The First Facility Management Blog

Turner Construction Company announced that the First Quarter 2010 Turner Building Cost Index, which measures non-residential building construction costs in the United States, has decreased by 0.5% from the Fourth Quarter 2009 and decreased 7.74% from the First Quarter 2009. Construction costs have decreased by 13.06 % since their peak at the end of 2008. The Turner Building Cost Index value for First Quarter 2010 is 799.

Karl F. Almstead, the Turner vice president responsible for the Turner Building Cost Index said, “The rate of decline in construction costs is not as dramatic as it was in 2009.  The reduced volume of work remains the driving force behind the market’s downward pressure on costs in the non-residential building construction sector.

“While there are signs of recovery in the economy, the construction industry trails the broader economy due to the time required for project planning and design. As the economic recovery strengthens, increased activity in project planning will provide an indication that the rebound in the construction industry is underway,” said Almstead.

Turner has prepared the construction cost forecast for more than 80 years. Used widely by the construction industry and Federal and State governments, the building costs and price trends tracked by The Turner Building Cost Index may or may not reflect regional conditions in any given quarter. The Cost Index is determined by several factors considered on a nationwide basis, including labor rates and productivity, material prices and the competitive condition of the marketplace.

The Small Business Index deployed by Mr. Clean Professional™, a provider of small business cleaning solutions, and the National Federation of Independent Business (NFIB) finds that more than one quarter (29%) of small businesses have scaled back on workplace cleaning. The Index was conducted to identify how the economy has affected small business cleaning standards and revealed critical resource shortages faced by owners today.

Despite that roughly one of every three owners (31%) recognized “cleanliness and appearance” as having the greatest impact on customer first impressions, a significant number have curtailed their cleaning processes. Eliminating professional cleaning services and buying cheaper or generic products are the most common ways owners have cut back, while others now clean less often or buy fewer products. Of those who have altered their cleaning practices, almost half (44%) report negative repercussions, such as rising customer and employee complaints and longer cleaning time when using cheaper products.

“Now more than ever, we recognize owners’ needs for solutions that work at the speed of small businesses today and for information that equips them with cleaning best practices,” said Pete Self, research and development manager, P&G Professional.

Six out of 10 small business owners (60%) said time is the biggest barrier to keeping their workplace, whether retail or professional, as clean as possible; meanwhile, less than one sixth (14%) believes staffing is the major hurdle to cleanliness. As a result, the vast majority of small businesses surveyed believe “effectiveness” is by far the most important factor when selecting cleaning products.

Additionally, when asked what cleaning resources would be most beneficial, approximately half of small business owners (49%) cited they need free resources and advice from trusted sources that help them get the cleaning job done.

“Our membership research confirms that owners continue to face tough conditions, including plans to reduce employment over the next several months,” said Mark Garzone, senior vice president, marketing, NFIB. “Solutions that save time in performing the critical task of cleaning as well as resources that offer cleaning guidance are more critical than ever in equipping owners for success.”

The P&G Professional/National Federation of Independent Business Small Business Index is based on a national survey of more than 1,100 small business owners registered with NFIB. Small business owners representing a wide spectrum of industries and functional areas participated in the online survey, conducted by Kelton Research, between October 16 and 26, 2009. Results of any sample are subject to sampling variation.

At the Rancho Bernardo Inn Golf Resort & Spa in San Diego, CA, the management team is offering a “Survivor Package” to attract would-be guests who may be dealing with lower than usual vacation budgets. Through September 17, 2009, the property (which has been recognized with 12 Gold Key Awards, 18 Executive Choice Awards, 18 Mobil Four Star Resort Awards and 32 AAA Four Diamond Resort Awards) is offering this package for as low as $19 per night.

There is a catch, however. That $19 per night will not get you a bed, or toiletries, or linens, or even lights (except for a bulb in the bathroom for safety). As reported by Reuters, one family checked into the upscale resort toting flashlights, sleeping bags, and an inflatable mattress. By depriving themselves of such standard fare as beds and lights, they were able to get their room for under $20 per night. Not bad, although it must take some work to strip down the room item by item to fit guests’ “choice” of amenities. Where are they storing all those beds?

