in this issue

E-Commerce Brick-and-Mortar:When Online Retailers Needa Home

Investment Fundamentals:Know Your Cost Basis

An Inside Look:Public Sector Consulting

Strategies

What’s driving co-working?

CO M M E R C I A L R E A L E S TAT E I N D U S T R Y N E W S A N D I N S I G H T S F R O M N E W M A R K G R U B B Z I M M E R • V O L U M E 2 • I S S U E 2 • S P R I N G 2 0 1 7

ADDINDICIAHERE

P.O. Box 411299Kansas City, MO64141-1299

co-work·ing/ˌkōˈwərkiNG/

noun

the use of an office or other working environment

by people who are self-employed or working for

different employers, typically so as to share equipment,

ideas, and knowledge.

Guest Commentary by Chris Davie – Co-founDer KinetiC

WorKspaCe

Chris Davie has been creating state-of-the-

art education and media production environments

for over two decades. He is the co-founder of

emerging co-working provider Kinetic

Workspace and Managing Partner of the consultancy

firm Sonority Group.

What’s driving co-working?

M any of us have become very accustomed to

picking up our mobile device, opening an app and receiving what we want. Society has embraced the “need it now" trend. These advances have powered huge steps forward in business and the quality of life for many. When the speed of innovative thinking is matched with the technology to execute it, products and services are made more accessible than ever to an even wider audience, creating opportunity.

Applying that thought process to commercial real estate has fueled explosive growth for co-working or shared workspace providers. Per a recent study on shared workspaces from 2016, the co-working market represents approximately 0.7% of the total U.S. office market. Small Business Labs, a group that tracks and forecasts trends in small business, projects that number to grow to just under 2% by 2020. This increase in market share may be just the tip of the iceberg—only time will tell. What we are seeing is increased confidence from the investment community as many providers are closing financing rounds to support aggressive growth plans domestically and around the globe.

Why does this model work? First, as previously discussed, because of society’s growing dependence on getting what we want or need immediately. Co-working spaces provide turnkey systems for companies large and small. They tackle the issue of long-lease commitments and capital expenses typically associated with launching an office or scaling an existing space. They create community links internally and externally, providing immediate opportunities to network and build a robust B2B backbone for growth. Co-working spaces also connect markets within and over state lines to provide quick and easy conduits for businesses to establish a presence in new markets. And for larger companies, they provide immediate space to house a new product development

team or newly acquired company still in its proving stage. They can also serve as gap fillers while more permanent space is under development or portfolios are re-balancing.

Second, they create an opportunity to accommodate the changing workforce. According to the U.S. Bureau of Labor Statistics in 2016, over the next five years contractors, temps, and self-employed workers will grow to represent more than 40% of the U.S. workforce. That’s more than 60 million people, and many are beginning to exit home offices and locate in shared environments. As millennials continue to represent more and more of the U.S. workforce, it is essential when developing future office spaces to take into consideration the generation’s known desire for mobility, work flexibility, and sense of community.

Though this 2.0 version of co-working and flexible workspace is relatively new, its growth trajectory is worth noting. Not all spaces are alike, and as the market evolves, like apps (even social media), some will stay, and some will go. However, creating a model building on the core concept of the shared economy for office space, like ride and room sharing services Uber and Airbnb, seems to be a natural progression. The question we are all waiting to answer is how the model will fair during the next economic downturn—and, if and how this model will impact the traditional office market. If history is any indicator, the prospects are good for its survival considering this version of the shared workspace was born during the last one.

BY:

CH

RIS

DAV

IE

kine

ticw

orks

pace

.com

market reportHaving served for nearly ten years as a member of the Kansas City, Missouri City Council and chairing the Planning, Zoning, and Economic Development Committee, I had an opportunity to become acquainted with developers representing virtually every kind of residential and commercial development you can imagine. Total development investment came to over $15 billion during my tenure as chair. From the preliminary plat to the issuance of the certificate of occupancy, my experience was deep and varied.

