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Will a vacant factory rescue Detroit small businesses?

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What would you rather have — a gargantuan, vacant hulk of a factory complex or a thriving artist colony /small business incubator? In Detroit, with 23% unemployment (Michigan as a state is just under 14% right now), the city is a veritable desert of old factories and abandoned buildings.

Time Magazine did an entire series based on the city last year, painting it as a sinking ship being abandoned by residents and business alike. Check out the magazine’s Detroit Blog: One Year One City, and a stunning photoessay titled The Remains of Detroit for a sobering picture.

Yet one entrepreneur has stumbled into an opportunity he didn’t predict, as outlined in Fortune’s July 5, 2010 article “Factory of Dreams”.

Giving a home to artists and start-ups

Dennis Kefalinos purchased the 2.2 million square foot Russell Industrial Complex for $1.5 million in 2003, gambling manufacturing or industrial tenants would appear. They haven’t.

But seven years later, he has filled 25% of the factory with artists and small businesses who pay $550 a month, heat included, for 1000-square-foot studios / shops. And he didn’t pursue this angle. The tenants came to him, one at a time, at a rate now of one new tenant a week.

He’s a long way from 100% capacity, but here’s an excellent example of how we have to start from scratch and not market a property for one particular use. Market your listings as “flex space / office / retail” rather than just one label, and who knows what will come out of the woodwork!

Flickr photo courtesy Bob Jagendorf

Erica Ramus is the Broker/Owner of Ramus Realty Group in Pottsville, PA. She also teaches real estate licensing courses at Penn State Schuylkill and is extremely active in her community, especially the Rotary Club of Pottsville and the Schuylkill Chamber of Commerce. Her background is writing, marketing and publishing, and she is the founder of Schuylkill Living Magazine, the area's regional publication. She lives near Pottsville with her husband and two teenage sons, and an occasional exchange student passing thru who needs a place to stay.

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15 Comments

15 Comments

  1. Dunes

    July 11, 2010 at 10:42 pm

    Interesting Article..Thanks

    The concept discussed is one I’ve seen and I’m sure most people have seen used and applied in many Cities/Towns/Rural Area…Areas with vacated Industrial Parks or Empty Downtown Buildings because the local Industry dies (Fishing/Logging/whatever) so you have a group of people (Like Artists) who before could not afford to Buy a Home & a Studio &…all of a sudden seeing Possibilities.

    Then the Town ect. changes, needs this or that to support this or that, the Artists have kids so schools, retired people say “Nice quiet place to live” and on and on..

    I could give you a list of many places this has happened successfully as I’m sure many others can..It’s one of the Main things many ACTUAL Investors look for…Potential down the line!!!!!

    Most Real Investors are NOT Flip and Flop minded.. those are the Late night TV Infomercial people or people building enough Cash Reserve/Credit/Expertise to find the Communities where they are the Money & Knowledge behind the scenes helping to create an environment/Community like they think one should be, which increases the value of their investments while also enjoying the Town-Father/Shaker and Mover/They are…Benefits. It’s not usually just about Get Rich Quick, it’s get Rich, Stay Rich and be Somebody…Status/Respect/Personal Satisfaction/Pride in accomplishment

    More always get’s done outside the Box than Inside the Box….You know and have Proven that in your career. What you are discussing in your article IMO is the type of Changes that will cure the Economy and RE Market…Always did before 😉

    Things just have to get cheap enough for a New Generation of people with Vision to be able to afford and have confidence/support to Buy the Buildings and Homes to live in, remodel, sell, buy a bigger better, remodel, sell.
    .Perhaps the Scenario sounds familiar..the times in the Past when Ideas had value with Lenders/Agents or at least more value than Formulas and “it’s how we do things”

  2. Erica Ramus

    July 12, 2010 at 7:31 am

    I am glad you enjoyed the article, Dunes. Yes, I am used to “outside the box” thinking with how I run my business, too. You cannot get stuck in “but that’s the way we always do it” mentality.

  3. Dunes

    July 12, 2010 at 10:55 pm

    Erica

    Based on Reading some of your Contributions here, your Tweets for awhile, comments elsewhere and looking at your Site, how it’s set up, your approach ect., has caused me to come to the Conclusion (May be right may be wrong but it’s my conclusion 😉 that you are a Thinker…

    By that I mean the Kind of person who wishes to be Good at what they do and wants to do what they do so they Watch, listen, space out thinking about, notice that when others did this it didn’t work but if I change this part …There’s more but I think ya get my Drift lol, and I would bet your Business model, goals ect. are more in sync with who you really are than what others suggest it should be…(I think Jay T is that way and a good number of other Pros who are actually Pros IMO)

    So I am honestly interested, eager and would be honored if you would share your honest opinion with me…

    Thinking outside the Box…These RE sites,,ActiveRain, Trulia, Zilliow, this one ect are in reality children, newborns with little history, experience, new concepts or approaches using a fairly new media. Those experts who advise, Gurus who suggest, PR people who PR are all as new at this media as anyone else yet many shout “How High” when they say Jump IMO

    So get to it Dunes, whatta do ya what to ask????

