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A Post-Recession Urban View

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Kevin Kuzemchak
Senior VP, Asset Management
Shorenstein Properties

As the commercial real estate industry emerges from the recession, location remains a driving force, while the definition of a good location has shifted. New real estate opportunities are emerging that will alter our cities and suburbs.

Evolution and change are inevitable. Over the course of time, every industry, company, and individual will arrive at an Inflection Point, that spot on the continuum where fundamental shifts become essential to realizing forward momentum. At issue is how an Inflection Point is addressed. It is not a place where a company, or person, can afford to remain static. Solutions require strategic and creative planning that will inform development and deployment of new approaches capable of shifting trajectory toward growth and success.

Senior Vice President, Asset Management, for San Francisco-based real estate investment firm Shorenstein Properties, Kevin Kuzemchak is well versed on the risks and shifts attendant to today’s real estate market. He talked with TMG about his industry’s response to its own Inflection Point, and the differences between pre- and post-recession landscapes in Chicago and across the nation.

 

What key indicators differentiate today’s real estate market from its pre-recession counterpart?

Real estate is still about location, but the criteria is changing. Investment philosophy has shifted toward providing a platform where employers can attract tech savvy, urban employees. Businesses want office space in trendy urban locations close to the talent pool. Evaluating what makes a good investment is more granular. We’re looking sub-market by sub-market, neighborhood by neighborhood.

Tenants want efficient and open space that supports their technologies and fosters collaboration. Every industry is transitioning to a more open floor plan where groups are encouraged to share their thoughts in impromptu meetings. Six or seven years ago this kind of collaboration was reserved for technology firms. Today it has become a critical factor in everyone’s decision-making process. Companies across the spectrum are becoming more efficient, utilizing less space for the same head count. An example is law firms, which are reducing office size, adding more open portions to their floor plan and eliminating law libraries and massive file rooms, which have all gone online.

The challenge is in gauging where we’re at on the change spectrum. How many firms have downsized and how many are yet to come? What’s the percentage and how is it affected by job growth? Without job growth, you’d better have a best option to deliver or you’ll be sitting on empty space.

Where does the Chicago market fit into this picture? Is the city ahead of the curve or slower to adopt than either coast?

Chicago has major competitive benefits that it has been slow to realize. New York City was known for financial services and law firms. Boston and San Francisco were tech centers. The business communities in each of these cities rallied to determine what they needed to do to become more diverse and encourage local talent to stay put. Chicago is on track to keep and attract homegrown talent and generate interest among students at nearby Midwest universities. 1871 is a perfect example of the how the city is providing resources and encouragement to young start-ups so they can become a vibrant part of the economy. Chicago also has a lower cost of occupancy than the coasts, which is a major selling point to coastal based firms that need to diversify location.

How is Shorenstein responding nationally? In Chicago?

Shorenstein is identifying assets in primary and secondary cities across the U.S. that are exhibiting growth in viable industries. No one is thinking financial services will be leading growth in the near term. River North Point at 350 N. Orleans (formerly the Apparel Center) in Chicago is the perfect profile of the building we’re targeting. It needs lease up and capital improvements that require our expertise across a full suite of services. It’s not a turnkey situation and is higher on the risk/reward spectrum.

What do you see on the horizon? How will the shift benefit business in the next 3 – 5 years?

First, I expect building image will continue to be subordinate to attracting young talent. Ten years ago we would be focusing only on Class A, high rise office buildings that law firms and investment banks would put on the covers of their brochures. Today, tenants want to be where junior staff is choosing to live. That will require ongoing granular investigation of sub-markets to find those neighborhoods that offer vibrancy 24/7. It’s going to result in additional struggles for suburbs as companies keep moving to the city.

Secondly, the efficiency curve is going to rise until the concept is integrated into all organizations. When lease renewals come up in the next three to five years, businesses will be looking for a lot less space that they can customize.

What do you think we will see in the shorter term?

2013 should be similar to 2012. People will make careful decisions without expecting too much growth in the short term. They may feel more bullish on their prospects and act more quickly in the third and fourth quarters.

Shorenstein doesn’t anticipate large growth in rental rates or huge changes in leased space this year. We haven’t seen sustained employment growth in the office occupying sectors that would generate rent increases signaling a landlord market. Companies may hold off on lease decisions because of genuine concerns about what their businesses will look like. Macro political issues need to be resolved. Organizations with a multi-national presence will be hugely affected by what happens in Europe. Here at home, debate about the debt ceiling and tax issues will have an impact, but the number one driver for demand is clearly employment growth.

Kevin, you’ve obviously enjoyed much success in your career. When you were a kid, what did you want to be when you grew up?

I wanted to play football, but my mom wouldn’t let me. She was concerned that I would get hurt. I would have been a great wide receiver or cornerback. I had a lot of speed like a Wes Welker or Jordy Nelson. In high school, I was as tall as I am now, but I probably weighed about 100 pounds total. Come to think of it, maybe my mom had good reason to be worried. But, I would have been awesome.