Today, with nearly ten years of experience in the private sector, I serve as a Managing Director of the Public-Sector Consulting Division within Newmark Grubb Zimmer. Because we interact with the public sector and quasi-governmental entities on a regular basis, I can clearly see the disconnect that at times, exists between the two—much like the apparent disconnect that exists between passing oil tankers.

Public-sector consultants act as the link between the public and private sector. A

Public-Sector Consultant helps the private sector interact and communicate intelligently

with the public sector. For instance, if someone needed a comprehensive plan update that goes above and beyond the

“cookie-cutter” approach that already exists today, a public-sector specialist would be the

perfect person to call. Strategic economic development plans, corridor plans and

other broad based strategic planning efforts are a small example of the work Newmark

Grubb Zimmer does in terms of public-sector consulting. NGZ has developed nearly 30 million square feet of real estate and over

3,000 acres of land. To develop that amount of land successfully, we first had to have a plan put in place. Successful development

requires excellent planning. Part of a plan is sourcing funds like development incentives

that help spur job creation and growth.

PUBLIC SECTOR CONSULTING?

WHAT IS

In Lexington, Missouri, the City Administrator Mark Rounds asked us to challenge the conventional wisdom with respect to comprehensive planning. By focusing on entrepreneurship and innovation, and understanding that capital mobility doesn’t respect borders, we emphasized matching seasoned entrepreneurs with up-and-coming entrepreneurs to pass on knowledge and experience. Also, we are learning how to take advantage of Lexington’s proximity to the largest city in the state of Missouri—Kansas City. This formulation recognizes smaller rural communities are no longer in competition with one another but instead are competing as part of a regional framework that is part of a larger global economy.

“ I once saw a scene in a movie where two large oil tankers were in relative proximity to one another, yet passed as though the other did not exist. While this example may be extreme, it is oftentimes how the public-sector and private-sector interact with one another. ”

AN INSIDE LOOK:PUBLIC SECTOR CONSULTING

It’s not just rural communities that we are working with to tap into their latent

entrepreneurial proclivities, it’s first tier suburbs as well. For instance, under the leadership of Mayor Leonard Jones, the Board of Aldermen,

and City Administrator Cory Smith, the city of Grandview, Missouri is experiencing an

economic renaissance. With the repositioning of the $76 million Truman Marketplace project and the coming $300 million Gateway Soccer

Complex, the city is poised for continued growth and expansion. Our firm serves as the

economic development department for the city and represents a new and exciting way of

practicing economic development. Less time is spent in the office and more time out in the field

connecting with developers, corporations and others that have an interest in becoming part of what many are calling the “Grandview Model.”

GRANDVIEWMODEL

THE

Lastly, we leverage our relationships at the federal, state, county and municipal levels of government on behalf of private sector interest to make sure every dollar spent is maximized and put to good use.

ENTREPRENEURSHIP& INNOVATION

FOCUSING ON

30MSQUARE FEET

3kACRES

“ ... many commercial real estate

professionals overlook the

importance of fully

evaluating their initial

cost basis in an asset.”

BY ANDREW GARTEN - NGZDIRECTOR, RESEARCH CONSULTING

investment fundamentals:know your cost basis

I n an increasingly competitive commercial real estate market, cap rates and initial investment returns have become the buzz words for brokers, lenders and investors. However, many commercial real estate professionals overlook the importance of fully evaluating their initial cost basis in an asset. Basis in its most basic form is your original cost to acquire the asset and is an important metric to keep in mind when evaluating your long-range exit strategy. One of the most simplistic forms of real estate investing is gain through growth of net operating income and appreciation over time. Often this simple principal is in jeopardy as strong market activity and demand can lead to acquisition of overpriced assets with exposure to changing market dynamics and tenant preferences. This is especially true in a period of cap rate compression as we have

experienced in recent years. As interest rates and cap rates increase, values of some assets will be negatively impacted. Without a real increase in rents, the resulting net operating income and asset value will decrease.

In competitive market conditions, such as these, the best investors seek to acquire properties at values that are at a discount relative to replacement costs or possess the qualities necessary to produce strong stabilized cash flow even in periods of market uncertainty. Fully evaluating your initial cost basis in an asset while keeping in mind your exit strategy will help mitigate risk within your investment portfolio.

