Don’t Put All Your Eggs in One Basket (Part 1 of 2)

Part 1: The Limits of Traditional Negotiating Techniques

Have you ever read a book about negotiating? Maybe you’ve read a lot of them. Did you try the techniques that the authors espoused? How well did they work for you?

When you think about it, if someone had discovered a technique to control the free will of the person on the other side of the negotiating table, how likely do you think it is that they would write that secret down in a book and sell it for $24.95?

All the traditional negotiating techniques that we have read about and used often seem more like a dance than a science. Eventually they are going to get you to a point somewhere within a narrow range of perceived possible outcomes. Using one technique or another may get you a little more or a little less, but none of them are going to change the landscape.

Before dusting off that book on negotiating you read a while back, let me give you a “Readers Digest” version of the nine most common negotiating gambits:

  1. Extreme Initial Position. This technique tries to anchor the preliminary discussions so that bargaining begins from an extreme position instead of a rational offer. The best counter to this approach is not to ignore the offer but to rationally address the reasons the offer is not worthy of serious discussion and to ask detailed and probing questions to weaken the factual basis behind the extreme opening position.
  1. Take it or leave it. This strategy involves making a firm and unyielding offer. This technique rarely works unless one party has a great negotiating leverage (in which case it’s more of a strategy on how not to negotiate than how to negotiate). It also suffers from denying your opponent participation in the bargaining process, which is often a key emotional need to reach agreement. 
  1. Limited Authority. Frequently used, this maneuver involves representing that you have no authority to go any further and must seek approval from others. The goal is to bind your opponent without binding yourself. With a skilled opponent, this approach usually just protracts negotiations since it’s easy for two to play the same game and to defer further discussions until the parties can check with their clients, superiors, investors, lenders or whomever else they claim to report to. 
  1. Nibble, Nibble. This is a variation of the Limited Authority technique. After apparently agreeing to terms, the negotiator gets back to their opponent with the distressing news that they need to make several minor changes to the agreement in order to get their client on board. This technique relies on the opponent being emotionally invested in the “almost final” agreement and not wanting to open things up. It’s easily countered by demanding reciprocity on the “small changes”. 
  1. Decreasing Offers. This move starts with a fairly realistic offer that is conditioned upon resolving negotiations by a set time. If full agreement is not reached by the deadline, the offer is withdrawn or reduced. This is a high-risk strategy since your opponent may in fact not be able to meet the deadline and then your bluff will be known. It’s also a difficult strategy to defend if your opponent asks you to detail the harm suffered if the deadline is missed. 
  1. Table pounding. This is an isolated technique and not an overall strategy. The risk is that your opponent reciprocates and the stakes of the negotiation have been needlessly escalated. It’s an effective technique if used very sparingly, and in a controlled manner. Just remember that when Nikita Khrushchev pounded a shoe on the podium of the United Nations in 1960, he was still wearing his two shoes.
  1. Brer Rabbit. To jog your memory, Br’er rabbit was the character in the children’s fable that when caught by the Fox offered to suffer any terrible fate as long as he wasn’t thrown in the briar patch. Of course, the Fox, having the upper hand in these negotiations, did exactly that; whereupon Br’er Rabbit made his escape. For Disney’s take on this technique see: https://www.youtube.com/watch?v=v9oWq9zIXTY The technique relies upon your opponent having the upper hand and being susceptible to reverse psychology. So, hypothetically, if Option 3 is your real objective, you offer to accept Option 1 or Option 2 as long as you don’t have to risk Option 3. A great technique, but rarely do the stars align in a negotiation so you can use it.
  1. Good cop bad cop. A technique learned by everyone who ever watched a police drama. Because it is so widely known and easy to identify, the method should have limited effectiveness, but it’s surprising how hardwired the brain is to please the “good cop” and avoid the “bad cop”. It is still the standard interrogation technique of detectives, but works best when you can detain the party in a poorly lit room for hours on end – not often the case in business negotiations.
  1. Village Idiot. Sometimes the smart thing to do is to play dumb. Peter Falk gave a lesson on this technique in every episode of the television series Columbo. It’s less of a negotiating technique than a discovery technique, but it should be in everybody’s toolkit. Don’t assume you understand what makes your opponent tick. If you play inept, and allow your opponent to explain his world and how it works, you will be better equipped to reach your negotiating goals. Of course, a sophisticated opponent will recognize this technique and resist the human tendency to want to help, and worse may feed you misrepresentations that backup their negotiating position. Obviously only reliable in a television script.

