Industry Roundtable: Commercial Real Estate

Wills Elliman of Newmark Knight Frank, Dave Kasey of Asset Management Alliance and Buddy Berger of Berger Harris participate in a roundtable discussion at Today Media offices. The topic was the health of Wilmington’s commercial real estate market.

Industry professionals share what’s ahead for Wilmington’s Central Business District

The climate of the commercial real estate industry is key to gauging economic growth. Delaware Business Times sat down with three individuals working in the sector to find out how the Wilmington Central Business District (CBD) has evolved and what it will take to compete with other markets.

How has the Wilmington commercial real estate market changed over the last 10 years?

Buddy Berger: I’ll start us off from the attorney’s perspective, and I have been in Wilmington since 1987. In the last 10 years it has gotten softer. It is more of a tenants’ market. I think certain tenants who, back in the day, couldn’t afford a Class A building maybe can today. Rents are stabilizing but I think it’s still a tenants’ market overall.

How has the role of the attorney/broker/property manager changed during that last 10 years?

Berger: Necessity for speed. Tenants have options. From a landlord’s perspective, you need to get the space locked up. You can’t sacrifice accuracy or proficiency just because there’s a demand for speed. It puts more stress on the attorney to get it done and get it done quickly and accurately.

Dave Kasey: From my perspective, it’s the quality of service we provide for the tenants and amenities that we have in the buildings. Parking is very important along with life safety systems and security. The City of Wilmington›s fire department conducts their high-rise training in our 222 Delaware Avenue facility. Providing a safe, comfortable environment for our tenants is paramount in retaining them long term.

I’d like to see the brokers go outside of the city, outside of the region and bring in the big law firms that are more national. That really helps the Wilmington market.

Wills Elliman: The biggest thing over the last 10 years is the proliferation of residential real estate buildings. I am really bullish on the city of Wilmington going forward. For example, Buccini/Pollin’s Residences at Mid-Town Park will be a game-changer. What was generally a downtrodden area is now going to be the newest, shiniest, greatest example of what Wilmington can be.

With purchasers making many of their transactions online, are you concerned about the effect of that on the retail industry?

Kasey: I’m not overly concerned about it. With the retail that we have, it’s location. It’s being on Delaware Avenue or having a storefront presence. That actually can help the retailers with online orders and getting things ready for them to come and pick up.

Berger: I have a little more of a concern. If you think back, Blockbuster and Radio Shack were considered credit tenants, and they’re not in business anymore. Amazon is going to acquire Whole Foods, so you’re going to order your gadgets online and you’re going to get your food online if you want to. Some people still want a mall experience. It’s a pleasant experience, especially if they have specialty shops. The old malls anchored by these big-box department stores, are becoming a dinosaur, at least from my perspective.
What’s your response to those who are considering leaving the Central Business District or not coming in the first place?

Elliman: I’d like to step in on this one because I’m working with a Fortune 500 company right now that’s been concerned, in the past, about crime. Mayor Purzycki personally came in, met with the local staff and is actually going to come back with the chief of police to address their concerns. What personal service! It’s such a breath of fresh air! Mayor Purzycki is so on the ball and on point with a greater police presence, increased trash pickup and a crackdown on liquor stores and nuisance properties under the new “neighborhood stabilization program.” Again, another reason I’m so bullish on Wilmington.

Does that make up for the city wage tax or the cost of parking?

Elliman: The Mayor’s involvement is refreshing. The Mayor, and previous mayors (and even future mayors) have a delicate balancing act of generating income to cover city costs vs. the tax burden on the employees. Fortunately, Wilmington’s wage tax is far lower than Philadelphia, New York, Baltimore, etc. Wilmington’s city wage tax depends on the density, how many people per square foot are in the space and then what they’re paid — that’s very reflective of what the wage tax would be. But it could be $2 or $3 per square foot. And then with parking, again, depending on the density could be between $5 and $10 a square foot. A law firm with big, lavish offices is probably more likely to be around $5 per square foot. But if it’s a call center environment similar to Bank of America or Chase, that could be more in the area of $10 per square foot It’s a big difference in price.