COMMENTARY BY DR. TROY NASH, JD, PHD Dr. Troy Nash serves as a managing director of public sector consulting for Newmark Grubb Zimmer. He holds a Doctorate in Education from Saint Louis University; a Juris Doctorate from the University of Missouri-Kansas City School of Law and holds advanced degrees in business administration, economics and political science.

MARKET REPORT DATA IS CURRENT AS OF 4Q16For the most up-to-date information, visit ngzimmer.com

Newmark Grubb Zimmer analysts are constantly monitoring market indicators, tracking and analyzing supply and demand drivers, cyclical patterns and industry trends. As Newmark Grubb Zimmer continues to evolve its presence in Kansas City and St. Louis, NGZ research now offers its clients an industry leading analysis of current and relevant industrial, office and retail conditions. Rather than rely on third party data sources, our data acquisition efforts involve inputs from advisors in the field, analysts and brokers executing transactions. The following research reports examine the multi-faceted Kansas City and St. Louis markets.

OFFICE MARKET:Kansas CityThe Kansas City office market realized its 13th consecutive quarter of increased asking rental rates in the fourth quarter of 2016, while vacancy decreased 80 basis points over the past year, from 13.6% to 12.8%. The Kansas City office market is poised for an increase in rental rates and decrease in vacancy across most submarkets in 2017. Due to the lack of viable space alternatives currently in the market, tenants are considering higher-end buildings. As a result, recently redeveloped Class A office properties, such as Corrigan Station located in the Crossroads Arts District, as well as 6601 College and Nall Corporate Centre in Johnson County, can expect to realize an increase in the amount of leasing activity in 2017.

St. LouisThe St. Louis office market realized an increase in asking rents during the fourth quarter of 2016, while overall vacancy decreased 150 basis points. Vacancy decreased 240 basis points over the past year, from 13.8% to 11.4%. The market experienced 1.1 million square feet of net absorption during the quarter and 1.9 million square feet over the past four quarters. Leasing opportunities for Class A space in the Clayton, Mid County, North County and West County submarkets remain tight, as vacancy ranges from 5.2% to 7.7%. True speculative development is still slow to become reality. However, developers and lenders are ready to commence construction with at least a portion of their buildings pre-leased; expect this trend to continue in 2017.

INDUSTRIAL MARKET:Kansas CityThe Kansas City industrial sector ended a robust 2016 on a high note as annual net absorption hit a record high. Positive net absorption occurred in 21 out of the past 23 quarters, leading to quarterly announcements of build-to-suit and partially leased speculative developments. As large tenants are left with limited leasing opportunities, both developers and investment groups are revisiting value-added opportunities. Announcements of additional large-scale speculative bulk industrial developments and build-to-suit projects will continue in 2017.

St. LouisThe St. Louis industrial market ended 2016 with both asking rental rates and vacancy rates at record levels. Positive net absorption has occurred in 15 out of the past 17 quarters. Rental rates are predicted to rise, while vacancy rates should hold steady near 6%, as a portion of the 5.8 million square feet of product currently under construction delivers to the market in 2017. With market vacancy hovering at a 10-year low, expect ongoing speculative construction starts, build-to-suit offerings and significant leasing and sales activity to continue for various areas of the metro. Modern bulk industrial and flex-tech projects capable of handling midrange to large space users will drive the market in 2017.

RETAIL MARKET:Kansas CityThe overall Kansas City market has tightened over the past year, realizing an 80-basis-point drop in vacancy. Demonstrating the strength of the local retail market, over 1.9 million square feet of net absorption occurred during the past four quarters, with nearly 3.2 million square feet absorbed over the past two years. The average quoted rental rate measured $12.89/SF, up $0.43/SF higher than the prior year. Fourth-quarter 2016 marked the 11th consecutive quarter of improving conditions for the big-box sector. However, at 7.0%, the vacancy rate for big-box stores remains 410 basis points above the 2.9% vacancy rate for shops smaller than 7,500 square feet.