The sliding scale at the Rancho Bernardo Inn reads like so:

• $219 per night (all amenities included)
• $199 without breakfast
• $179 without honor bar
• $159 without A/C or heat
• $139 without pillows
• $109 without sheets
• $89 without lights
• $59 without linens
• $39 without toiletries
• $19 without bed

Michael A. Dunlap & Associates, LLC announces the results of the 21st edition of its quarterly MADA/OFI Trends Survey, a tool that designed to measure the current business activity of the office furniture industry and its suppliers. This survey was completed during the month of July 2009.

The survey focuses upon 10 key business activities, with respondents rating each area on a scale of 10 (the highest) to ONE (the lowest). The business activities are Gross Shipments, Order Backlog/Incoming Orders, Employment Levels, Manufacturing Hours (Overtime vs. Reduced Hours), Capital Investment, Tooling Expenditures, New Product Development Activity, Raw Material Costs, Employee Costs, and the respondents’ Personal Outlook on the industry.

An Industry Index Number quantifies where the industry is currently performing. For example, an index of 100 means that things “couldn’t be better,” an index of ONE is “absolutely the worst” it can be, and an index of 50 means it is neutral; no change “up” or “down.”

The July 2009 Overall Survey Index is 48.30. The January 2009 and April 2009 Overall Survey Index values were 46.17 and 41.45, respectively. The highest recorded Index was 59.72 in July 2005. The average is 54.34 since the survey started in August 2004.

Gross Shipments, Order Backlog, Employment Levels, Hours Worked, Capital Expenditures, Tooling Expenditures, and Personal Outlook all improved significantly compared to April 2009, but remained below 50.00.

Dunlap commented, “I am pleased to see the improvements, but they still indicate that the industry is still in the doldrums. I expect to see more improvements during the 3rd and 4th quarters of 2009.”

Personal Outlook Index improved to 45.85 after falling to 37.04 in January and 41.38 in April 2009. “It’s been below 50.00 since January 2008, so even though it is low, there is some improvement during the past three months,” Dunlap commented. “More than 34% reported they are optimistic about the future. It was only 25% in April.”

The majority of respondents continue to cite the economic conditions, healthcare costs, and energy
costs as the “largest threats to the industry.”

Dunlap stated, “[This year] has been an exceptionally difficult [one] for this industry, but I see brighter days ahead. There are enough indicators that tell us that the current industry recession has probably bottomed out. The modest increases in shipments and orders during the second quarter suggest this.”

The July 2009 MADA/OFI Trends survey was sent to more than 630 individuals involved with office furniture manufacturing and suppliers from Asia, Europe, North and South America and from companies ranging from more than $1 billion in sales to less than $10 million in sales. The survey repeats in October 2009.

After showing signs of stabilization over the last three months, the Architecture Billings Index (ABI) plunged nearly five points in June. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to 12 month lag time between architecture billings and construction spending.

The American Institute of Architects (AIA) reported the June ABI rating was 37.7, far lower than the 42.9 the previous month. This score indicates a sharp decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 53.8, the fourth straight month with a score in the mid-50s.

“It appears as though we may have not yet reached the bottom of this construction downturn,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Architecture firms are struggling and concerned that construction market conditions will not even improve as soon as next year. There has also been little movement in terms of stimulus funding allocated for design projects having the desired impact of leading to new work.”

Key June ABI highlights:

• Regional averages: Northeast (42.8), South (40.5), West (39.9), Midwest (36.2)
• Sector index breakdown: mixed practice (43.5), commercial/industrial (39.5), institutional (37.0)
• Project inquiries index: 53.8

On 5/27/09 IPD, the global real estate performance analysis and benchmarking specialist, published its first ever annual commercial real estate index and quarterly indicator for the U.S. backed by 10 years of historical data.

According to the IPD U.S. Annual Property Index, capital growth was -12.2% in 2008. For the 12 months to the end of December 2008, all property income return in the U.S. was 5.4%, contributing to an overall total return of -7.4%.

The Annual Index is born out of IPD’s core U.S. Portfolio Analysis Services, which has been measuring the relative performance of individual funds against peer group benchmarks since 2005. The U.S. IPD office has amassed data on $121 billion worth of U.S. commercial real estate portfolios for the first Annual Index, data which is expected to expand substantially in coming years.