    Erica, what is your opinion of how your Industry/Agents are using the Internet? They proclaim their expertise in Social Media, they announce their positions that this is good or that is the way and declare their expertise (Based on a RE Agent is obviously more qualified than those who are not, which puzzles me since it’s my experience most 12 year olds know more about the Internet than we do..Research, Web sites, they do it Blindfolded)…so do 20 year olds, 25 year olds and they are the Buyers/Sellers for the next period of YEARS…
    Who’s the Social Media Experts?

    In your opinion is there some message, image, perception, information Agents are trying to get out to the Public or is it mostly a Fishing pond for most..leads leads leads..gonna get those leads with Good time to Buy, Interest rates are low (Same spiel from many Agents since 2006, same Press release and talking points from NAR since 2006, it’s turned into the Boy who cried Wolf to most Non-Pros/Consumers/the Public IMO)

    I ask because if Image, Credibility and Trust are the Things which need to be developed or restored for the Pond to actually have any Fish then How is what is displayed by the self-proclaimed RE Social Media Experts & seen by the average person using the internet suppose to help create, build or restore Image, Credibility or Trust….How is anything presented “Thinking outside the Box”? How can ANY of this approach be Beneficial?

    Your article was an example of thinking “Long Term” to turn around a disastrous situation/market, yet the Social Media approach I see seems to be diametrically opposed to any sort of “Long Term” fix for the Industry, Agents, Consumers or Market..

    I would sincerely appreciate hearing your Opinion…When it Comes to Social Media/Internet …..how/in what way are Agents “Thinking outside the Box” or using it to build Credibility, Image or Trust…

    Thanks and I do apologize if this seems odd or off-topic or a hi-jacking but I Promise ya it is nothing more than me deciding I would appreciate hearing YOUR Opinion..

  4. Erica Ramus

    July 22, 2010 at 9:47 am

    Dunes — Sorry for the delay in response here. I think for many agents Social Media is indeed a fishing pond! Especially with the use of twitter and facebook, they are out there fishing for buyers and sellers. It’s not much different than heading out to the local chamber of commerce mixer and passing out business cards. It’s just a virtual mixer.

    Many many agents don’t GET IT. It is about building long term relationships and trust. The trust factor is missing in our industry (not with all, but with many). As a broker, I hear all the time how an agent / bad transaction soured the consumer on our whole industry. One or two bad apples do spoil the bunch. And when an agent acts unprofessional or unethical or breaks a law it harms all of us.

    I think sites like Trulia, ActiveRain, and yes AgentGenius are great for bringing “minds” together to discuss our industry. Consumers ask questions, and we can help / answer them.

    What I hate to see is the agents who obviously have nothing to do, “fishing” online on sites like Trulia, answering questions that are out of their scope of expertise. Many are out there just fishing for referrals. “I am not an agent in California and I don’t know enough about your situation to answer, but here is my opinion.” Or even worse, “I am not an agent in your area but I know one. Give me your details and I’ll send you to a great agent in your area [and take a referral fee for making a call].”

    You only get credibility and trust when you earn it. It is not a short term fix, but you have to do this long term. I recently helped a client build a blog and am trying to drive business to him (he is a home builder). Less than 4 weeks ago we built his web presence into a blog, and facebook page. He is doing great. But nobody has called to “order a home” yet. It takes TIME. He had 4 fans a month ago. Now he has 40 people reading his blog and on facebook. Hopefully in another month that might be 100 people. And in a few months, the leads will start coming in.

    Too many agents put a sign on a house and an ad in a print journal and think they are “marketing” it. That’s not good enough these days. And neither is building a facebook fan page and watching it wither out there with no interaction. Or writing a blog nobody reads. You have to work it, drive traffic to it, and constantly come up with new ways to promote your listings. There is no quick fix. And if it takes months and months, unfortunately, many agents will be long gone by then.

    It’s like anything… this business is WORK. The harder you work, the “luckier” you will get!

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Commercial Real Estate

Pace of commercial real estate improvement is slowing

(Commercial Real Estate) The commercial real estate sector has improved substantially since the economy crashed, but is now showing signs of slowing, but data does not indicate lost ground.