St. LouisMetropolitan St. Louis retail vacancy rate decreased to 6% during the fourth quarter of 2016. Following a robust fall shopping season, the overall St. Louis market has tightened over the past year, realizing a 50-basis-point drop in vacancy. Over 1.5 million square feet of net absorption occurred during the past four quarters. The average quoted rental rate was $11.92/SF, down $0.22/SF from the previous quarter and unchanged from the prior year. With decreasing vacancy and substantial net absorption and deliveries, the metropolitan St. Louis retail market continues to show signs of improvement and is well-positioned for 2017.

Kansas City St. Louis Nationwide

Average AskingRent (Price/SF)

Vacancy Rate (%)

Net Absorption (SF) - Quarterly

INDUSTRIAL MARKET

$4.77

6.0%

1,212,350

$4.35

6.1%

1,018,211

$6.03

5.7%

52,125,459

Kansas City St. Louis Nationwide

Average AskingRent (Price/SF)

Vacancy Rate (%)

Net Absorption (SF) - Quarterly

OFFICE MARKET

$18.81

12.8%

79,057

$18.92

11.4%

1,079,752

$29.98

13.4%

6,207,266

Kansas City St. Louis Nationwide

Average AskingRent (Price/SF)

Vacancy Rate (%)

Net Absorption (SF) - Quarterly

RETAIL MARKET

$12.89

6.3%

446.976

$11.92

6.0%

336,278,211

$16.54

5.0%

21,231,989

BY

CHR

IS R

OB

ERTS

ON

- N

GZ

AS

SO

CIA

TE D

IREC

TOR

& M

ICH

AEL

VA

NB

US

KIR

K, S

IOR

, CCI

M, C

RE

- N

GZ

EXEC

UTI

VE

MA

NA

GIN

G D

IREC

TOR

, PR

INC

IPA

L

02: NGZ brokers analyzed the client’s office space and determined

approximately 65% of their space was being utilized. Although the building was built specifically for this tenant, the building had characteristics that

would allow it to be suitable for multiple tenants. The NGZ brokers developed

a strategy allowing the tenant to consolidate their offices to the top

two floors of the three-story building, leaving the remaining space on the first floor to be leased to third party tenants.

Although approximately two years remained on the lease, NGZ brokers

approached the landlord to extend the lease on the two full floors the client could use, while immediately giving

back space on the first floor for the landlord to lease. This reduced

the tenant’s space obligation by a third.

03: NGZ Brokers negotiated with the landlord to give back the first-floor space in exchange for a lease extension on the remainder of the space. This solution provided the tenant with an immediate $1,500,000 savings in occupancy costs and substantially reduced the costs associated with potentially relocating to another building at the expiration of the lease term. The space consolidation also allowed the client to achieve a more efficient and productive workspace. Additionally, the landlord was satisfied with retaining a tenant for the majority of the building instead of having a 90,000 square foot vacancy in two years.

01: An NGZ client had approximately two years left on a lease of a 90,000-square foot building. The client had far more space than was needed to accommodate current and future employment projections. The client needed to identify ways to reduce occupancy costs for the remaining two years of the lease.

04: NGZ Brokers were able to develop a plan that achieved their client’s two primary goals of consolidating their space and saving a substantial amount of money immediately.

BY

NIC

K S

UA

REZ

, CCI

M -

NG

ZM

AN

AG

ING

DIR

ECTO

R,

PRIN

CIP

AL

Today, Newmark Grubb Zimmer is an organization comprised of people with wide expertise, practical education and experience ranging from bachelor’s degrees, master’s degrees and doctorates. Our degrees and expertise encompass a variety of industries including real estate, architecture, engineering, law, construction, economic development, finance, economics and marketing. NGZ strives to achieve excellence for not only our clients and vendors, but also internally with a strong group of dynamic people. We continue to attract and develop a winning team. It is our pleasure to introduce some new faces.

