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August 2008 |
Bogue Miller, David Rubenstein
Julie Pollak & April Farner
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The Other Bear in the Market
 There is no hiding the impact Bear Stearns' break
down has had on Wall Street. Nationally, it added significant weight to an already uneasy economic infrastructure. Unfortunately, additional downward market pressure will be added by the empty bricks and mortar the investment bank's
corporate offices will send to the market.
While the buyout proceedings have lost some inertia since the initial announcement, landlords Manhattan-wide are bracing for a quick spike to their city's vacancy rate. The undertow will soon stir up turbulence in other cities that house
Bear Stearns, especially those that have a national influence on office space trends. According to Reuters, " … the steel husk of an unfinished tower is a reminder of how Bear Stearns had planned to consolidate its London staff into one
building."
Further complicating the issue is how JPMorgan's corporate real estate strategy gels with the floorplans, leases and occupancy practices of Bear Stearns. In Manhattan, JPMorgan has already announced plans to move in to space Bear owns,
leaving empty offices they had planned to occupy before the takeover. Quite simply, vacancies begin to jump from building to building, leaving the market uneasy about where available space will turn up next.
Other major markets have been hurt by a wide variety of corporate downsizing, especially by firms in the residential mortgage, financial services and home construction industries. When large users of space suddenly vacate, the entire real
estate market, which includes companies considering relocation, takes notice. With unexpected competitors now in the mix that could offer reduced price subleases with well-appointed space and capital equipment in place, the game completely
changes. Landlords have to compete harder to win back potential tenants, rolling out marketing tactics that typically translate into rental rate reductions, aggressive concessions and in the end, a little-more frantic real estate market.
It's important to communicate with your tenant representative to explore the type of alternatives that may arise as a result of a larger user's quick decline. Great deals can often be discovered as affordable vacancies pop-up in places you
may have previously dismissed. Keep your radar up and trust your tenant rep for news about the market, especially when conditions appear unpredictable.
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Bonus Depreciation in the New Economic Stimulus Package
 One of the more contentious efforts on the part of
the federal government to bolster our nation's economic wherewithal is the economic stimulus package that is sending payments to millions of Americans. While on the surface the plan appears as simple as a financial tetanus shot for the
country, it actually has several layers of business-driven stimuli for commercial tenants.
One of the package's most appealing incentives will enable commercial tenants to write off 50% of first-year construction costs to a space provided the work is completed by the end of the year. Typically, non-residential leasehold
improvements are depreciated over 39 years, allowing depreciation write-offs of roughly 2.56% of costs per year. Under this plan, first-year depreciation increases to as much as 51.3%, the remainder of which can be spread out over just 15
years.
Additionally, the plan allows for businesses to write off 50% of their investment in capital equipment for the year it is put into service. Normally, the depreciation schedule for this sort of property is 20 years. Now, a significant
portion of the investment can be re-captured in tax savings in the same year it's purchased.
A company should not consider relocating for the tax advantages alone but for those with a relocation plan underway, it could provide incentive to take down more space to accommodate future expansion. It should also give a company a reason
to consider first generation space that can better accommodate a custom space plan. Landlords can take advantage of the plan by offering higher tenant improvement allowances.
A similar plan was put into place shortly after 9-11. It started as a 30% "bonus depreciation" in 2002's economic stimulus act but ramped up to 50% as part of the U.S. Jobs and Growth Tax Relief Reconciliation Act of 2003. If the current
bonus language is similar to 2003's, then it's likely that annual depreciation deductions after the bonus year will be reduced to take the bonus into account.
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Emissions Trading is Picking Up Steam
 Not unlike carbon offsets, emissions trading is a
process by which companies pay to improve the environment. With an already firm foothold in Europe, it is time this important green strategy finds a place here in the states.
Emissions trading involves corporate entities, often industrial in nature, that are given a limit by a governing body (not necessarily a public, elected assembly) for how much of a particular pollutant, or greenhouse gas, they're allowed
to emit. That level is granted to a company in the form of an allowance, or credit. Should that cap be breached, the offending company must purchase credits from a company that is polluting less and thus, has to trade credits.
The process encourages groups on both ends to stay focused on reducing the harmful output that many business processes create. Those that do are rewarded. However, unlike carbon offsetting, which is voluntary, emissions trading is
regulated once a company is part of a trading organization.
To date, nine U.S. states have established legislation to monitor emissions and there are groups ramping up trading programs, such as the Chicago Climate Exchange, which has been active since 2002. Still, the European Union is far ahead of
the states in this endeavor, despite how well our country has responded to the climate crisis.
Companies looking to get involved in emissions trading will be viewed as a leader in the green movement. Additionally, they'll become a part of what is expected to be a substantial global business effort and in years to come, potentially a
vital financial market.
Given the relative immaturity of the emissions market coupled with the rapid pace at which companies are trying to adopt green strategies, debate over the effectiveness of emissions trading is to be expected. Opponents feel that the
emissions market is a cop-out for heavy polluters. Nevertheless, it's a collective action toward the repair of a disintegrating climateand that's not all bad.
For companies seeking involvement or just more information about emissions trading, the International Emissions Trading Association is a good start.
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