Tag: brokerage

Predictions about commercial real estate in Little Rock circa 2050

In this month’s issue of the Arkansas Times, Hank Kelley shared his thoughts about what the commercial real estate industry will look like in 2050. 

Hank Kelley, CEO

Hank Kelley, CEO

Connectivity

There is demand now — and will be in the future — for unique living and workspaces in multiple-story buildings so your space can be close to other residents and professionals, and to other recreational and educational uses. The way we “go to work” now will change over the next 30 years, and the need to have the same level of hard-wall separate office areas within a building will change. More emphasis will be placed on a building’s connectivity for virtual connections than exists today. Even today, mobile professionals regularly chart their destinations based on the connection to credible Wi-Fi. In 30 years, the need for high-quality connections will be a constant and core requirement.

The exterior of buildings will hopefully be a source of energy generation through advances in solar panel technology, but not at the expense of views within the spaces. More filtering will improve indoor air quality. Rooftop decks and balconies with sunscreen canopies will be the norm as people continue to want to be outdoors but become even more concerned about sun exposure.

Mixed-Use

I believe we will continue to see an evolution of larger office buildings to include a mixture in their uses. The cost of converting their use, though, will have to be feasible before developers will invest in the remodeling needed for conversion. The conversion of office buildings to residential and or hospitality (hotel) requires extensive plumbing and mechanical alterations, and those changes will only happen when adequate demand for those uses justifies the conversion cost. In the short run, we will see workspaces within the buildings compressed to more flexible work environments and, in some cases, with even more open floor spaces for cubicle and tabletop workspaces. Landlords will become more flexible on tenant expansion and contraction needs to retain their tenants and use the surplus space they have to attract growing businesses.

The office buildings and existing residential condo buildings in Little Rock’s Central Business District represent the highest density of population per mile in our city and region, and companies will continue to be attracted by the excellent accessibility to both I-30 and I-40. People who live in midrise and high-rise buildings in the Central Business District enjoy walkable amenities now — the Central Arkansas Library, the Robinson Center, the Arkansas Museum of Fine Arts — and we believe the demand for walkable amenities will grow over time.

“’Hoteling’ of office space and rotation of in-office and out-of-office workdays will become more of a norm.”

As regards trends toward remote working, we don’t believe the majority of companies will choose a completely remote workforce because of the challenges in maintaining the culture needed to compete. “Hoteling” of office space and rotation of in-office and out-of-office workdays will become more of a norm. We continue to believe there is value in the separation of workspace and living space. The networking component of “going to work” is now and will continue to be a valuable need for workers and companies.

Energy Efficiency

We will see great advances in products and technology to conserve and generate energy, water and land at both the individual user level, but also at the utility provider level. We are hopeful those advances will reduce operating costs and help preserve our natural resources. The office building industry has been active in conservation efforts through the LEED certification process. Maintaining buildings to operate at peak efficiency will become a requirement to own and operate a building, and utility providers will charge non-compliant building owners penalties for excessive consumption.

We expect that fewer people will own their own cars, meaning we will see less of a need for parking spaces.

Finally, inflation will increase interest rates on the debt and the cost of services to maintain existing buildings. Some building owners are not prepared for their debt and operating expenses to increase, as they have been trying to maintain current rent levels with tenants. This means less income is available to pay debt and reinvest in building upgrades needed to maintain an efficient and attractive building. The squeeze of increasing costs will challenge some building owners and cause a change in ownership if those owners don’t have adequate reserves. Tenants will seek out buildings with owners who have the financial resources and desire to reinvest in their properties.

Hank Kelley is CEO and Executive Broker at Kelley Commercial Partners, and has been working in brokerage and property management in Little Rock for 36 years.

Commercial Real Estate Leases: The Basics

Leases: The Basics

 

Whether you are a property owner with leasable land or space or an individual looking for space to lease, it’s important to know the basics of the types of leases that are most common in the commercial real estate world.

Gross Lease

In a gross lease (also known as a full-service lease) the tenant pays a flat monthly rate while the landlord remains responsible for all operating costs of the property including taxes, insurance, and maintenance, as well as other expected costs, such as janitorial service. Because landlords must cover all of the property’s operating costs, the rental rate for gross leases is generally higher than for a net lease. In exchange for paying a higher rate, the tenant has the security of a fixed monthly rent payment, minimizing the possibility for variations in their operating costs, making budgeting more predictable and less complicated.

