After their $68 billion acquisition of rival Wyeth Pharmaceuticals, Pfizer corporate real estate executives are engaged in a massive integration and portfolio optimization task.  Certainly many properties from both organizations are under strategic review, but this one undoubtedly involves the most external scrutiny.

Pfizer was not a party to the suit, and in fact is not even located strictly on the land at issue in the Kelo case.  But its prospective presence on 26 acres nearby was a critical and controversial element in the seminal real estate development battle. 

State and local politicians and economic development officials attracted Pfizer with a 10-year, 80% tax abatement on their parcel at 50 Pequot Ave, New London, CT.  Meanwhile, they used the company as the raison d’entre for an “urban village” revitalization plan in front of neighboring Fort Trumbull State Park, involving retail, multi-family residential, and hotel uses.  That plan called for existing properties to be forcibly taken by the city, leveled, then transferred to the site’s quasi-public developer, New London Development Corporation. 

As Pfizer completed construction on their $294 million facility in 2001, residents on the mixed-use site sued the city to prevent the completion of the project.  The city pursued the case to the High Court, and ultimately prevailed in a 5-4 decision interpreting the Fifth Amendment concept of “public use”, which was widely criticized. 

Subsequently, congress and 43 states have created various laws prohibiting or limiting the use of eminent domain for strictly economic development reasons and/or transfer to private developers.  New London’s “urban village” project has mostly failed to materialize, and the land between Shaw Cove and Greens Harbor where a neighborhood once stood is a splotchy mix of grass and dirt.  Now, Pfizer’s world-class office building next door will be vacant by 2011, just when the tax incentives run out.

In a front-page New York Times article, former residents such as Susette Kelo and Michael Cristofaro delivered what may be their final punches with “I told you so” spirited interviews.  Robert M. Pero, the incoming mayor, who fought for the project as a city councilman, also appears to be fuming that Pfizer did not consult or notify the city before announcing the move.

In the past few weeks, months of speculation are culminating as Pfizer has announced a number of closings – and affirmed the longevity – of various facilities throughout the world.  In other municipalities, local politicians are proactively approaching the company to discuss their plans and pitch the case to stay-put.  The US pharmaceutical industry is significantly clustered in a line between southern Connecticut and southeastern Pennsylvania.  Pfizer’s headquarters are in New York City, and Wyeth was based in Collegeville, Pennsylvania. 

Geographic clustering creates strong incentives and relatively straightforward opportunities to downsize the corporate real estate portfolio.  GlobeSt.com reported that Pfizer plans to reduce its global R&D footprint by 35%.  Functions and workgroups are being shuffled among sites throughout Pennsylvania, New Jersey, New York, and Connecticut.  Realignment will also affect properties in North Carolina, the United Kingdom, and elsewhere, but it seems these will not be as rapid.  And certainly none will be as dramatic as New London.

At present, it appears that Integrust is essentially a one-man shop with several strategic alliances.  According to LaFavre’s CCIM Professional Profile, he has been involved in commercial real estate for 20 years, starting with The Trammel Crow Company in 1989.  He joined Colliers Turley Martin Tucker in October 2004, after ten years with United Properties, where he was Vice President of Corporate Real Estate Services. 

LaFavre is also a former the Co-Chair of CoreNet Global’s Midwest Chapter, and former President of the Society of Industrial and Office Realtors (SIOR) Mid-Continent Chapter.  He holds an MBA with Finance concentration from the University of Minnesota (1991), a BS in Marketing from Oral Roberts University, and several professional designations.

Integrust Advisory Group may be contacted via phone at 612-605-8467 or mail to 3116 Chelsea Ct, Burnsville, MN, 55337.

• 4% of 5,102 job postings were for corporate RE positions (see Chart 08)
• 3% of 101 job postings were for corporate RE “C-level” positions (see Chart 19)

Of course we’ve always known that in the big universe of commercial real estate, corporate “insiders” (users) represent a small group.  Non-user functions such as asset management, development, property management, advisory services (including brokerage), and finance account for the majority of positions in the sector. 

Paraphrasing that old maxim that “the tide affects all boats”, we are more concerned about the overall trend in advertised positions, which plummeted from 1,085 openings in June to 591 in August.  While data is not yet available, it seems plausible to assume that September and October were even worse.  Moreover, 45% of survey participants expected hiring activity to decrease going forward, compared to 5% in the previous period. 

The survey claims the sample data covered “16.9% of all professional, commercial real estate jobs available in the U.S. in 2008″ (page 19).  So very rough extrapolation would tell us that in August 2008 there were perhaps 3,500 open CRE positions throughout the nation, only 140 of which were in corporate real estate.  A small pond indeed, with no rain in site!

Comparing the 2008 and 2007 periods, hot regions such as New York and California have contracted the most in relative share of the national job market.  Alas, a silver lining appears with job growth in Texas, Florida, and a few other unconventional areas.  (Chart 3)  The takeaway for many: start considering geographic flexibility.

The survey provides other nuggets of wisdom, including applicants’ geographic preferences, supply/demand analysis by job function, compensation dynamics, and the value of post-graduate education.