Berger: I do more landlord representation. So I’m usually having to sell from that side. I think part of it is you have good access off 95. You do have a good talent pool here. You have a great service industry here. You have the Riverfront. There are more and more nightlife opportunities, amenities, good restaurants, that are coming here, and I see a very positive trend. But those issues are still real issues for many tenants, both who are in the city, considering their next move and those who are thinking about coming to the Central Business District and weighing some of the pros and cons.

Is the Riverfront the savior for Wilmington or is it what’s happening downtown?

Berger: It’s a great thing for the city. It’s a great attraction. I would not, however, go as far as to say that it’s the savior for the city. You do have some issues, which I think are being dealt with in the way we talked about and the way that Wills described. I think it’s a wonderful amenity for the city and to attract people to the city.
Elliman: Also, what’s so important about the city is the walkability. You can work, live and play all within walking distance. By contrast, in the suburbs, you have to get in your car to go eat somewhere. In the city it’s all right there. For instance, Apple and Google, out in Silicon Valley, are creating their own little cities so people never want to leave.

Berger: The Riverfront’s clearly attracting more office, more retail, more residential, and they feed off each other.

Elliman: Millennials are key. Millennials don’t want to be in the suburbs with a colonial house and a yard. They want to be in the city with other millennials and walkable amenities.

You mentioned millenials. What are the factors driving the tenant demand for office space, and how has that changed over the last 10 years?

Elliman: There’s really been a flight to quality over the last 10 years. The lesser quality building cannot sustain in a tepid market. A high quality asset will always do better in the Wilmington market, or any market for that matter.

As an example, there was a building at 1001 Jefferson Street that was 100 percent occupied. The tenant was paying in the mid-$30’s when dot-com’s were booming (around 1997-2001), a rental rate that no building in Wilmington is getting today. There was no inventory and everything was tight — everything was exploding. Well, after the dot.com bubble collapsed, the building sat vacant for years and was eventually demolished a few years ago. Today the site has been approved for what could be Wilmington’s first skyscraper with up to 35 stories of mixed-use space.

Berger: We’re talking about tenant demand and what’s driving tenant demand. Obviously price. I talked earlier about maybe today a B tenant can afford an A space. Maybe, maybe not. But flexibility, the ability to expand, the ability to contract, termination options. If you’re a new company, and you don’t know if you’re going to make it, you want to have that flexibility.

Flight to quality. Absolutely. They want efficient buildings. They want amenities. It may sound so simple that you want a building with a good HVAC system, but that’s not a given. Those are the things I’m hearing on the landlord side when we get tenants or RFPs for tenants.

Elliman: It depends on the industry, but, when you’re trying to attract “knowledge workers,” the price of real estate doesn’t matter as much because out of a bucket of 10, your labor cost is eight of the 10, and then the administrative cost might be nine of the 10, and then real estate is 10 out of 10. Ten percent of the cost is real estate. If you could have a much nicer building and maybe you paid 50 percent more for it, so instead of 10, you’re paying 15, but you then are able to attract better labor, it’s a much better value. So spending money on good-quality real estate can actually be cheaper in the end for your labor costs.

How has technology impacted the way you conduct your business today compared to ten years ago? Also, how has technology changed the amount of space people need in your buildings?

Elliman: Technology has made a huge impact. Since you now have technology that is far more advanced in the palm of your hand, people can be fluid with where (and when) they work. Especially in the last couple of years, with the use of co-working space. Robert Herrara at The Mill has just crushed it downtown! Where people might have had a thousand square feet here, a thousand square feet there, they’re now just saying, ‘I’ll go to The Mill.’ So a lot of the smaller tenants that were typically in Class B buildings, are now consolidating into new and efficient co-working space.

Berger: As a law firm, we use fewer administrative people per lawyer than 10 years ago, even five years ago. Part of it is the younger generation. They’re very adept at doing their own work. They don’t need as much administrative support. So that affects, obviously, not just how much space we need but how we utilize that space.

Elliman: From a real estate perspective, it used to be a traditional law firm was 1,200 square feet per lawyer. Now it’s down to about 700 square feet per lawyer.

Berger: And you don’t see as big of a difference in the partner office versus the associate office as you did years ago.

How has technology impacted your business over the last 10 years?

