The 12 most expensive office markets

Worlds most expensive office locations, Source: Jones Lang LaSalle

Source: Jones Lang LaSalle

The most expensive office market in the world is in London, specifically the St. James’s submarket in the West End, according to a new list from Jones Lang LaSalle. Interestingly, of the 12 cities on the list, only two are in the Americas — in New York City and Northern California’s Silicon Valley — while five each are in Europe and Asia.

According to Colin Dyer, president and CEO of Jones Lang LaSalle, expensive office locations are found in the premier financial or commerce districts of well-connected global cities, with lots of supply constraints and global headquarters. He notes:

“High-margin tenants are attracted to such high-cost space. The corporate tenants, law and consulting firms, venture capitalists, banks, hedge funds and other financial-services firms who call these places home clearly believe that the benefits outweigh the cost.”

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LorettawebfinalLoretta Clodfelter is a contributor to Institutional Real Estate, Inc.

Passing 400

This month the Institutional Real Estate Newsline published its 400th original news story of the year. At the end of June, I wrote about how IREN reached its 200-story marker. I must say, this is quite impressive when comparing the new IREN format to old.

I remember when IREN was a PDF, and it was “rare” for an IREN issue to contain an original story. I think the most original stories I published in the PDF were about four a week. Now, IREN is publishing eight to 10 original stories each week. The most ever published in one week was 15.

I credit the new format (with a daily email and stories posted to the website as we break the news) and our digital-first objective. I believe it gives IREN more incentive to write more IREI stories. In addition, our Data Services team has been essential in mining data and providing story leads.

Today, IREN is a two-person team: the IREN editor (me) and a reporter, Reg Clodfelter. Occasionally, other editors write original stories as well.

Not only does October mark our 400th story published, but also October has the most ever original stories published with 52-plus. By the end of the year, IREN is hoping to publish 500 original stories, but aiming to publish 600. Fingers crossed!

Some big original headlines published this month are:

Two more months are left in the year. I believe IREN can get to 500 by Dec. 31, 2013. The activity this month pushes IREN ahead of expectations. To read more IREN original news, visit our news feed.

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AndreafinalwebAndrea Waitrovich is editor of IREN and web content editor of Institutional Real Estate, Inc.

Ground control to Major Tim

Tim Cook, Apple CEO, may have to take his protein pills and put his helmet on, as it seems he will finally be able to land the mother ship that Steve Jobs had only dreamed of. The City Council of Cupertino, Calif., has given approval to Apple to begin construction of their long-anticipated Campus 2, which, in current concept images, looks more like the space station from 2001: A Space Odyssey or the utopic space-world in Elysium than an office building. Maybe Jobs got the idea for his ideal work environment while dropping in on the 1975 NASA Summer Study conducted at nearby Stanford University, where the Stanford Torus ringed space-station design was originally developed.

Current plans are for ground to be broken this year, and, while it won’t be nearly the size the Huffington Post would lead you to believe, the main building alone will still be approximately 2.8 million square feet! (For reference, each World Trade Center tower contained roughly 4.8 million square feet of space.) Though the sci-fi headquarters, designed by architectural firm Foster and Partners, won’t house the likes of Ziggy Stardust, it will still be filled with as many as 13,000 Apple-ites upon completion. The outer edge of the main building will be constructed entirely of cutting-edge curved glass, with Jobs even claiming, “There isn’t a straight piece of glass in this building.” Construction is expected to be completed in just 32 months.

Jobs, a Cupertino native, first brought the idea to the Cupertino City Council in 2011 with a presentation that had City Councilmember Orrin Mahoney commenting, “Now that we’ve seen your plans, the word ‘spectacular’ would be an understatement. I think everybody is going to appreciate what clearly is going to be the most elegant headquarters, at least in the U.S.” But it wasn’t until this month, following a proposal from Apple’s director of global real estate Dan Whisenhunt, that the city council finally approved plans to keep Cupertino’s largest taxpayer within city limits.

The 176-acre site, much of which Apple purchased from Hewlett-Packard in 2010, will be completely transformed as existing buildings totaling roughly 2.66 million square feet are demolished and replaced by not only the mother-ship headquarters, but a fitness center, auditorium, utility plants, underground parking center and a variety of ancillary buildings as well. Additionally, the site, located off Highway 280, will be revamped from a space containing only 20 percent green space and several parking lots to one that is nearly 80 percent landscaped with 90 percent of surface parking removed and replaced with underground parking units. Nearly 3,000 trees will be added to the lot as David Muffly, Apple’s senior arborist, works to reduce water consumption by adding indigenous vegetation that is adapted to the area’s dry climate. Additionally, current plans will have the building running entirely on renewable energy.