All of these traditional negotiating techniques suffer from a fundamental flaw: The techniques assume that the negotiator is limited to dealing with a given set of circumstances. 

But what if you could change the circumstances surrounding your negotiation? In other words, why deal with the cards you are dealt when you can change the cards you hold?

We will examine the new science of negotiating and how to change the cards that you hold in Part 2 of this blog.

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Why a Broker Isn’t Good Enough

“The beginning of wisdom is the definition of terms.”
― Socrates

A lot can be learned from reading a dictionary. It reveals the origins of words and uncovers the true essence of what things are. This is especially true when the word defines a person’s profession such as “doctor”, “lawyer” or “broker”. Though professions evolve over time due to changes in technology, custom and practice, at their core, these professions essentially remain the same. Certainly there have been tremendous medical advances over the past 500 years; however, a doctor is still someone who treats sick people. The legal industry is much different than it was 200 years ago but lawyers still advocate for their clients at the negotiating table or in the court room applying the rules of law. But what about a broker?

Webster’s, defines a broker as “one who works with opposing sides in order to bring about an agreement.” They list, among others, as synonyms “mediator”, “conciliator” and “intermediator”.

Historically, brokers put deals together between two or more parties. They matched together people who wanted to sell something with people who wanted to buy something. To facilitate deals, brokers often helped the parties determine a fair price based on similar deals being transacted whether it be corn, soybeans, minerals or real estate. Brokers were not advocates for either party—they couldn’t be because they had both seller and buyer clients. Brokers were merely intermediaries and facilitators trying to make a deal happen.

Unfortunately, unlike with medicine or law, not a lot has changed over the years with regard to real estate brokerage. Notwithstanding what many full service brokerage firms say in their marketing materials, ultimately many brokers still view themselves as primarily as intermediaries who bring landlords and tenants together—their value is space finding. It’s right there in their engagement letters.

The tenant engagement letters required by most large brokerage firms say that, following the expiration or termination of the engagement, if the tenant ends up doing a deal with any building the broker showed or otherwise identified to the tenant during the term of the engagement, the broker will be owed a fee. There is no requirement that the broker negotiate actual deal terms, structure a deal or shepherd the deal to closing– the mere introduction of the property to the tenant entitles them to a full fee. In sum, their job was simply to find the tenant a building.

There is other, more compelling evidence that most brokers still view their role as a deal facilitator and not as an advocate for tenants. Whereas lawyers can never represent opposing parties without an express written waiver from all of their affected clients, brokers take positions that are directly adverse to their clients all the time. They regularly represent landlords and tenants in the same market and even the same transaction. In fact, they will even be the landlord in a transaction with one of their tenant clients and negotiate aggressively against them.

How can a broker reconcile these direct and irreconcilable conflicts of interests? Simply put, there can be no real conflict of interest if they see themselves primarily as match makers facilitating a deal between a willing buyer and a willing seller—just like the old days.

However, whereas it might have sufficed 100 years ago for a broker to be a mere facilitator in a world where buyers and sellers (or landlords and tenants) had relatively equal knowledge and leverage, that’s not the case today. Now real estate is dominated by large REITs, insurance companies and private equity funds. These landlords have large staffs of experts and professionals who work in real estate all day, every day whereas tenants only need space maybe once every five or ten years. It’s a rare event so they don’t have on staff the expertise to compete with the landlord’s army of professionals. As a result, when the time comes for a tenant to do their lease, they need a dedicated advocate, not a neutral intermediary.

Sometimes to understand why things are the way they are, you need only look at a dictionary. How a profession is defined often reveals the essence of what that person does and what they believe their true service and value is. The traditional roles of professionals don’t really change much over time and old habits die hard; especially when the traditional roles worked so well for the professional. While clever marketing materials can spin wonderful tales, the engagement letters they are required to sign and the conduct of brokerage firms tell tenants the real story. In the end, a broker is not enough. Just ask Socrates.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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What Can the Highest Grossing Movies of All Time Tell Us About the Philadelphia Real Estate Market?

Can you name the five highest grossing films of all time?

Looking at domestic box office receipts, the top five are:

1   Star Wars: The Force Awakens 937 2015
2   Avatar 761 2009
3   Titanic 659 1997
4   Jurassic World 652 2015
5   Marvel’s The Avengers 623 2012

Does anything look strange to you about this list? The oldest movie on the list is Titanic which was released in 1997. Didn’t anyone make good movies before 1997? Was Marvels’ The Avengers – fifth on the above list – really a bigger hit than Gone with the Wind (1939), The Godfather (1972) or Jaws (1975)?