Meet our team

When online retailers need a home

BY

SCO

TT B

LUH

M -

NG

ZD

IREC

TOR

e-commerce brick-and-mortar

case study: A solution provided

about newmark grubb zimmer

Newmark Grubb Zimmer is a full-service commercial real estate company that provides a range of services including sales and leasing, property and facilities management, global corporate services, and investment sales and capital markets. We also specialize in owner’s representative services for public and private development projects and public sector consulting.

NGZ is regularly recognized as one of the top brokerage firms in the region, negotiating more than 450 transactions per year. The firm currently manages more than 7.8 million square feet of office, medical, industrial, retail and educational property and serves as corporate real estate advisor for an assortment of local, regional, national and international companies.

NGZ’s approach provides clients with real estate solutions that deliver quantifiable results. Our offices are located in Kansas City, Missouri; St. Louis, Missouri; Lee’s Summit, Missouri; Salina, Kansas; and Phoenix, Arizona. As an affiliate company of Newmark Grubb Knight Frank (NGKF),

owned and managed by members of the Zimmer family and other senior management officials, the NGZ Team leverages the breadth and depth of the NGKF platform to offer its services throughout the Midwest, the United States and around the globe.

Newmark Grubb Knight Frank is one of the world’s leading commercial real estate advisory firms. Together with London-based partner Knight Frank and independently-owned offices, NGKF’s 14,100 professionals operate from more than 400 offices in established and emerging property markets on six continents. NGKF’s full-service platform comprises BGC’s real estate services segment.

NGKF’s strong foundation makes it one of the most trusted names in commercial real estate.

Melissa wolff

Previously, Melissa was the Vice President in property management specializing in Class A office buildings at Gershman Commercial Real Estate. Melissa is a member of BOMA and a licensed Missouri Realtor. In 2012, she was awarded the BOMA Presidential Choice Award and in 2013 the BOMA Todd Arnold Member of the Year.

Michelle geringer

Michelle began her career at Gershman Commercial Real Estate where she assisted on various portfolios consisting of office, retail and industrial. She graduated from Hawaii Pacific University with a Bachelor of Science degree in business administration. Michelle is a member of BOMA and a licensed Missouri Realtor.

The first step in placing a tenant is determining the best location for the user and the e-commerce user. This process is very different from that used by the traditional warehouse user of the past. These new users demand climate-controlled space, additional parking, increased clear height, highspeed fiber optics and power redundancy. Recently, proximity to specific consumer demographics has entered the mix. To meet the intense demand of speedy shipping, e-commerce has shifted the focus from locating fulfillment centers in proximity to their clients and vendors, to now locating closer to households and key demographics. Proximity to logistic hubs are still important and the e-commerce model has created an emphasis on additional site criteria. This has increased land values and spurred new development in specific markets.

While the changes in the industrial market could go unseen be many, changes to brick-and-mortar stores are much more evident. One could argue the brick-and- mortar retail model is crumbling and that malls and shopping centers will soon be a relic of yesterday. However, recent trends would disagree, showing the current climate as one of adaptation. The e-commerce boom has forced many B2C companies, like Best Buy and Radio Shack, to re-evaluate and become more creative in how they model their stores. Future retail stores will blend digital and physical offerings to create a

seamless shopping experience. These guide shops will serve as showrooms, fitting rooms, and producttransaction hubs. Technology will be integrated to connect the shopper online with reward apps, in-store pick up and product reviews. Another key to pulling shoppers out of the home is developing shopping centers and malls that function as lifestyle destinations, sometimes called “lifestyle centers.” These developments combine upscale dining, entertainment in an outdoor park setting.

The e-commerce boom had a significant impact on the industrial market. Recently, they seem to havethe jump on their retail counterpart. Markets across the country have displayed an increase in industrial investments and the overall industrial product type has benefited with upgraded amenities and sitelocations. While brick-and-mortar continues to search for the anchor that the industrial market found, recent trends indicate that the brick-and-mortar locations will stabilize and replant their footing with a greatly improved consumer-driven business model.