Though construction will create approximately 9,000 jobs and keep Cupertino’s most important business in Jobs’ hometown, vice-mayor Gilbert Wong wants more: “One thing I want to ask you to keep in mind is giving back to the community. … We don’t like going to Valley Fair [Mall] or Los Gatos for an Apple store; we would love an Apple store here in Cupertino.” It is quite surprising that there isn’t a single Apple store in Cupertino, but, all jokes aside, Apple’s Campus 2 seems to prove that the future may be now, at least when it comes to office buildings.

“Definitely, the mother ship has landed here in Cupertino.”

— Gilbert Wong, vice-mayor of Cupertino

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ReggieClodfelter91x119Reg Clodfelter is a reporter at Institutional Real Estate, Inc.

Picking up steam

SteamThe seventh annual Institutional Investing in Infrastructure conference took place earlier this month in Half Moon Bay, Calif. This was quite a shift in venue — previously, the conferences had been held in the more “infrastructure-type” cities of Chicago, Dallas and Washington, D.C. But with the change in atmosphere outside the conference room came a shift in atmosphere inside the conference room as well. Discussions were more animated; the audience was more engaged; discussions delved deeper; everyone just seemed more focused. It felt like we’ve reached the tipping point — infrastructure is here to stay, even if there are still lots of questions to be answered.

Investors made it clear that they need more data, they need more transparency, they need a set of standard practices and they need a benchmark. In fact, benchmarking turned out to be one of the conference hot topics. We’d only allowed a half hour for Anthony de Francesco’s presentation on the IPD Australian infrastructure fund index — and we could have gone all morning. Who knew wonky indices could generate such interest and audience interaction?

Nearly all the panels discussed risk in one way or another. It was noted that the government is going to be your partner in all of these investments, so you better get who takes what risks correct from the beginning.

Greenfield investment has always been seen as riskier than brownfield, but this is not always the case. More brownfield investment deals have failed or blown up than greenfield deals — though this could be because there have been more brownfield deals than greenfield.

One of the head-slapping moments for me was when a long-time investor noted that the characteristic that makes infrastructure so attractive — its really long-term duration — is the same characteristic that makes it so risky. It’s nearly impossible to forecast demand, government actions and technological advancements that could make your asset obsolete that far down the road. That leaves investors with an asset that they’ve underwritten with actionable data for the early years, and underwritten with crossed fingers for the later years.

Another example of the havoc long-lived investments play on investment forecasts is the embedded greenfield risk in brownfield investments. A lot of investors look at brownfield investments as core and are happy with core returns. What they fail to appreciate, however, is the greenfield risk embedded in any asset that you plan to hold for 15, 20, even 30 years. At some point in these assets’ lifecycle, investors are going to have to put new money into new plants and equipment, into repairs, into expansion, into facility upgrades, into new technology, all of which are substantially more risky than core infrastructure. They are essentially future greenfield risks. And if investors don’t consider these risks beforehand, they will never be rewarded for taking them. But how do you price that future greenfield risk? The answer to that question and others will need to be taken up at a future I3 conference.

It’s no secret that infrastructure is an emerging asset class. In fact, it’s at the stage where a sizable contingent of the investment industry would still argue that it’s not really a class at all — though most now agree that it has the characteristics of a discrete diversified class.

But because infrastructure is not a mature class, we are still feeling our way around the edges. A lot has been learned in the past 10 years or so, but we still have a long way to go. Enough deals have succeeded — and enough deals have failed — to enable the market to begin to see a pattern and to begin to focus on what makes infrastructure unique. What does it do for a portfolio? What are realistic returns? What are the inherent risks? What are the best investment structures?

We might not have the answers yet, but we at least have begun to know the questions. And that is progress.

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Sheilaflippedfinalv3stSheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.

Unusual work perks

Unsurpassed for many decades, the existence of the coffee machine in the workplace has been one of the best and most inexpensive inventions businesses have ever seen because the unlimited caffeine fix has helped keep employees around the world more alert, productive, happy and at the office for longer periods of time in order to do even more work.

But tech innovations, competitiveness among businesses to retain talent and the sheer expense of living in high-rent areas are creating a unique environment that could shape a number of businesses in the years to come.

