Will "Goldilocks" Economy Continue?

Everyone hopes the economy won't grow too fast, causing inflation, or too slow, leading to unemployment. Lately many economists note the U.S. economy has been growing just right, and refer to it as the Goldilocks economy. Steady, balanced growth also makes lease rates more predictable and gives the market a chance to balance the supply and demand of office space.

The Federal Reserve Bank prefers the term "neutral" over "Goldilocks." With inflation staying low (around 2%) while the economy keeps putting unused capacity back to work, the Fed plans to keep raising short-term interest rates to a level between 3% and 5% that neither stimulates nor restrains economic growth.

But things could heat up anyway. Businesses are signaling more confidence by their spending. The Commerce Department reports that new orders for manufactured durable goods such as cars, computers and machinery were up 1.4% in June and up 6.8% compared to a year ago. Overall business investment grew at a 4.1% annual rate in the first quarter spite of uncertainty about oil prices. Economic growth predictions for the second half of the year are being increased from around 3.5% to 4% or more.

Knowing that things are improving, the continued decline in office vacancy rates seems likely to continue, perhaps even reaching by the end of 2007 its own Goldilocks level of 10-12%, where the rule of thumb is that rental rate increases will match inflation. No matter what the trend, our office keeps an eye on conditions market by market and building by building to secure clients the best lease deals available.

Getting to Know Triple Net

Many people have the general understanding that the term "triple net" lease means the tenant is responsible for the taxes, insurance, maintenance and repairs. But there is often not a precise agreed-upon definition of a triple net lease, also called "NNN," so each one should be examined by a trained tenant representative.

In negotiating a triple net lease, for instance, a common source of disputes concerns the responsibility for structural repairs and replacements, particularly with respect to roofs, driveways and parking lots. Some landlords consider a lease that provides for landlord obligations to not be a net lease. They think of a triple net lease as a "bond" or "hell or high water" lease (in that the tenant pays rent come hell or high water) where the landlord has no obligation beyond cashing the monthly check. Most commonly this would be found in a sale leaseback, synthetic lease or other financing lease.

In most cases with a triple net lease the landlord pays the major expenses that have value well beyond the lease term, such as roof, structure and foundation repairs.

Generally, NNN indicates that there is no cost of operation to the landlord. But in newer properties on long-term leases, structural and replacement costs are increasingly specified as reimbursable expenses, either directly or through amortization. Our office will be happy to review your NNN lease with you.

CBD Office Statistics - Class A/B

Source: CoStar Property

occupancy
Existing Bldgs: 69
# Spaces: 746
Existing RBA: 40,086,293 sf
Vacant: <7,569,154> sf, 19%
Occupied: 32,517,139 sf, 81%
Leased: 33,213,756 sf, 83%

Galleria Office Statistics - Class A/B

Source: CoStar Property

occupancy
Existing Bldgs: 58
# Spaces: 563
Existing RBA: 16,677,443 sf
Vacant: <3,052,520> sf, 18%
Occupied: 13,624,923 sf, 82%
Leased: 13,905,627 sf, 83%

Greenway Plaza Office Statistics - Class A/B

Source: CoStar Property

occupancy
Existing Bldgs: 58
# Spaces: 272
Existing RBA: 10,482,925 sf
Vacant: <1,913,113> sf, 18%
Occupied: 8,569,812 sf, 82%
Leased: 8,756,663 sf, 84%

Is This My Father's Desk?

By Julie Pollak, Ivan Allen Workspace, Atlanta
Julie.pollak@ivanallen.com

Burdened by fear of repeating the growth explosion and colossal dot-com failure, some companies have turned a deaf ear to the idea of progression in their work environments. So technology and space have remained expenses to be managed instead of assets to be leveraged.

This approach is potentially quite dangerous for American companies. It is critical to recognize that the United States rose to international dominance during the Industrial Era when organizational charts looked more like a family tree than a strategic matrix of executing business. Now many overseas competitors are rising to the top of a Post-Industrial world focused on teamwork and technology. They are playing offense while we are playing defense.

How do we shift the paradigm? A good start is to relinquish our nostalgia for the past. The future of America is in the hands of the GenerationXers (born between 1960-1980) and the Generation Nexters (born between 1980-2000). Baby Boomers (born between 1943-1960) have typically been driven by their desire to advance within their company and view their success as proximity to the corner office. On the other hand, GenXers and GenNexters are driven by innovation, charting new paths and having access to the latest revolutions in space and technology. They view success as proximity to knowledge and cannot prosper in the offices of our past. Their environment must be one of adaptability in both form and function.

Continuing to view space and technology as expenses to be managed denies our future generations the resources they need to advance American business, a practice that will have far worse implications than the dot-com demise.

Next month, we will discuss specifically how this need for work environment adaptability impacts the way we will need to design and furnish tomorrow's office space.