For corporate real estate job seekers, CRE-Insights has found that SelectLeaders is among the best specialized resources, along with CoreNet Global’s Career Services area.  SelectLeaders is a subsidiary of Equinox Partners, a retained executive search firm focused exclusively on the real estate industry.  Equinox CEO Anthony J. LoPinto also publishes a regular column on GlobeSt.com called Executive Watch, which highlights openings, new hires, and promotions, and should be considered required reading for any CRE professional who is proactively managing their career.

Another search firm with solid corporate real estate credentials (and strong presence in those growing regions) is Joseph Chris Partners.

In its Autumn 2008 Survey of CRE managers, London-based GVA Grimley reports significant pessimism and plans for portfolio contraction across the board, particularly in leisure (hotels & restaurants), retail, and financial services sectors. 

Among the findings, personnel cuts have left 50% of the corporate real estate users with surplus property, and 40% sitting on completely vacant sites.  Rather than hold the space for better times (e.g. subleasing), a strong C-level emphasis on cost control and profitability has over half of all firms aiming to downsize their portfolios by up to 25% in the coming months, mainly through lease terminations (“lease breaks” to the Brits) and non-renewals.  The survey was conducted largely before the dramatic economic problems of the past month.

The complete executive summary points out:

• Business confidence has continued to fall since the Winter 2007 survey.

• Significant job losses are expected across many sectors as output expectations have weakened.

• Occupier demand for property has eased in the last six months and looks set to fall in the next six months.

• The majority of sectors are reporting significant effects from the credit squeeze and the economic slowdown.

• Over half of Corporate Occupiers would ideally shed up to a quarter of their leases.

• Corporate Occupiers are intending to exercise a significant number of breaks and not renew leases expiries.

• Half of all Corporate Occupiers are carrying surplus property, and over three quarters of those have vacant property.

• The changes to vacant rates are having the biggest impact on medium size firms and those in the engineering and transport sectors.

• Business is being driven by profitability and reducing costs.

• Property decision making is based on cost reduction and the contraction or expansion of the business.

Although the report contained nary a positive remark, there is always the implicit fact that “Negative Absorption Means Opportunity” for corporate real estate professionals, as discussed here a short time ago.  For those who are poised to grow (or just renew), now is the time to get out there, push great lease deals, and “go long”.

The Confederation of British Industry (CBI) co-publishes the survey with GVA Grimley.

On Friday, October 3rd, I spent several hours with the executive team of a privately-held financial services firm in New York.  It seems clear that – provided things don’t become much worse – the smaller, nimble, financially healthy firms are in a great position to take advantage of the recent economic events.  There is a wealth of talent “on the street” (quite literally), and these firms will be able to establish and grow new teams, groups, and divisions with relative ease through the next year or so.

With that shift in personnel comes along the shift in office space needs.  Large firms like Barclays (Lehman Brothers), JPMorgan Chase (Bear Stearns), Bank of America (Merrill Lynch), and others will be trimming their office portfolios drastically in the near future, from New York to San Francisco and everywhere between.  The smaller firms of today, who will be aquiring some of the new “free agents”, will be looking to add office space as well.  Still, between the frictional period and more efficent growth by small firms, we are undoubtedly up for a solid run of net negative absorption.  (Refresher definition: Negative absorption occurs when the quantity of space becoming available in the market (through lease terminations and new construction) exceeds the quantity of space being taken off the market (through new leases and renewals)).  Negative absorption, essentially, leads to increased vacancy rates.

In fact, also on Friday, Alex Frangos of The Wall Street Journal reported that:

Nationwide, rents on office properties — including landlord concessions and discounts — were flat in the third quarter, the worst result for office-property owners since late 2004 — when commercial real estate began to emerge from a prolonged slump, according to Reis Inc., a New York real-estate research firm.

Rent stagnation and increasing vacancies put “strain on borrowers to make payments on mortgages,” said Sam Chandan, Reis’s chief economist. “It hasn’t shown up yet in terms of delinquency rates, but this is clearly an issue we need to be very attentive to,” he said. Almost every type of financial institution, from community banks to Wall Street, lends to office-building owners.

The office market in suburban areas and smaller cities has been declining throughout the year. But now, with a recession looking inevitable, the pain is spreading to most large metropolitan areas. Previously immune cities such as San Francisco and Boston saw vacancy-rate increases in the third quarter. San Francisco’s vacancy rate rose 0.6 percentage point to 9.9% in the quarter. Boston’s rate rose 0.8 percentage point to 11.7%.

Of the 79 markets Reis tracks, vacancy rates increased in 66. Rents declined or were flat in 40.

- Frangos, Alex; “Office Space Is Emptying Out“; The Wall Street Journal; 03 Oct 2008; A2

It’s clear that negative absorption has already taken hold, and it will likely continue as the prevailing theme in office transactions for at least the next 9-18 months. 

While it is unfortunate for owners and landlords, increasing vacancy rates mean great opportunities for savvy tenants and corporate users.  The pendelum swings in this direction for about a year or two, every 5-8 years.  Now is the time to become increasingly proactive and aggressive about negotiating early lease renewals or extensions, and entering into new long-term leases.  Now is the time to push for higher tenant improvement allowances, and longer free/abated rent periods. 

Smart deals completed now will look even smarter in 3 years, and when it’s time to renew in 5 or 7, cyclical odds are that we may be in the next economic dip!