The inaugural IPD U.S. Quarterly Indicator, which monitors quarterly movements in U.S. commercial real estate value trends and returns, revealed that capital growth was -10.5% for the quarter ending March 31, 2009. Over the same three month period, all property income return in the country was 1.4%, contributing to an overall total return of -9.2%.

Annual sector and regional returns
For the annual period, the Office sector fared the worst, with capital growth of -12.8%. For the same one year period, the Industrial and Retail sector capital growth was -11.7% and -11.4%, respectively.

At the regional level, Western states posted the largest decline with a capital growth of -13.0% for the 12 months ending with December 2008. Capital growth results were similarly negative for the East, South, and Midwest, at -12.3%, -11.1%, and 11.0%, respectively.

Simon Fairchild, managing director at IPD US, said, “A clear feature of these U.S. results is the apparent synchronization in the downside performance. Whatever manner in which we analyze the data—either across regions or sectors—market values have been written down at broadly the same rate.”

The IPD U.S. Property Index measures returns to direct investment in U.S. commercial property. It shows total return on capital employed in market standing investments (i.e., properties held from one monthly valuation to the next) but excludes any properties bought, sold, under development, or subject to major refurbishment in the course of the month.

It is no surprise that the continuing economic uncertainty throughout world markets and the lingering impact of a global credit crunch are seen as the greatest risks faced by real estate companies.

“In this time of great economic uncertainty and lack of liquidity, many companies are proactively looking for ways to manage risk, streamline operations, and enhance their business relationships effectively so they can hit the ground running when markets begin to stabilize,” says Howard Roth, Global and Americas Real Estate Leader, Ernst & Young.

The 2009 Ernst & Young real estate business risk report, produced in conjunction with strategy consultancy Oxford Analytica, itemizes the 10 top business risks faced by the industry as ranked by leading sector analysts. The top 2009 risks in order are:

1. Continued uncertainty and impact of the credit crunch. Tighter credit is just one threat to real estate from the crunch; the economic downturn is affecting commercial vacancy rates as well as property valuations.
2. Global economic and market fluctuations. Due to capital flows and business expansion, the real estate industry has become a truly global industry and, as such, is increasingly susceptible to global market fluctuations.
3. Impact of aging or inadequate infrastructure. Particularly in the U.S., but also in other markets around the world, a lack of key transit and utility infrastructure is a threat to economic and real estate growth. (This is huge for the facilities profession!)
4. A global war for talent. Globalization of business has also created a worldwide talent pool with countries forced to compete for human capital.
5. Changing demographics. Aging and urbanizing populations are changing competitive dynamics and creating new markets in real estate.
6. Inability to find and exploit non-traditional global opportunities. With competition increasing worldwide from sovereign wealth funds and others, many global investors face a tough time sourcing new deals that will meet return expectations.
7. Pricing uncertainty. With few transactions taking place in the real estate market, valuations are a problem for existing owners as well as buyers and sellers.
8. Green revolution, sustainability, and climate change. Real estate is at the forefront of the green movement with pressures intensifying to build and operate in sustainable ways and minimize the carbon footprint throughout all types of real estate. (Another huge issue for facilities.)
9. Economic vulnerability and regulatory risks in developing markets. Developing markets are a key focus for global real estate firms but regulatory risk in these markets is constantly changing as authorities seek to jump start economies.
10. Increasing energy costs. Few analysts expect more than a temporary respite from high oil prices as new supply will be unable to meet renewed demand. (Probably one of the most relevant and tangible for fms right now.)

Given the risks outlined by analysts in the report, it is time for owners, investors, and users of real estate to use the time afforded by this lull in real estate activity to prepare their businesses for the next period of economic growth.

“There will be a fundamental shift back to traditional real estate underwriting principles, including comprehensive cash flow analysis and prudent levels of debt and equity in consummating real estate transactions. This ‘back to basics’ movement will lead to the greater transparency necessary to restore confidence between buyers and sellers,” says Roth.

The real estate sector has felt the tightening conditions in credit markets perhaps more than any other sector due to its heavy reliance on capital. Financial conditions for real estate projects are undoubtedly worsening, and the current financial market landscape is expected to persist for the next couple of years.

According to Mark Costello, America’s Leader of Ernst & Young’s construction and real estate advisory services practice, “Real estate is typically the second highest cost item on an income statement after payroll and so provides excellent opportunities for companies to unlock hidden value, particularly through a back to basics approach.”