Kasey: The main concern from a property management perspective is utilizing an advanced building automation system. You have to stay current with that technology. Make the owner understand return on investment. Energy is the biggest part of operating expenses in a building. You want to keep those costs down. You want to make sure you secure the best electrical rate possible. Delmarva’s no different. They have no assets to produce electricity. So you take your electrical load and the more you can get together, the better your pricing is out on the open market. So we use a broker. Affinity Energy does a fantastic job saving all our customers a lot of money.

Elliman: It used to be my office was a physical place with my computer and telephone. Today, this smart phone is as much my office as my computer is anymore. I’m in the office during the week, but I’ll tell you what, a lot of times, like yesterday morning, for example, I knew in my office there would be a lot of distractions. So I decided to stay home with my iPhone on and got just as much work done, if not more, than I would have had I gone into the office.

Berger: What this is all describing to me is the word I used earlier – speed. The client needs it turned around quickly and accurately. They’re not willing to pay for somebody to go research something that you can Google in five minutes. You’re expected to be available. I’m not going to say on a 24/7 basis, but you’re expected to be available and to get it done, because if you don’t, somebody else will.

Kasey: We have to respond at any time to facility issues. And, just the other day, we had both chillers go down at the City/County Building, but we have alarm points set up through the building automation system. So we’re responding before the tenants come in to get everything back to comfort, and they don’t even realize there was a potentially big problem that could have affected their business.

As you all grow, is there a talent pool to support what you need?

Kasey: That’s difficult. The tradespeople are disappearing, and finding really good help is not easy. We have been searching for a mechanic up in Wyomissing and Reading for six months now. We have gone to vocational schools, but then you’re getting somebody that really needs to be mentored for a period of time before you can turn them loose in an office environment in a building to fix problems. So it’s a challenge. We just interviewed a retired union electrician. That’s the type of person we’re looking for.

Berger: I think there is a talent pool for what we need. It’s getting better. Part of it is what we described before with better housing in the city. It’s attracting the talented millennials that we weren’t finding as readily before.

With regard to the sale of commercial property and leased commercial space, would you find it easier to have a main point of contact like a property management company during the transition to handle inspections and maintenance?

Kasey: There’s a lot involved in the transaction of a commercial office building, and we are the point of contact for the facilities we run for all the code inspections, life safety, maintenance records, equipment history. And the more organized you are at transferring that off, I think the whole transaction goes a lot smoother.

Berger: I agree. As the attorney on a transaction, I’m the quarterback, and one of the things that really drives me crazy is early on they will say copy these 32 people on the email because everybody needs to know what’s going on. Of course, I will do whatever the client needs or wants me to do, but it’s much more efficient having one contact person, a property manager who knows the project, can answer the questions about the finances, the reserves, and things we were talking about. It makes my job a lot easier, not having to answer to all these different people during the due diligence period.

What percentage do you think having a property manager makes it easier in the transfer?

Kasey: We believe we do a very effective job in representing owner assets, but we feel we do a very effective job in representing the owners. We take pride in managing and maintaining all areas of a facility. Whether it is a high profile lobby and landscaping to behind the scene mechanical and storage rooms. It’s opening up those mechanical room doors. That’s really how you can tell how well maintained the facility is.

What do brokers and realtors look for in a full-service property management company when they’re trying to complete that lease for sale of the property?

Kasey: I think we play an important part to help in a transaction or assisting a commercial real estate broker who’s looking to lease space. Or, if an owner of a condominium association proportionate share is selling, for them to be able to speak on how well-maintained the building has been can only help in the transaction of the sale.

Elliman: We have an amazing full-service property management team. On the leasing side, we work in conjunction with our property management team. They are at the buildings every day, making sure everything is humming along nicely, and to make sure the tenants and the owners are happy. We also rely on them to review RFPs to make sure that everything requested from an incoming tenant is compliant with the building operations.

On the sale side, NGKF’s property management team has all the information that interested buyers will need on the building and uploads it to one location (we call it the “data ball”) so prospective buyers, brokers and Capital Markets can easily access everything they need, when they need it. We all work very fluidly together in the sale process. Let’s face it, they know the buildings better than anyone. They know every inch of the building, its systems, structure, etc.

Berger: I represented a developer and group of investors who owned a pretty big apartment complex out in Colorado. They sold it last year. And this goes to the point of the property management company. It was a national REIT that bought this project. One of the reasons that the transaction went so smoothly is because of the property management team, there were several of them, they were so on point in delivering information and responding.

