Commerical Real Estate In The Internet Age

 

COMMERCIAL REAL ESTATE IN THE INTERNET AGE

                                                                 by Stewart Friday

Most of us are shopping online, buying online, and dating online now... and the Internet unlike the retail market place doesnt favor the places with the most consumers... consumers don't care how far away a business is away from their house, because the US Mail system charges mostly flat rate service for all but the largest parcels... and even those are entirely predictable by the US Mail Service API's based on weight and dimensions.

And if all of that is true, if I am running an Internet Business, I can just as easily put my employees on Hilton Head Island, as in Jersey City in practice, except for some financial issues like Investment Banking, legal services, and supply chain sourcing which usually are easier in the major financial hubs. So where does that leave us?

Can we find talent anywhere? At the University of Iowa, or Michigan just as likely as NYU, and Harvard, probably, there may be some exceptions on occasion, a CFO might not want to relocate to Grand Rapids when he has more job opportunities in the Northeast, but if you pay him enough, and get him a good enough membership at a nice golf course, and guarantee his salary for long enough it might not matter. So where does that leave us?

Are skyscrapers valuable? Well yes. They are important to consolidating massive groups of businesses in one place... but does it have to be in a Major Metropolitan area, or can I build a high rise in Dover Delaware just as easily? After all its closer to the beach, and it has all the access any other capital city does?

Are there political advantages? Well if you build a high-rise in Dover, DE, and agree to hire 3K delaware residents, I am fairly sure that the Governor of Delaware is going to eat lunch with you, and play golf with you on the weekends. You might even know his family. But Build a high-rise in Chicago or NYC... ho-hum.

Consider the odds they say, if you have a lot of office space in Chicago, or NYC you are more likely to get other interested parties... just wait they say...someone will want it.... we arent so sure. In places like Columbia, SC, a city 300 years old, there is 40 miles square of commercial there are no businesses want. Why? There is no capital here? Well we happen to know that Wells Fargo may ask you to drive to Atlanta to meet their Investment Banker, but he really doesnt care where his funds are going if he likes your model. So a few lone executives need to travel to get money... we got that. But thats a short term problem? Your banker may like that you are paying 6/ft for office space, instead of 10,12,even 15... he may think you are smart.

So whats left? Prestige, honor...we gotta be in NYC? How about commuter costs, and sales reachability? Well Dover isnt so great to get to NYC, but Newark Delaware is on the Northeast corridor to Washington, Baltimore, Philadelphia, NYC, and Boston, and I can get there with a nap, and shave... Thats what Joe Biden did... it works....

We will say this... if the US Congress doesnt require licenses to sell online, Amazon, Walmart, and eBay are going to continue to dominate... and will make commercial real-estate only valuable to gas stations, and UHAUL storage companies... as now everyone has to move to find work. 

Are the days of living in one metro region for life over? Hmmmm.... well California thinks there is no Internet in Alabama... and they can prove it. But the rest of us dont agree with them....

Until then... landlords would be wise to consider Trenton NJ, or Newark DE over NYC, and expect 10/ft everywhere rather than 15/20/25....even for Class A. And in Columbia, SC, they should in fact consider 5/ft... as there is probably 50M feet of office space here, that commercial companies are improperly appraising for their owners.

Now here's the problem...if the value of 1 acre of commercial land drops to say 100K dollars versus 1M, or 2M today... is the US Government bankrupt? Its very value is based on US Post office real-estate, military bases, and even National Parkland.... who is going to pay for it if it doesnt have Gold, or Oil on it?

So our best advice is for Landlords to seek high occupancy and longterm relationships with their customers... as 50 year deal at 10/ft is much better than three leases of 5 years at 20....we think...after all you have to tell your investors every year how you are doing? Does the next recession leave you with lots of tax payments and no income?

LASTLY... the value of any real-estate is usually the market value of the residential value of the property if its converted to apartments. People have to sleep somewhere. But a 750 sq ft apartment is only worth 1200/month I promise....and thats high.

TECHNOLOGY SHIFTS

1) Other things to consider... Google, Amazon, and Microsoft Datacenters make combination campuses nearly worthless...or considerably less valuable. They have supercomputer centers on a stick... you got NADA...

2) Other things to consider ....Micronization of Compute, and Phone Resources. It doesnt take a football field anymore to host 1000 cores. Thats a single 23inch ranch wide x 42 inches high...Admittedly clean power is still a challenge, and generators still just as hard as before... but we can do that in 1000 ft, instead of 1M feet like in the past. So if you own a few million square feet datacenters like Bank of America that you dont know what to do with... perhaps you ought to set up cots, and feed the homeless... because then maybe you will get some federal dollars to offset your tax burden.