On the construction side of the industry, two out of three capital projects are currently over budget or behind schedule, according to Malcolm Bairstow, Ernst & Young’s Global Advisory Services Leader for the real estate and construction sectors, which he adds is a statistic exacerbated by the uncertainty surrounding the economy and the availability of financing. “Yet, deploying risk mitigation or accelerated delivery methods after careful assessment of a project can also reduce risk and cost and bring in projects on time and on budget,” Bairstow adds.

“The real estate industry as a whole is focused on simplicity, transparency, and quality deals. However, when things are going really well, it tends to mask organizational inefficiencies,” says Costello. “Companies which address those issues now and solidify their businesses will be in a much better position to address future risk threats.”

Battered by the U.S. economic recession, the commercial real estate market is struggling to maintain values across all property types and geographic areas, kicking a growing number of investors into survival mode as they painfully watch the value of their existing portfolios decline, according to investors and real estate professionals surveyed as part of the first quarter 2009 PricewaterhouseCoopers Korpacz Real Estate Investor Survey(R).

Real estate investors do not expect a rebound in any of the commercial real estate sectors until well into 2010, according to the survey. In the meantime, property owners are faced with limited financing options, declining tenant demand, rising overall capitalization rates, and deflated confidence. They are looking to protect the value of their existing properties in order to compete and survive in an increasingly challenging environment. To mitigate value loss, landlords are being more proactive about signing tenants to new leases, expansions, and renewal, in some cases offering leasing incentives and lower rental rates. In addition, some are attempting to cut property costs and better position assets in a rapidly growing tenants’ market.

“Tenants are in the driver’s seat, and landlords are in survival mode, trying to preserve revenue streams in one of the harshest ownership environments ever encountered,” said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers. “It will be survival of the fittest going forward, with owners who are able to remain financially strong being better positioned to capitalize on the buying opportunities that are to come.”

Positioning For The Rebound
Although sales have been weak, investors surveyed by PricewaterhouseCoopers expect buying opportunities to emerge in the coming months as commercial loan defaults increase and the number of distressed assets on the market increases. In fact, some investors are preparing for potential acquisitions by boosting their liquidity through de-leveraging, joint venture partnerships and select dispositions of current holdings. However, the bid-ask pricing gap remains wide between buyers and sellers, pricing is opaque because of limited sales activity and financing remains scarce.

Also making acquisitions difficult is the fact that recession conditions in commercial real estate are not expected to ease until 2010 at the earliest for most major property types. One exception to this recovery is the U.S. apartment sector, where demand increased with the rise in foreclosures as many homeowners turned to rental properties as a housing option. As demand for multifamily housing catches up with supply, the apartment sector is expected to emerge from the recession phase of the value cycle ahead of the other sectors, according to the survey

“In recent months, even the most optimistic real estate investors have conceded how challenging today’s economy is for the industry. Their confidence has been battered and it could take years to regain it,” said Susan M. Smith, editor-in-chief of PricewaterhouseCoopers Korpacz Real Estate Investor Survey(R) and a director in the PricewaterhouseCoopers real estate sector services group. “The one certainty they can hold on to is that there will be a recovery, but, until then, they need to determine how to survive under some very tough conditions.”

First Quarter 2009 Sector Highlights
As investment risk has increased, the average overall capitalization rate increased on a quarterly basis for all surveyed markets with the exception of the Washington, DC and Houston office markets. The Pacific Northwest, San Diego and Denver office markets posted the largest quarterly overall cap rate increases in the office sector. Most of the real estate professionals surveyed as part of the Korpacz Real Estate Investor Survey(R) project overall cap rates to increase over the next six months.

Among the significant developments in select sectors during the past quarter:

• Regional malls flatline - Sale transactions have nearly come to a standstill in the national regional mall market, with investors wary of performance and having trouble pricing assets. The average initial-year market rent change assumption dipped to 1.71% this quarter, 92 basis points lower than a year ago and the lowest average ever reported for this market.
• Power centers struggle - With consumers curtailing spending, national power center property owners are struggling to maintain occupancy levels and rental rates. The overall cap rate increased by 41 basis points in the past quarter, to 7.98%, the second straight quarterly increase of at least 40 basis points.
• Office markets crumbling - Demand has weakened for office space, and many traditionally strong markets are seeing vacancy increase. As supply outpaces demand, the average initial-year market rent change rate remains on a downward trend in the office sector, dropping roughly 260 basis points over the past year in the surveyed office markets. Furthermore, property values are expected to drop as much as 30% nationally over the next year in the CBD and suburban office markets.