Net Leases

Net leases shift some or all the operating costs associated with a property to the tenants, and tenants are responsible for that cost in addition to their regular rent. There are three types of net leases: single, double, and triple. Tenants with a single net lease are responsible for one of the operating costs associated with the property, generally the property taxes. With a double net (net-net) lease, the tenant assumes the cost of two of the operating costs, generally the property taxes and insurance. With a triple net (NNN) lease, the tenant assumes all of the property’s operating costs, which include taxes, insurance, and all maintenance costs. Lastly, there is a variation of the triple net lease called absolute net lease (also known as a bondable lease). This type of lease relieves the property owner/investor from all financial obligations and risks associated with the property, including taxes, insurance, structural maintenance, and debt liability. All those obligations are passed on to the tenant normally in exchange for a lower base rent.

Benefits of Net Leases

From the landlord’s perspective, entering into a net lease can simplify the management and operation of the property, which can be especially beneficial if they own multiple properties. Furthermore, net lease rates are typically made for longer terms, which gives the landlord the benefit of long and stable income from the property.

Because net lease tenants assume more of the unpredictable costs associated with maintaining the property, their base rent is often at a reduced market rate. This can mean considerable savings in rent over the long term of the lease. While annual rent increases may be built into the lease agreement, they usually remain below the rate one would pay with a gross lease.

Ground Lease

Yet another variation of a net lease is a ground lease. An owner with undeveloped land may enter into a ground lease in which the lessee agrees to incur the cost of developing the property (i.e., construct a building or business on the land) and in exchange, pays only a NNN lease on the land. Ground lease terms are long, generally 50 to 99 years, but when the lease term ends, the ownership of the both the building and the land revert to the owner.

Negotiating a Lease

Before entering into a lease agreement as “lessor” or “lessee”, know your options so that you can benefit the most from the deal. Agents at Kelley Commercial Partners have the knowledge and experience to walk you through the process and negotiate with your best interests in mind.

Kelley Commercial: Creativity, repurposing rules CRE market in 2021

As seen in The Daily Record

March 15 – 21, 2021

by Dwain Hebda

 

Of all the industries shaped by the events of last year, the impact of COVID-19 on commercial real estate is arguably the most profound. Beyond just impacting a tenant’s ability to pay, 2020 represented a seismic shift in how companies think about leased space and the role of such spaces in the still-dawning era of mass work from home arrangements and the ubiquity of residential retail delivery.

As a result, commercial real estate companies find themselves with the daunting task of reimagining their inventory right along with tenant and public usage patterns, even as the battered economy begins to plod along toward recovery.

The Daily Record sat down with several partners of Kelley Commercial Partners in Little Rock to catch a glimpse of where the market currently stands and what successful commercial real estate (CRE) firms must do to ride the change current brought on by the pandemic.

Change is the only constant

In almost every conceivable way, CRE has transformed market thinking in ways large and small, from the size of space footprints to the way those spaces are configured.

“Heading into the pandemic, I don’t believe that I really saw a lot of people trying to downsize their footprint. Everything was pretty much going on as normal, depending on the type of business that they’re in,” said Cheryl White, senior property manager.

“What we’re seeing on renewables is that a lot of the tenants are either wanting to downsize because so many people are at home and wanting to remain at home,” said White. “Or (they are) trying to work with them while they transition to see what they’re going to let their employees do, whether they’re going to let them remain at home or if they’re going to try to bring them back into the office setting.”

White said CRE companies that demonstrate sensitivity to tenants’ needs as they bring their people back or look for a new space will be critical. This means being flexible on office modifications that promote social distancing or making other investments that speak to health issues within a building.

“We’ve really tried to assure our tenants that we’re doing what we can with our building to promote health and safety,” she said. “From our cleaning and janitorial to having hand sanitizers in the building, we want to make it to where they feel safe enough to come to the office. We ask that they wear their mask and going through all of that protocol as well.”

Even so, most CRE firms are still in a reactive posture when it comes to such measures, given the large amount of uncertainty that still surrounds COVID-19. This puts pressure on management companies and building owners alike to remain light on their feet to adapt and adopt, quickly.

