

While it’s not a terribly difficult job it can be time consuming and the actual work takes place before the sun comes up.  Stores like Fresh Market, FedEx Office and CVS open early and the property needs to be cleared before customers get there.

CIP’s property management and maintenance staff has been doing this for three days (and I didn’t even mention the HVAC that sprung a huge leak in one of our office buildings that had to be repaired and cleaned).

While this is an extreme weekend things like this take place quite often.   Experienced property managers like CIP’s Teresa Taylor, know how to handle difficult situations.  They know who to call to solve a problem when the “Emergency Mailbox” rings at 3:00am and how things can be repaired in a cost effective manner.   

Property management can go from just cleaning your buildings all the way to providing full accounting for your investments.

Basically it comes down to time and responsibility.   How much time do you have to focus on your properties?  Is another job/business suffering because of it?  What cost are you willing to pay to have your property well take care of so in the event of a snow storm you don’t have to get up on 15 degree weather to clear the properties and avoid a possible law suit if someone were to fall.

I will get a little deeper into all aspects of property management later but given the events of the last few days I thought this was timely.