This quarter’s report also includes a review of the local market outlook for 18 major U.S. office markets including Atlanta, Boston, Charlotte, Chicago, Dallas, Denver, Houston, Los Angeles, Manhattan, Northern Virginia, Pacific Northwest, Philadelphia, Phoenix, San Diego, San Francisco, Southeast Florida, Suburban Maryland, and Washington, DC.

Photo: WGME

Less is more, at least for one innovative coffee shop in the small town of Vassalboro, ME. Owner Donald Crabtree has found a way to bolster business and bring in the customers (and job applicants) during this tough economic spike: topless servers.

More than 150 applicants expressed interest in the 15 positions (10 women and five men), and Crabtree made his selections based primarily on customer service attitudes—not overall physique or previous serving experience. From CNN:

In a town with fewer than 4,500 residents, the topless coffee shop is booming with business. Paul Crabtree, the owner’s brother, describes business so far as “fantastic.”

Many local residents were irate over the idea of combining coffee and nudity. Crabtree, however, saw a profitable business venture.

“I know what people want,” the owner said. “People like nudity, and coffee is profitable. Sure, I’d start a coffee shop, but I’d be out of work in a week.”

The coffee shop jobs are paying off. One waitress received a $100 tip for a cup of coffee, and most of the wait staff make about $30 a table.

“The economy is so bad,” Crabtree said, “Everyone’s losing their homes, their ties, everything they own. People leave here happy and can’t wait to come back. It’s nice to see people smile again.”

Check this link for a video of resident responses.

The shop opened on Monday, February 23, 2009. Patrons are not allowed to touch the waitstaff, and customers must be over the age of 18.

[Photo: Warehouse 727]

Reflecting the troubled U.S. economy and recessionary conditions, the national warehouse market struggled during Q4′08, according to the fourth quarter industrial report from Colliers International, a leading global real estate services firm. Industrial absorption was negative during the October through December period, with occupied space shrinking by 18.1 million square feet (msf). This marked the largest such decline since early 2002.

A confluence of factors - including an increase in delivery of new industrial construction and softened demand for warehouse space - led to a rise in industrial vacancies, which jumped from 8.67% at the end of Q3′08 to 9.06% at the end of Q4. Compared to one year ago, warehouse vacancies are up from 7.90% to the current 9.06%. Market polling results indicated 42 markets reported an increase in vacant industrial space, and only 12 markets showed declining vacancy in 2008.

In terms of new supply, 46.5 msf was completed during Q4 - which was the highest quarterly injection seen in 2008. This brought full year construction to 171.9 msf - compared to 181.2 msf in 2007.

As for Q4 rents, the average warehouse rental rate registered $5.51 per square foot (psf), which was down 1.5% from the third quarter average, and down 3.3% from the year-ago period. Notably, sizeable rent decreases were witnessed in nearly all California, Arizona, Nevada, and Florida markets.

With tightening lending conditions and the anticipation of further demand weakening, builders largely ceased new construction in Q4. Indeed, only 66 msf stood under construction as 2008 drew to a close, compared with 107 msf at the end of Q3′08. Construction activity is at its lowest level since Q2 2004.

This cessation of construction will lead to a much slower growth in industrial inventory in 2009. Only 75 msf is expected to come online for the whole of 2009 - a major drop-off from the 172 msf brought to market in 2008. Indeed, the January ISM (Institute for Supply Management) number coming in at 35.6 truly sets the tone for a grim year ahead for manufacturing.

“Clearly, we’re in the midst of a deepening recession, which continues to take its toll on the industrial sector,” remarked Ross Moore, executive vice president and director of market & economic research at Colliers International. “While the consumer has been in retreat for the past several quarters, the export sector - which up until recently had been a bright spot - is now experiencing the downward trajectory that’s been felt for quite some time in other areas of the economy. That said, the promise of a significant uptick in infrastructure spending, as mandated by the Obama administration, could provide a much needed jolt for the warehouse market.”