“As it relates to the near future, I’m not sure anybody can really guess or estimate what’s going to happen because we don’t know what’s going to happen with policy making or how the government’s going to address a lot of tenants’ needs,” said Nick Kelley, executive vice president. “People who have been getting [stimulus] help from the government, may no longer get it. It’s hard to know what’s going to happen in a lot of the spaces that we manage.”

“I do see encouraging outlooks, as it relates to commercial real estate. There’s been an increase in activity with the announcement of the vaccines. But the truth is, the immediate future is going to be hard to know because we don’t know what’s going to happen with the pandemic.”

Challenges related, but not identical

Specific needs within the CRE market, while all stemming from the same challenge of COVID-19, continue to vary widely. Not all segments come under duress at the same time or to the same degree, demanding something more than one-size-fits-all solutions.

“The three segments of the market that we deal with are all different: retail, office and industrial,” said J. Daryl Peeples, president and principal broker. “At the start of COVID, I spent a majority of my time dealing with retail as it was the retail tenants that couldn’t pay rent. So, we were working with our clients and with our landlords on a daily basis, negotiating rent forgiveness or rent deferral or a combination of those two things and trying to negotiate something on the back end of the lease to give them a little bit of relief.”

“The office spaces were dark, but office tenants, by and large, were paying rent. We weren’t dealing with the nonpayment of rent in our office environment,” continued the local real estate executive. “Today, the larger firms haven’t come back yet, but some of the smaller firms have. So, you’ve got the needs of that segment of the office market and then the segment that hasn’t come back to work.”

Peeples said the industrial market, by contrast, is one of great opportunity, particularly as it pertains to distribution and other flex-type spaces. It’s an example of one segment’s loss is another one’s gain.

“National companies, in general, are trying to focus on distribution, rather than having a retail presence,” he said. “It’s delivery to the homes and trying to improve their distribution of their products. I think they’ll be looking for more flex-type space to provide that product directly to their customers, rather than through a retail environment and that’s a very active market that we want to participate in.”

To that end, Central Arkansas has a distinct advantage with amenities such as the Port of Little Rock and other large footprints that have successfully lured the likes of Amazon.

“Little Rock’s been on a consistent growth pattern for 25-plus years,” Kelley said. “We get back to that rate with a slight uptick because of some of the industries that have started to look at Little Rock as a great opportunity thanks to our shipping ability, our intermodal transport. The Little Rock Port provides a service that’s second to none in the country and people are starting to catch wind of it and taking notice of it.”

“As the community adopts these new people moving in, these new companies and new employees, I think there will be an even greater push for Little Rock to continue to grow in that sector, which will benefit all of us.”

Adapt, adapt, adapt

Capitol Center 12th Floor Executive Suites

Kelley Commercial Partners is converting the 12th floor of Simmons Tower to executive suites which offer professional, affordable spaces with flexible terms. The remodel should be completed by April 1, 2021.

All the partners interviewed agreed that some of the changes that have occurred as a result of COVID-19 are likely to be the norm rather than the exception going forward. The CRE companies that thrive in this new environment are those that can nimbly adapt to fundamentally new ground rules, be it in lease terms, office design or repurposing spaces for alternate uses.

“We have managed to increase and put some new tenants in and it’s all been because the landlord was willing to meet the needs of the tenant and give them the flexibility that made them comfortable to move in,” said Maggie Hogan, chief financial officer. “When people get back open, we’re going to see combinations where maybe not everyone has a private office because they don’t work everyday from the office. Or, people will still want to have an office, but maybe those offices are shared offices throughout the month.”

“I think the trend toward having higher density [in offices] is going to be less, even when COVID’s over. People are going to be a lot more aware, should another pandemic come around, of what we have to do to make sure that we’re prepared. I think people are going to be much more aware that it’s a possibility of having to make changes and being able to adapt quickly to changing situations.”

Peeples said repurposing of spaces will be of paramount importance moving forward. For instance, Kelley Commercial has transitioned several floors of Little Rock office space into “flex space,” what company leaders describe as an “office Airbnb” where drop in and short-term clients can utilize office amenities.

Similar repurposing is in demand. In a retail sector pummeled by online shopping and home delivery, yesterday’s retail store or bank branch is increasingly finding new life as something entirely different.

“The market tells you what’s going to work and what’s not going to work,” said Peeples. “Medical’s an excellent example. Health care entities are very active and are looking for 2,000- to 4,000-square-feet and landlords very quickly have to say, ‘Okay, what’s it going to take to accommodate that tenant?’ It might take a significant amount of money to refurbish a property for that type of use, but landlords are quick to adjust to the market.”