The list of the top five domestic grossing movies is a good illustration of a problem that has been recognized by economists for years:  The problem of Nominal vs. Real Values.

In economics, nominal values are simply a raw, unadjusted numbers. On the other hand, a real value has been adjusted to account for an extrinsic factor so you can get a true apples-to-apples comparison. The most common type of adjustment is for inflation, but economists also sometimes adjust for the size of the population base.

When Gone With the Wind premiered in Atlanta in 1939 the average ticket price was a little less than a dollar. The total U.S. population was about 131 million. In 1997, the movie Titanic opened during a time when the average ticket price was around $4.60, and the US population was about 273 million.

Here’s what the list of top movies would look like if we took the nominal values and adjusted them for inflation:

1   Gone With The Wind 1,747 199 1939
2   Star Wars 1,541 461 1977
3   The Sound of Music 1,232 159 1965
4   E.T. The Extra-Terrestrial 1,227 435 1982
5   Titanic 1,172 659 1997

Only Titanic survived adjustment for inflation.

What if we were to further adjust for population? That would give us a number which would be the average inflation-adjusted dollar spent per person for each movie. Here are the top five:

Real Value

($ Millions)

Year USA  Population ($ Millions) Per Capita Spend
Gone with the Wind $1,748 1939 130.9 $13.35
Snow White $943 1937 128.9 $7.32
Star Wars $1,541 1977 220.2 $7.00
The Ten Commandments $1,133 1956 168.9 $6.71
The Sound of Music $1,232 1965 194.3 $6.34

Gone With the Wind has gone from being absent on the first list, to being in the runaway blockbuster movie of all time on the third list with a per capita spent of almost twice that of the runner-up.

So what does this tell us about real estate in Philadelphia? For the first time in history, Philadelphia’s new crop of class A+ buildings are commanding rental rates over $40 (on a gross basis which includes first year operating costs and taxes). Is this a sign that Philadelphia is about to lose its reputation as being a real estate bargain compared with other Northeastern cities? Are Philadelphia rents out of control?

No.

Rental rates, like many numbers, that are brandished about are too often expressed as nominal values, not real values. What if we inflation-adjusted Philadelphia’s historic rents? Let’s go back 20 years to 1997 when the movie Titanic was released. When we first saw Leonardo DiCaprio and Kate Winslet standing, arms outstretched, on the bow of the Titanic the consumer price index was 160.5. In 2016 the CPI was 239.5. That means a $40 rent today, adjusted to 1997 dollars, would be only $26.21. That’s significantly less than the gross rent the top buildings in Philadelphia were getting in 1997.

So although nominal rents have been increasing, the real rent in Philadelphia has been falling even as stock of buildings in Philadelphia get newer and better. Sounds like the perfect plot for a blockbuster.

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Landlordholm Syndrome

Most people are familiar with the term “Stockholm Syndrome” which refers to psychological symptoms that sometimes occur in victims of a hostage situation.  The term originated in Stockholm, Sweden in the summer of 1973 when gunmen took four bank employees hostage and held them in a vault for over five days.  Surprisingly, when the hostages were finally freed, it became evident that they had developed an empathetic and emotional attachment to their captors.  While all common sense would tell them that the hostage takers did not have their best interests at heart and the legal authorities did, the victims came out sympathizing with the former and demonizing the latter.

Since 1973, this phenomenon of forming paradoxical attachments has been associated with numerous adversarial situations including kidnappings and personal crimes. One of the most famous victims of Stockholm Syndrome was Patty Hearst in 1974.  She not only formed an emotional attachment to her kidnappers, she ultimately joined their movement.

The fundamental characteristics of Stockholm Syndrome are:

  1. The victim develops a surprisingly adverse reaction to those who are trying to help them—the police.
  2. The victim develops a fondness, empathy and sense of trust towards his or her captors who put them in danger.
  3. The captors develop a fondness towards their victims.

While not every hostage or kidnapping victim experiences Stockholm Syndrome, there do appear to be some common factors in those who develop it.  Among these factors are:

  1. The victim and the captor are exposed to each other over an extended period of time.
  2. The victim and the captor are in close proximity to each other—when they are separated into different rooms, the phenomenon does not seem to occur.
  3. The captors show kindness to the victim. Again, the phenomenon does not occur when the captors show aggression, violence or anger towards the victims.