E -Commerce is a term that has become a prominent part of every industrial real estate professional’s

vocabulary for the better part of a decade. Amazon’s business model created a major shift in how goods are purchased and supplied. What many people do not consider is how this model has affected and potentially revolutionized industrial real estate. This shift has resulted in retailers shuffling to either mimic the e-commerce model or compete against it entirely. For example, Walmart seized the opportunity to increase competition with Amazon by acquiring Jet.com, deemed one of the fastest growing e-commerce companies in the U.S., for approximately 3 billion dollars in 2016.

ActionProblem

#1#2

Solution#3

Outcome#4

ngzimmer.com

look for us at these conferences:

KANSAS CITY, MO1220 Washington Street, Suite 300Kansas City, MO 64105816.474.2000

SALES & LEASING

Mark C. Long, SIOR, CCIM, LEEP APExecutive Managing Director, Principal

Justin BealDirector

Scott BluhmDirector

Wendy S. BrandDirector

Victor G. CascioManaging Director

Richard Chamberlain, SIOR, LEED APManaging Director, Principal

Debora H. FieldManaging Director

John Hassler Director

George HindeAssociate

John M. HoeferAssociate

Allan Kaufman, SIORDirector

Joyce MurrayManaging Director, Principal

Nick G. Pickard, CCIMDirector

Susan L. Smith, SIORManaging Director, Principal

Nick Suarez, CCIMManaging Director, Principal

David J. Zimmer, SIOR, FRICSPresident, Principal

PROPERTY & FACILITIESMANAGEMENT

Ellen Z. Darling, CPMChief Executive Officer, Principal

Vern Walters, CPM, LEED APDirector of Facilities

Robin FishProperty Manager

Donna Knopp, CSMSenior Property Manager

Jack Livingston, RPAVice President

Alan L. MooreDeputy Facility Manager

Kassie MurphyProperty Manager

John Strharsky, CFM, LEED APVice President

John B. Wells, Jr.Property Manager

Kim WielandProperty Manager

DEVELOPMENT MANAGEMENT

Daniel F. MusserExecutive Managing Director, Principal

Alana LitmanProject Manager

Kirk Sherman, LEED APManaging Director, Principal

GLOBAL CORPORATE SERVICES

Matt McFaddenExecutive Managing Director, Principal

Andy DoyleDirector

Andrew GartenDirector, Research Consulting

Matt McOmberManaging Director

Joe OliaroManaging Director

INVESTMENT SALES &CAPITAL MARKETS

Michael VanBuskirk, SIOR, CCIM, CREExecutive Managing Director, Principal

Chris RobertsonAssociate Director

PUBLIC SECTOR CONSULTING

Dr. Troy Nash, JD, PHDManaging Director, Principal

EASTERN JACKSON COUNTY1485 SW Market StreetLee’s Summit, MO 64081816.474.2000

Bernell RiceDirector

ST. LOUIS, MO8235 Forsyth Boulevard, Suite 310Clayton, MO 63105314.254.4600

SALES & LEASING

Mike Carlson, SIOR, CCIMExecutive Managing Director, Principal

Kevin McLaughlin, SIORExecutive Managing Director, Principal

Ben AlbersAssociate

Scott BernsteinManaging Director

Ben WeisAssociate

INVESTMENT SALES

Jay KerleyManaging Director

Dan RossiniManaging Director

PROPERTY & FACILITIESMANAGEMENT

Michelle GeringerAssistant Property Manager

Melissa WolffDirector, Property Management

SALINA, KSP.O. Box 3224Salina, KS 67402816.474.2000

Tracey Mann, CCIM, LEED APManaging Director, Principal

IAMCSpring 2017 Professional Forum Tampa:April 8th-12th

NGKFTop ProducerMeetingLaguna Niguel:April 26th-28th

SIOR 2017 Spring World ConferenceNew Orleans: April 26th-29th

ICSCRECon Global Retail ConventionLas Vegas: May 21st-24th

FFF

F

FFFFFFF

FFF

FFFFFFFFFFF

F

FF

FFF

F

F

FF

F

F

FF

FF

F

FFF

FF

F F

F

F

FFFFFFFFF

FFFFFFF

FFFF FF

F

F

F

FF

FFF

F

FF

F

F

F