The Party's Not Over, Just Piping Down

A look at commercial market trends

September 1, 2000

Industrial and office practitioners around the country are reporting a slowdown, though slight, in the absorption of space among dot-com and other Internet companies—a group that has been one of the demand drivers for both office and industrial space in recent years.

Last spring’s capital market decline slowed the growth of Internet companies, resulting in less growth in space absorption by those tenants.

But don’t fret. The Internet economy is just beginning its long-term run-up. That was the clear message sent in June to more than 2,500 people attending Realcomm 2000, the technology and commercial real estate conference produced by the Society of Industrial and Office REALTORS® and The Jamesan Group.

What the market is experiencing now is the pause, however wrenching for dot-com shareholders, that will allow the new economy to regroup on more sustainable footing. The commercial absorption forecast for the next several years sees a few percentage points of decline in office and industrial space take-down. But it shouldn’t be catastrophic.

One reason steady absorption will continue is that telecommunications companies are taking up the dot-com slack. Telecoms of all stripes are entering many markets with a huge appetite for space as they lay down the backbone for the information age, installing switches and servers and setting up back offices and call centers.

In Columbia, S.C., for example, the newly merged Verizon wireless company (combining Bell Atlantic and GTE) is negotiating to double the premerger 70,000 square feet the company had taken last fall in an upscale but struggling shopping mall. Verizon is using its portion of the shopping center as a call center, but shoppers don’t even know they’re sharing the building.

How can real estate professionals best serve telecom tenants? A recent meeting of SIOR chapter leaders outlined the needs of telecoms and dot-coms.

Here’s what they reported:

  • Like dot-coms, telecoms need extensive broadband, fiber-optic wiring and backup power sources to keep their networks online, no matter what.
  • Dot-coms want short lease terms with “out clauses” of one, two, or three years, but telecom tenants want longer leases--10 years is common.
  • Telecoms are accustomed to paying for build-outs that incur substantial cost but add no value to a property, something it often takes some educating to get dot-coms to do.
  • Telecoms rarely need letters of credit or advance rental payments to overcome the lack of credit history common among Internet start-ups.
  • Telecom tenants are so eager to secure long-term leases that they’ve begun reviving attornment agreements, whereby the tenant’s lease survives any eventuality, including landlord bankruptcy, foreclosure, and sale of the property.

Although the new economy is still a relatively small part of the $8 trillion U.S. gross domestic product, its impact is widespread. In 1999, Internet-related employment totaled 2.48 million. That’s at least double the workers in the real estate industry, according to the Center for Research in Electronic Commerce at the University of Texas at Austin.

A commercial real estate professional who commits to staying abreast of changes in the field will be in the best position to capitalize on this growing market.

Stanland, CCIM, SIOR, is president and chairman of the board of the Society of Industrial and Office REALTORS®. He’s also vice president of office & industrial leasing for Edens & Avant Inc., Columbia, S.C.

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