Due diligence was — it was a pretty quick transaction — 45 days, and we closed 30 days thereafter. I wouldn’t say we wouldn’t have gotten to the closing table but for the property management company, but we got there a lot easier and more efficiently because of their knowledge and how helpful they were thoughout the transaction.

Asset Management Alliance has been involved in the receivership role of distressed properties. What influences lenders’ decisions on the selection of a receiver?

Kasey: We played the role of receiver for a large bank that received a portfolio of properties that were in distress, and it went very well. We have a relationship with that bank.

Elliman: Professionalism, experience, responsiveness, and of course, accuracy are all definite influencers when lenders are looking to appoint a receiver. As a global organization we manage receiverships quite often. We are fortunate to have all the necessary relationships with the large financial institutions/banks and all of the special servicers. We have successfully executed many transactions early on, and because of our expertise have now become kind of the go-to firm for several of the special servicers in the region.

When lenders receive distressed properties, how important is continuity of property management services?

Kasey: You want to keep the tenants that are still in the building. If they’re extremely satisfied with the services that have been provided in the building, it is important to a lender.

Berger: But in some cases where they don’t have the type of property management service you just described already in place, Dave, chances are they have lost tenants for one reason or another and they need to bring somebody in to stabilize the situation.

A lender’s going to look at are they local, do they know this project, service, obviously, and is it going to give tenants a calming sense that it’s business as usual, notwithstanding that the property may be in receivership and ultimately foreclosure.

What’s the view of the commercial realtor on the value of having proactive management at a building? Does it actually enhance the leasing activity?

Elliman: It’s a given that you have excellent property management, and if you don’t, it’s a problem.

What predictions do you all have on where the market will be in two more years?

Elliman: I think you’re going to see vacancy rates in Wilmington reduce by 200 basis points. Why is this? Because of the new beautiful residential projects that are being built right now in Wilmington. More people will be moving to the city. People, especially Millenials, want to work closer to where they live and play — especially if they can walk. And now you’re going to have all this beautiful, brand-new housing stock.

Berger: I think it’s going to be stronger and I think that, if you are a tenant and have the ability to renew your lease now, it’s probably not a bad time to do it.

Kasey: I think the new administration in the city is going to play a huge role in trending this all upward. We have a business approach now in the mayor’s office and a new chief of police. Providing an atmosphere for a thriving business community and safe City will be vital for future growth.

How much will the development of West Center City help the Central Business District since it is its neighbor?

Elliman: I think it’s huge. Huge.

How does the Delaware office product compete tri-state?

Berger: I think we can compete. No sales tax, good access to 95, the Riverfront. I think we have a lot to be proud of and to talk it up, but there is competition. We have this new public-private partnership in terms of economic development, and hopefully that’s going to be successful. I think it will be, but that’s all part of the mix, because Pennsylvania, Jersey, Maryland, they’re all pulling, too.

Elliman: People want new and upgraded places to live and walkable amenities. Fortunately, Wilmington is on the right path with all of this residential development, new and upgraded restaurants and bars, because that’s key. Up until now, we have been losing, mostly to Philadelphia.

Berger: Or living in Wilmington and working in Philly.

Elliman: We’re also seeing the other side, where we have a couple of startup companies that are now 12 people, hoping to grow into 50 within the next two years. They want to be located near the train station because a lot of their talent is living in Philly and commuting on SEPTA. With all of the improvements planned for Wilmington, there is a better chance that in a couple of years more of the talent will be living in Wilmington rather than living and commuting from outlying areas, as they are today.

Is the permit process smoother or is there still a bottleneck?

Berger: It’s becoming smoother. Not every project that’s submitted is going to be built, but speaking for the county and the city, if it’s a project that makes sense, I think they are trying to streamline the process because they know that time is money and economic development is being encouraged.

Elliman: You have seen that since the election.

In general, how can we become more competitive and fill those offices?

Berger: We need a little bit of time for all these things that we have been discussing here to take effect. It’s not an overnight process. But from a 30,000-foot view, I’m seeing progress in all these areas and I’m feeling optimistic.

Elliman: As mentioned earlier, I could not be more bullish on the Wilmington CBD.

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