Smart Corporations
Are Renters
Corporations buy o;ce properties for a variety of reasons,
but if they think they’re going to make money on the deal,
they’re probably mistaken. That’s because, for the most part,
corporations buy high and sell low, says Jonathan Wiley, assistant professor at the
Robinson College of Business at Georgia State University in Atlanta. His research,
which appeared in the fall 2012 issue of Real Estate Economics, concludes that many
corporations might be better o; financially if they leased space.
To what degree do
corporations fare worse
than other commercial
real estate investors
when buying and selling
property? My research,
which used CoStar data to
compare o;ce property
bought and sold by corpo-
rations and by noninsti-
tutional investors, found
that corporate investors
overpaid by an estimated
12 percent when they
bought property. Corpora-
tions also discounted
property by an estimated
10 percent when they sold.
Companies that
bought when a market
was falling paid about
the same prices as other
investors, but those that
bought when the market
was expanding overpaid
by 20 percent. When
corporate owners sold
during a contraction, they
took a 39 percent lower
price than noninstitutional
investors. Essentially,
corporations buy high and
sell low.
What accounted for this
significant di;erence
in price? Did di;er-
ences in occupancy or
operating expense play
a significant role? No.
When I controlled for
di;erences in the sample
buildings, I found that
asking rents at corporate-
owned buildings were only
2. 2 percent lower than
those at investor-owned
properties. Occupancy
at corporate properties
was actually 3. 2 percent
higher. So gross revenues
for the corporate-owned
properties were almost
the same as for those
owned by investors.
Then how do you explain
the di;erence? Corpora-
tions value properties in a
di;erent way than inves-
tors. When traditional
real estate investors look
at a property, they focus
on rents, occupancy, and
operating expense. Corpo-
rations are buying for very
di;erent reasons. They
consider psychological
issues ranging from pride
of owning a corporate
headquarters to having
an o;ce near the CEO's
home. Of course, there are
also financial factors such
as the opportunity to use
the building as collateral
if they need capital or tax
savings from depreciation.
Are there other reasons
corporations are often
losers in real estate
transactions? One issue
is that even though real
estate accounts for
between 25 percent and
40 percent of a company’s
operating expenses, most
businesses don’t have a
sta; real estate expert.
Another factor is that
companies often buy
when they have extra capi-
tal—during a boom—and
sell when they need cash—
during a contraction.
Finally, corporations are
less patient about waiting
for the best price.
What conclusions does
your research draw?
Most corporations are
better o; renting. That
way they preserve their
cash and stay focused
on what their businesses
do well. If you want your
name on the building,
hire a good commercial
broker to find you the right
space and put the signage
requirement in the lease.
By Mariwyn Evans
service tenants “turn a center into a hodgepodge,”
says Birdie. Service tenants such as a church or li-
brary may harm the retail tenant mix at a strip cen-
ter. Customers of these tenants may take up parking
for extended periods, which is why many national
retailers restrict certain service tenant uses near
their stores.
>>>
Create a Sense of Vibrancy
Top-notch tenants can create a destination, but
keeping a center vibrant requires creative market-
ing. “Most restaurants o;er some sort of t wo-for-one
special at dinner on Valentine’s Day, but one of our
restaurants that was hosting a Mom’s Club breakfast
on Feb. 14 gave every customer a rose," says Carbone.
"That made a real connection because it was out of
the ordinary.”
Loyalty programs and coupons distributed
through social media and mail are another widely
used retail promotional tool and are “a great way to
invite customers into your center for the first time,”
says Judy Hatfield, ;;;;, a principal with Equity
Commercial Realty in Norman, Okla.
An emotional connection—whether it’s to an in-
dividual owner or a restaurant or store that’s a local
institution—is another way to create a destination
experience that can’t be replicated online, says Car-
bone. In smaller stores, customers are often attracted
by the personality and personal story of the owner.
Keep Facilities Tip-Top
The final piece of turning just another retail strip
into a destination is appearance. During the recent
recession, some landlords were too cash-strapped to
spend on upkeep. Now there is “more of a willing-
ness among capital owners to fix up center exteriors
and o;er tenant improvement concessions that will
create synergies and higher sales,” says Orr.
That’s good because “street appeal is absolutely
key to making a center a destination,” says Andrews.
“Cosmetic appearance is the No. 1 thing that con-
sumers comment on, and it’s an easy one to fix,” he
says. Painting and parking lot restriping should be
done at least every other year. More extensive facade
renovations are necessary every seven to 10 years to
keep a center looking current, he adds.
Why Destination Matters
At a time when consumers can shop anytime with
a phone, tablet, or laptop, “landlords have to give
consumers an experience that is more engaging than
what they can find on the screen,” says Taylor. With
the right combination of distinctive merchandise at
the right price in a vibrant atmosphere, the result is
retail success. W