What does all of this have to do with real estate? We’re getting to that.

First—and this is very important– let us preface the balance of our discussion by saying that we in no way compare landlords to kidnappers, robbers or terrorists.  Overwhelmingly landlords are good people who are just running a business and trying to make a profit.  They develop long standing relationships with their tenants and, over the years, these relationships often develop into strong and meaningful friendships.  We certainly have developed similar bonds with our landlords and count many of them as good, personal friends.  Leases are long term partnerships between two businesses and the best ones end up with personal connections.

However, notwithstanding these friendships and personal connections, it’s important for tenants to understand that their financial interests are directly adverse to the landlord’s interests when it comes time to renew their lease (or enter into a new lease).  Landlords make more money when they obtain higher rents and dish out smaller cash concessions.  Tenants make out better when rent is lower and cash concessions are maximized.  It’s a zero-sum game.

Given the foregoing realities, common sense tells us that the best way for a tenant to ensure that it gets the best lease deal is to separate its personal feelings towards the landlord from the business relationship and compete its requirement in the open market.  Competition always generates better deal terms.  Despite this obvious truism, some tenants still fall victim to what we call “Landlordholm Syndrome”.

Like with hostage victims, tenants, after spending years in a landlord’s building, often develop paradoxical feelings.  Whereas the hostage victim believes the police are the bad guys and the hostage taker is the good guy, tenants sometimes allow themselves to believe that their landlord is looking out for their economic well being and that potential tenant brokers are the bad guys trying to damage their wonderful relationship. While a rational observer would understand that hiring a dedicated tenant broker to compete the lease requirement in the open market would be in the tenant’s best interests, the tenant suffering from Landlordholm Syndrome sometimes sees the broker as obstructionist or muddying the waters.  Thus, these tenants insist on doing a “friendly” deal with their landlord without engaging a broker and without creating any competition for their requirement.

Conclusion

Tenants shouldn’t make the mistake of confusing a landlord’s kindness and friendship for altruism.  Landlords ultimately must answer to their shareholders and investors so they have a duty to maximize their profits.  Because they are striving for completely opposite outcomes in the lease negotiations than tenants, it is unrealistic to believe that a “friendly,” non-competed lease renewal is going to achieve the best economic result for the tenant.  Before falling victim to Landlordholm Syndrome, tenants should take a step back and reassess who is really fighting for their best interests.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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Six Keys to Ensuring Great Space

You’ve just signed a new lease or agreed to renew your existing one.  As you’ll be occupying this space for the foreseeable future, you want to make sure it not only supports your business operations, but also helps brand your firm and reinforce your corporate culture.   Today, space is not just a place where your employees come to work; it’s a tangible representation of who you are and, as a result, it will impact employee morale and retention and either be an asset or liability in helping you attract new talent.  Just as important, because real estate can represent one of a company’s largest line item expenditures, companies today are more judicious than ever about efficiently consuming space.  That means every foot of space must be justified.

With office space design becoming more important to companies, those charged with the execution of the office move (or renovation) need to approach the task with great care.  Tactix just executed our own transformative move to new space so we thought we’d share some thoughts and ideas with you that can help you with your next deal.