4261 Stockton Dr, NLR

Stockton Medical Plaza at 4261 Stockton Drive in North Little Rock offers a great location and space ideal for health care providers.

“From my perspective, anything that’s B-retail is eligible to be converted to service office use, medical use, et cetera,” said Hank Kelley, Jr. CEO and executive broker. “This is a fantastic opportunity for the hospitals, the medical practices and the clinics that need retail-like locations to go grab some of those locations at a fraction of what they would spend to go build a building.”

“Look at all the bank branches that are around. They’re being repurposed. Why are they being repurposed? Because, they’re at some of the best locations that exist in the market. Most of them have drive thrus. In the restaurant world, if you have a vacant restaurant building that has a drive thru already built into it, somebody’s looking into that. I don’t care what part of town you’re in, somebody’s looking to do a drive thru business.”

More questions than answers

The pandemic situation still poses far more unknowns than concrete trends, the partners said, both for the company and for present and future tenants. From economic recovery to health aspects and availability of vaccines to as-yet unimagined government and regulatory changes, the CRE market is fluid at best.

“Today, you’re saying, ‘Well, what’s going to happen with the office market?’ I think that’s yet to be determined and I think the challenge will be in the next few years, as we deal with lease renewals on these offices,” Peeples said. “What is that going to look like now that these larger firms have had a year of working remotely? How’s that working for them? Is the savings of rent worth continuing to work in that environment?”

“We don’t know the answer to that yet. I think people are still in a wait and see mode before they make any decisions on where they’re going to lease space. We’re hopeful that in the second half of this year, the leasing activity will pick up.”

Hank Kelley said uncertainty in the market can also work in the company’s favor when talking to prospective clients trying to decide between building a new headquarters and leasing existing space.

“The availability of capital is more important now than it’s ever been,” he said. “On one hand, if I go to the bank and borrow 50% of the cost of the project, I have banks lining up to make that loan to me because there’s no risk to it.”

“But most people want to borrow 75% loan-to-value and the banks and the lenders are very risk-averse right now. Even though they don’t have a lot of loan losses, they can see where the potential for loan losses lies on the horizon and they’re being very cautious about what they’re lending.”

And even if a project can access capital, Hank Kelley said, clients are finding money isn’t going as far given higher construction costs such as materials and labor, only some of which is pandemic–related. Therein, he said, is CRE’s ace in the hole.

“The advantage we have as managers and owners of existing buildings is that the cost of our space is maybe 50 percent of what the cost of a new building is now,” he said. “We deliver extraordinary value to the users of those buildings, as compared to if they decide to move and go build something themselves. The last resort of any client that I’ve got is to come out of the ground with a new building on a piece of ground right now, unless it’s build-to-suit where no other building can be adapted to the client’s needs. We’re developing several of those right now and we’re glad to have that as part of our business.”

“But even then, any client that comes to me and says, ‘I’m thinking about relocating,’ I make them go through buildings that are existing to see if a building can be upgraded or remodeled because the end solution is going to cost them a fraction of what it would cost them to build from the ground up. So, there is hope for these buildings that are may be dormant right now. When the market comes back, existing spaces will have a real advantage.”

 

Kelley Commercial Partners Adds New Shareholder Partners

Kelley Commercial Partners is pleased to announce the appointment of two new shareholder partners, Jessi Miller and Gary Smith. They will be joining existing partners Hank Kelley, Daryl Peeples, Maggie Hogan, Nick Kelley, Cynthia Lu, Brooke Miller, Kevin Pledger, Eric Varner, and Cheryl White.

­­

Jessi Miller

Jessi Miller, Director of Human Resources and Accounting Manager

Jessica Miller joined Kelley Commercial Partners in 2007 and worked her way through accounting, brokerage, and property management departments before settling into accounting in 2013. In 2018, she was promoted to accounting manager and director of human resources. Miller works in conjunction with the executive committee to set policy for employees and manage day-to-day human resources issues.

A native of South Dakota, Jessica and her family chose Arkansas as their home state after her husband’s retirement from the U.S. Air Force. Miller earned a bachelor’s degree in human resource management from Park University in 2012 — an accomplishment she is especially proud of as she was able to complete the degree in four years while working full time at Kelley Commercial Partners and raising two children.