Facebook, for instance, is developing a $120 million, 394-unit rental housing community — Anton Menlo — near its Menlo Park, Calif., headquarters that will be open to anyone but that may seriously benefit some of its employees, especially those struggling to make ends meet and/or deal with lengthy commutes. Apart from being within walking distance from the Facebook campus of offices, amenities for the 630,000-square-foot Anton Menlo property will include:

  • Onsite cafe, convenience store, and sports pub
  • Bicycle repair shop with onsite storage
  • Pet spa with doggy daycare, pet walking services, dog park
  • Resort-inspired pool, spa and cabana area
  • Indoor/outdoor wellness, yoga and training facility with personal training
  • Rooftop entertainment deck with three-themed areas

In a video interview, Reed Albergotti, a reporter for The Wall Street Journal, calls this move by Facebook the return of company housing or the company town, something atypical for Silicon Valley:

“Silicon Valley is the antithesis of the company town because the whole idea of it is that there is this melting pot of ideas, people from different companies switching companies, starting new companies, so this could be an effort by Facebook to pull some of those employees back and take advantage of those ideas changing hands — changing minds, if you will — but keep it internal so that Facebook itself can come up with the new innovations.”

As more and more firms globally shrink office space square footage per employee to save on rental costs, make better use of more communal work environments for exchanging ideas and even take advantage of short-term office space options, company towns could see a resurgence, particularly in the social media and high-tech space, in order to help firms maintain a competitive edge in increasingly expensive places to live and work.

So if your firm doesn’t yet have a communal sports pub or sleeping pods, one of Google’s top 10 perks, maybe it should. You never know when that next big idea might strike.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.


A 15 percent solution in search of a theme

We like to talk about thematic investing. It makes us sound sophisticated. It makes us sound like we just might have Nostradamic tendencies.

One-off investing is for nebbishes. We thematic types take into account manifold forces at play, analyze their confluence and then harmonize our investments to take full advantage.

It all sounds so metaphysical.

As long as we’re on the case, we might want to give economist Tyler Cowen a fair hearing. He says the United States is gravitating toward a new theme, one significantly different than its past.

Cowen, author of a new book titled Average Is Over, says the nation’s growing gap between rich and middle class and poor is only going to become more pronounced. But rather than the 1 percent running roughshod over the 99 percent, an upper class representing about 15 percent of the population will rise and do extremely well and be very politically powerful.

The traditional American middle class will slump to lower middle class, though they will not be the daft lower middle class of the past. Members of this slumping segment of the population will be well educated, cultured and creative. (You will be more apt to find them at an Impressionist art exhibition than a NASCAR rally.) But their soft skills won’t have the monetary value they once did.

The upper class will be dominated by professionals and entrepreneurs with outstanding technological and scientific skills. The truly skilled also will have an easier time being discovered and achieving prosperity because we are facing a future where everything will be measured. Workers will have the equivalent of credit scores that make available to the world how many jobs we’ve had and how reliable we are. Also measured will be the number of traffic tickets we’ve accumulated and lawsuits filed against us. Screw up early in life, and it’s liable to dog you the rest of your mortal days. Do great things, and the professional world will quickly recognize you’ve got the chops and will embrace and reward you.

It will be a repressive environment to many, Cowen acknowledges. On the other hand, he says, it will be a fantastically creative society with many people liberated from oppressive manufacturing and service jobs that will instead be carried out by computers and robotics. The world’s best education will be available online and free of charge.

“I think there’s a lot about this future that will be enormously, fantastically exciting,” he says.

Yes, it is just one economist’s view of the future, but one that doesn’t sound at all far-fetched. If Cowen is right, what are the implications for real estate investing?

Let’s get thematic. Let’s just make sure we get it right. We’re being measured, after all.

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MikeCfinalwebMike Consol is editor of The Institutional Real Estate Letter – Americas.

Growth in Asia

Industry leaders say infrastructure investment is the key to opening up Asia Pacific economies to more growth.

The growth-driving Beijing Olympic games are a distant memory and worries over the bursting of Asian bubble economies persist, yet CEOs operating in Asia Pacific remain confident of opportunities in the region. According to PricewaterhouseCoopers’ just released report, Towards resilience and growth: Asia Pacific business in transition — a survey of 478 CEOs and industry leaders in 21 Asia Pacific economies — 42 percent are “very confident” of revenue growth during the next 12 months and nearly 70 percent intend to increase investments in the region. The study was released at the Asia-Pacific Economic Cooperation (APEC) forum in Bali, Indonesia.

What’s got industry excited about Asia Pacific? According to the survey, the trend toward urbanization in many Asia Pacific economies, the emergence of the local middle class and the need for infrastructure development are boosting confidence.