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commercial real estate

commercial real estate

Commercial real estate outlook is positive

According to the National Association of Realtors’ (NAR) quarterly forecast, commercial real estate is continuing to improve, but the pace is slowing.

Dr. Lawrence Yun, NAR chief economist, said that fundamentals are still on an uptrend. “Growth in commercial real estate sectors continues at a moderate pace from a very slow pace of absorption, despite job additions to the economy. Companies appear hesitant to add new space,” he said.

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“Office demand is expected to see only slow and gradual improvement,” Dr. Yun added. “Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space. Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners.”

Forecasting the future

Overall, national vacancy rates in the coming year are forecast to drop 0.2 percentage point in the office sector (the sector with the worst vacancy rates) to 15.6 percent in the first quarter of 2015.

Vacancy rates are projected to fall 0.1 point in industrial to 8.9 percent, and 0.3 point for retail real estate to 9.9 percent.

With rising apartment construction, the average multifamily vacancy rate will edge up 0.1 percent to 4.1 percent, but this sector continues to experience the tightest availability and strongest rent growth of all the commercial sectors.

Rental rates for various sectors

Office rents are projected to increase 2.3 percent in 2014 and 3.2 percent next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 44.6 million square feet this year and 50.0 million in 2015.

Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015. Net absorption of industrial space nationally is seen at 106.1 million square feet in 2014 and 110.6 million next year.

Average retail rents are forecast to rise 2.0 percent in 2014 and 2.3 percent next year. Net absorption of retail space is likely to total 14.6 million square feet this year and 20.9 million in 2015.

Average apartment rents are projected to rise 4.3 percent this year and 3.5 percent in 2015. Multifamily net absorption is expected to total 204,900 units in 2014 and 112,500 next year.

Regional performance varies

The markets with the lowest office vacancy rates in the first quarter are New York City, with a vacancy rate of 9.5 percent; Washington, D.C., at 10.2 percent; Little Rock, Ark., 11.6 percent; Birmingham, Ala., 12.7 percent; and San Francisco and Nashville, Tenn., at 12.8 percent each.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.7 percent; Los Angeles, 3.8 percent; Miami, 5.8 percent; Seattle at 5.9 percent; and San Riverside/Bernardino, Calif., at 6.1 percent.

Markets with the lowest retail vacancy rates include San Francisco, at 3.1 percent; Fairfield County, Conn., 3.8 percent; Long Island, N.Y., 4.8 percent; San Jose, Calif., 5.2 percent; and Northern New Jersey and Orange County, Calif., at 5.3 percent each.

Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.1 percent; Minneapolis and New York City, 2.3 percent; and Oakland-East Bay, Calif., and San Diego, at 2.5 percent each.

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Commercial Real Estate

Should you buy or lease office space? 5 questions to consider

When considering whether you should lease your office space or buy, an industry expert outlines the questions you should ask yourself.

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office leadership

office leadership

Should you buy or lease an office space?

Many people set up shop and lease office space, assuming this is their best, and often only option, but there are some instances where buying office space is a better option. Many blindly make this decision based on a gut feeling, and we’re not saying that is a bad thing, we’re saying that in addition to that instinct, these five questions should be asked when considering whether you should lease or buy an office space.

Stan Snipes, senior advisor, Sperry Van Ness Investec Realty of Nashville notes that the two options depend on several variables, as he outlines below:

1. Is your business well-established?

If your business is still in the startup phase, I rarely recommend buying. During the next 5 to 10 years you’ll experience employee count fluctuations, client and customer oscillations and even business direction and strategy adjustments. That is, you’ll need to be flexible, not tied to a certain space. Additionally, any leftover capital should most likely be recycled back into your budding startup. You don’t want to stretch yourself too thin.

The only exception that applies some of the time — not every time — is if your startup is in the technology space. Oftentimes tech employees can work remotely, or the technology is automated and won’t require more employees in the future. Additionally, clients of many tech startups can successfully access the company’s offering without visiting a physical office space.

2. Will you endanger your business with a property purchase?

Yes, buying can be a great investment and add a source of revenue, but even well-established business owners need to think about the stress that buying a property can put on their bottom line. Oftentimes your time and money is best spent on what you do best, running your enterprise. If buying means you won’t be able to focus essential resources to your first priority, your business, then you might want to hold off on buying.

Further, because commercial real estate can be a great investment, business owners are sometimes so eager to get in the game that they sell off portions of their business to finance the purchase. This is a bad idea. You should not let real estate decisions determine how you run your business. You’ve worked long and hard to build a successful company — don’t give it away. Another deal with always come along.