“I am grateful to work for a company that has supported and encouraged me in my professional and personal goals. I look forward to the opportunity to contribute to the company and the team.”

Gary Smith

Gary Smith, Director of Business Development

Gary Smith began his commercial real estate career as an agent Kelley Commercial Partners in 1998 and was promoted to director of business development in 2005. He is a committed professional skilled at identifying and meeting his clients’ commercial real estate goals. Smith attributes his success to establishing trust and negotiating transactions with the best interest of all parties in mind. He works closely with the Little Rock Port Authority and was part of the team that helped bring Amazon’s new distribution center to the port.

Smith received a bachelor’s degree in sociology from East New Mexico University where he was a member of the golf team. Smith is still an avid golfer and has contributed his passion and talent for the game into serving his community. For several years, he has served as chair and member of the golf committee for the Centers for Youth and Family Foundation Annual Golf Tournament. He and his wife, Jennifer, are also active members of their church, where they lead the greeting team.

“It is an honor to be named a partner and I am proud to be a member of the team of professionals at Kelley Commercial Partners.”

Hank Kelley on 2020 and beyond

Hank Kelley, CEO, Executive Broker, Partner

Like so many businesses and individuals, the COVID-19 pandemic has presented Kelley Commercial Partners with unprecedented challenges, but it has also given us a unique opportunity to more clearly focus on the continued improvement of our knowledge of the commercial real estate sector and the values by which we run our business. Our commitment to the safety of our employees, clients, and customers has been and will continue to be paramount. Ensuring the readiness of our team to work remotely is part of that commitment. We’ve garnered much insight by working more closely with banks and the Small Business Administration as many of our clients navigated the tricky waters of PPP loans and other unplanned COVID-related expenses. Maintaining financial stability for our clients and our own company continues to be a top priority and our team grows more confident each day that we have the knowledge and values to keep moving us all moving forward. Many of the companies we interact with — both locally and across the country — have faced challenges that require a higher level of patience and empathy as we all wrestle with the uncertainty a pandemic has delivered.

The good news is that these lessons are making us a stronger company, one more prepared than ever to face whatever the next decade may bring. Many of our team members quickly adapted to working remotely and some will likely continue working from home after the pandemic is gone. Our cloud-based brokerage management, accounting, and payment systems have been very effective tools to ensure that we are operating as efficiently as possible, whether we are behind our desk at home, in the office, or on a property site.

However effective these applications have proved to be, the true defining characteristic of our company’s success has been our team’s ability to earn and maintain the trust of our clients. If this year has taught us anything, it’s that most clients care far less about exactly what we know and instead place much more importance on how we show that we truly care about them both personally and professionally. Our agents go through rigorous training and development to ensure they have the skills and knowledge that our clients expect and deserve, but as we all know, even the wisest counsel can only be heard after trust is established and skills are proven. This focus on always coming to the table with a positive attitude and willingness to do the hard work of building trust has been in place since day one and will remain a principal aspect of our company culture far into the future.

We work throughout the state in many property categories — unimproved land, build-to-suit, retail, office, industrial, hotels, multifamily. Prior to March, we were spending more time on retail and office requirements. Today we are working with a variety of industrial and distribution needs as well as acquisitions by users and investors. We believe industrial properties will be active over the next several years to answer the needs of online distribution and manufacturing.

We see some retail space making a transition to more service and medical uses. Owners of retail properties that are able and willing to make that conversion will benefit by diversifying their tenant mix. COVID and the growth in online shopping have caused owners of retail properties to convert empty spaces to uses not directly affected beyond online shopping. COVID accelerated the transition, and that will continue.

Office space users are also weighing their future needs. Some are looking for more traditional office plans providing an emphasis on safety; others are planning to make remote work permanent. However, we are confident the value of working together, in person will bring the office market back to a normal condition during the next two years.

The pandemic did force us to pivot some aspects our business plan, but our focus on unwavering client support has not changed. Our standards are still as high as ever and we measure our performance against those standards. We are grateful for the opportunities we have had during this past year and know that 2020 will be thought of as a year that taught us some valuable life lessons. Now the challenge is remembering these lessons as we move through this stage of the pandemic into a future filled with hope.

In the December 21 issue of Arkansas Business, Hank Kelley and six other business leaders in the community were asked to share their expectations for the future.