Survey respondents noted the information and communications tech grid (44 percent), transport networks in urban areas (44 percent), trade infrastructure (42 percent), energy (40 percent) and social infrastructure education (40 percent) as the infrastructure sectors where further investment would create significant growth opportunities for principal economies:

“There are clear cases where further improvements in infrastructures will fuel business growth. CEOs identify power supplies as an area where development translates into greater opportunities for more businesses. Above all, more CEOs believe lifting regulatory barriers that raise costs and uncertainties around trade and long-term investments can directly support business growth. Yet no business operates in isolation. When asked where improvements could create opportunities for the economies where they are based, more CEOs pointed to clogged transit networks in many Asia Pacific urban centers as a priority. They also expect the extending of broadband access (and lowering the costs) to more people will create ‘significant opportunities’ for growth in their countries.”

Another 49 percent of respondents indicated public private partnerships are important models for their companies’ growth and 20 percent said existing IT infrastructure is a barrier or emerging barrier to business growth.

The economy with the best chance of surprising with its business opportunities is Indonesia followed by Myanmar, China, the Philippines and Vietnam. Among the most cited attractive qualities for these economies were expanding middle classes, ample natural resources, increasing transparency, infrastructure improvement plans and political stability.

Despite increasing prospects for the region, “APEC economies now also face many of the uncertainties of slower growth, previously limited to the more developed markets,” states Dennis Nally, chairman of PricewaterhouseCoopers International Ltd.

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thm_AndrewCampbellDrew Campbell is senior editor of Institutional Investing in Infrastructure.

Confidence or complacency?

Last month we had our sixth annual Editorial Advisory Board meeting for The Institutional Real Estate Letter – Asia Pacific in Bangkok. As always, we had very interesting discussions, and I will be writing about them in an upcoming issue of our Asia Pacific publication.

There was a high degree of confidence expressed during the discussions: Confidence in the general economic environment, in interest rates staying low, and in China continuing its “long march” up, up and up.

China is one of my favorite subjects, and I try to follow news and research on China regularly. It is not only the members of our Editorial Advisory Board who expressed a high level of confidence in China. Recently, there have been numerous reports on U.S. blue-chip asset management companies raising funds and investing in China in a big way. KKR, Blackstone, Carlyle and even Sam Zell’s Equity International all raised huge amounts of capital to invest in China, with some of this capital having been invested already.

I may be jumping the gun, but the current situation reminds me of the pre-crisis times when Whitehall, MSREIF and several other mega-funds were piling into Chinese real estate at the top of the market with very tragic results for many of their investors.

It always makes me nervous to see such frenzied investment activity by foreign investors while locals are starting to exit the market. As I mentioned in one of my previous posts, prominent Chinese developers have started seeking projects in the United States and other markets outside of their home turf. Although this can be explained as a natural progression of successful firms expanding overseas, how would you interpret recent transactions by Li Ka-Shing, who is often compared to Warren Buffett and Sam Zell thanks to his documented ability to predict markets’ tops and bottoms? He has started exiting his positions in China and has recently sold his holdings in a shopping mall in Guangzhou and an office building in Shanghai. Not a big deal you may argue, just two transactions. But these transactions coincided with the weakening of the rental market in Shanghai and other cities. Such trophy properties as Plaza 66 and Wheelock Square in Shanghai have started lowering their rents, and office owners started offering huge incentives to leasing firms to attract tenants to their buildings. Is this a temporary aberration or the beginning of a new trend? We all know what happens when property prices continue going up while rents start declining.

What is your take on the situation in China? Do you think we should brush off recent signs of weakness in the office market and look at Li Ka-Shing’s transactions as simple profit taking, or is it similar to Sam Zell selling his office portfolio at the peak of the market right before its crash?

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AlexFinalv3webAlex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

The government shutdown and U.S. real estate

With the topic of the government shutdown all over CNN, MSNBC, the local news and even Facebook, it’s showing to be the trending topic of people of all ages.

The shutdown affects national parks and monuments, food and meal plans for seniors and young children, federal workers’ employment and even research into life-threatening diseases, but what does it mean for U.S. real estate?

In a recent article for the National Association of Realtors by Brian Summerfield, “Would a Gov’t Shutdown Affect Foreign Investors’ View of U.S. Real Estate?,” he goes over the potential stoppage in services that affect foreign individuals and companies’ views of investing in U.S. real estate:

“Of course, if visa and passport processing cease for any amount of time, that could put a dent in real estate investment from smaller-scale foreign buyers. And overseas institutions with less knowledge of the inner workings of the U.S. government may become wary of property purchases. But the real danger for U.S. real estate markets and the broader economy lies in a protracted dispute over funding federal programs.”

It’s definitely worth a few minutes of reading time. Check it out!

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DenisefinalwebDenise DeChaine is special projects editor of Institutional Real Estate, Inc.