3. Do you have heavy, difficult-to-move equipment?

If you have machinery or specialized equipment that make it difficult for you to move, buying may be a great option for you. Two primary reasons: 1.) Lugging dense equipment from leased space to leased space is annoying, cumbersome and costly.

Plus, you increase the chances of damaging it every time you move. 2.) When a landlord knows it’s difficult for you to relocate, he or she is holding the cards when it’s time to renew your lease. If your lease doesn’t have a stipulation to remediate this, leasing office space will cost you more money than it should. More often than not, buying a custom space for your specialized equipment is the way to go.

4. Does your location affect employees or clients?

If attracting and maintaining top-notch employees means securing office space in your city’s prime business district, finding the perfect space to buy may be difficult. Why? Prime business districts usually have lower vacancy rates, which typically means higher prices plus fewer properties to choose from. Anytime you’re limited to a narrow location, you risk not landing the best deal. This doesn’t mean don’t buy, just understand what you’re up against from the onset.

The other issue you may face in buying location-specific space is when your customers or clients depend on your position for convenience. This is a challenge when and if your city’s submarkets are in transition. The trendy spot of the last five years, may not be in vogue five years from now. A lease allows flexibility to move where your customer and clients need you to be.

5. Are you prepared to be a landlord?

There’s a lot of maintenance that goes along with owning a building. Will you have the ability to hire a maintenance crew or will you tend the bathrooms, burnt out light bulbs and overflowing trash bins yourself?

Furthermore, many landlords have easy access to financing that could benefit you in the form of a tenant improvement package. Even though you may have capital to buy your building, can you afford to build it out the way you want to? The cost of ownership is sometimes underestimated. Make sure you’ve considered all of the possible expenses that go along with buying your office space.

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Commercial Real Estate

Commercial real estate improving modestly, little change to come

As commercial real estate improves across all sectors, the gains have been modest and NAR predicts they will continue to inch forward.

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detroit

Commercial real estate sector is improving

According to the National Association of Realtors’ (NAR) quarterly commercial real estate forecast, commercial real estate is improving modestly, with little change seen for the near future. Dr. Lawrence Yun, NAR’s Chief Economist said in a statement, “Jobs are the key driver for commercial real estate, and the accumulation of 7 million net new jobs from the low point a few years ago is steadily showing up as demand for leasing and purchases of properties,” he said. “But the difficulty of accessing loans remains a hindrance to a faster recovery.”

NAR reports that leasing activity rose 2.0 percent in the third quarter compared to the second, and sales levels are higher than a year ago.

Yun said there have been some shifts in commercial purchases. “Investors have been looking for better yields, and have found good potential in smaller commercial properties, notably in secondary and tertiary markets. Sales of commercial properties costing less than $2.5 million in the third quarter were 11 percent above a year ago, while prices for smaller properties were 4 percent above the third quarter of 2012.”

Commercial investment in properties costing more than $2.5 million rose 26 percent from a year ago, while prices for large properties were 9 percent above the third quarter of 2012.

National vacancy rates over the coming year are forecast to decline 0.2 percentage point in the office market, 0.6 point in industrial, and 0.5 point for retail real estate. The average multifamily vacancy rate will edge up 0.1 percent, but that sector continues to see the tightest availability and biggest rent increases.

Retail vacancy rates should be going down

Retail vacancy rates are forecast to decline from 10.4 percent in the fourth quarter of this year to 9.9 percent in the fourth quarter of 2014. Average retail rents should increase 1.4 percent in 2013 and 2.2 percent next year. Net absorption of retail space is projected at 11.0 million square feet in 2013 and 18.1 million next year.

Multifamily construction will meet demand

Multifamily Markets
The apartment rental market – multifamily housing – is likely to see vacancy rates edge up 0.1 percentage point from 3.9 percent in the fourth quarter to 4.0 percent in the fourth quarter of 2014, with new construction helping to meet higher demand. Average apartment rents are forecast to rise 4.0 percent this year and 4.3 percent in 2014. Multifamily net absorption is projected to total 239,400 units in 2013 and 211,300 next year.

Office rents should be going up

Vacancy rates in the office sector are expected to decline from a projected 15.6 percent in the fourth quarter to 15.4 percent in the fourth quarter of 2014. Office rents should increase 2.4 percent this year and 2.5 percent in 2014. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is seen at 32.2 million square feet this year and 46.1 million in 2014.

Industrial vacancies on the decline

Industrial vacancy rates are likely to fall from 9.2 percent in the fourth quarter of this year to 8.6 percent in the fourth quarter of 2014. Annual industrial rents are expected to rise 2.3 percent this year and 2.5 percent in 2014. Net absorption of industrial space nationally is anticipated at 97.0 million square feet in 2013 and 104.9 million next year.

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