  1. Find the Right Design Firm. There are lots of great design firms in the region who have executed wonderful work environments for their clients. How do you pick the one that’s right for you?Some people feel that each design firm has its own style and that when they walk into a space, they can tell which firm designed it.  While design firm ideally take direction from their clients and then reflect the client’s vision into the space, clearly some firms have consistent components, materials or features in their work.To see if your style meshes with the design firms, visit one or two spaces they have recently worked on which they think is most representative of what you have described to them (i.e., open plan, cutting edge design, traditional etc.).   If they haven’t done something like what you want, they may not be the right firm for you.Most likely your broker will introduce you to several potential design firms and will propose that you invite them in to make presentations.  Use the interview process to test the creativity, flexibility and listening skills of the various design firms you are considering.  Most design firm pitches cover the basics: how they help you develop a space program, how they will facilitate the “visioning” process to define the aesthetic for your space, and how they document these ideas into actual plans.  Because they are all have the technical abilities to do the work, the presentations often sound the same and blend together by the end of the day of interviews.  After all, it’s not what they do that sets them apart (the steps they take are virtually the same), it’s how they do what they do.  As a result, try them out during the interview process by making it a working session.  Have them solve a problem in your existing design or come up with an idea to improve your current space.
  1. Give Your Design Team Direction. A good design firm will create exactly the look and feel you are looking for if you can clearly articulate your vision.In our case, we are a boutique brokerage firm who clients come to because we are NOT a big, institutional firm where they may feel anonymous.  They like that we’re smaller and have a more personal approach.  We wanted our space to reflect that distinction so we told our design team to create space where clients will feel like they are in our home among friends.  However, we told them that, in our case, we wanted “home” to feel like a Soho loft.  They nailed it.While this approach works great for those who know exactly what they want, what do you do if you don’t really know?  As more and more of our clients are telling us with regards to the rapidly changing landscape of space design and workplace layouts, “I don’t know what I don’t know.”  In these instances, start taking note of spaces you have seen (i.e., clients, peers, vendors or even in magazine photos) and like or don’t like. Share them with your designers.  Understand what message you want your space to convey to people and try to articulate that.The more direction you can provide them, the better the chance your space will meet your expectations and reflect your unique objectives. 
  1. Build a Representative Team of Stakeholders. Clients often ask us, “How many people should be on my real estate committee and who should I get input from in vetting our design?” It’s important to remember that change is very hard for people, especially in today’s world where the trend is to reduce people’s individual work space and often make their personal space less private.  It’s one thing to move to a new building or location and disrupt commuting, parking or eating/shopping patterns, it’s another to dramatically change someone’s personal work space.  Ultimately, you want space that helps people work better.  To ensure this happens, seek input from different departments and worker categories in the company.Law firms should seek input from their administrators on how secretaries/administrative assistants work.  Should they become shared resources available to a general population of attorneys or remain dedicated to a defined team of bosses?  How much surface area do they need for their work?  How much filing space do they need nearby and do they need a printer within arm’s reach?  Without understanding how people work, you can’t plan space to make them more efficient and that will cause problems.In assembling your team, remember, if you are asking for people’s input, you need to be prepared to listen to their suggestions and incorporate some of what they suggest.  That means you want to keep your team (or the group of people interviewed by your designers) relatively small.  You can’t accept everybody’s wish list and eventually you need to make decisions.
  1. Insist on Clarity from Your Design Team. Moving into your new space shouldn’t be a surprise. If you don’t fully understand what your space is going to look like, ask for more clarity.  While you will typically see test fits of your space (one-dimensional partition plans), pricing notes which reflect quality of materials and even sample boards showing color palates, fabrics and finishes, it’s often hard to visualize what the space will look like.  Given how important the space is to your business and how much money you will be spending to construct the space, you’re entitled to fully understand what you’re getting.Today, design firms have cutting edge technology which can enable you to take a virtual, three-dimensional tour through your space before it’s built.  In our case, we had our design team prepare artists renderings of what our space would look like as well as photos of similar spaces we could expect our space to look like.  The result:  no surprises. We got exactly what we were expecting on the design.The furniture can cause some unique issues.  If you can go to the showroom (more likely for larger tenants given the cost involved), you can actually touch and feel the exact product you will be purchasing.  In fact, in some instances, we have had furniture vendors set up mock offices in our client’s existing space featuring the new furniture systems and configurations so they could test drive the package before committing to it.  In our case, we sometimes needed to pick furniture based on photos or brochures and hope for the best.  Luckily for us, our designer knew our taste and we ended up loving what we got.  If you are picky, insist on seeing the actual product you are buying.
  1. Establish a Budget and Stick to It. Anyone can design beautiful space if money is no object. The real talent is designing great space within a fixed budget.  Figure out how much money you are prepared to spend on your “all in” move and work backwards from that number.  You’ll need to consider how much cash your landlord is providing you under your lease for Tenant Improvement dollars and make sure you cover all related project costs including: furniture, information technology, audio visual, moving, artwork, design and project management fees and even the landlord’s “supervisory fees”, if any.Once you determine how much money you can afford to spend on “bricks and sticks” construction, make sure your design firm buys into this budget and commits to work within it.  Create a process whereby you have interim checks on pricing as the design progresses so that you can spot problems before it’s too late.  When we got our initial pricing back based on our schematic drawings, it was clear that we had exceeded our established budget by a good amount.  Because we caught the problem early and had time, we were able to work with our designer to come up with wonderful value engineering alternatives that got us the aesthetic we all wanted at a fraction of the originally quoted cost.  By identifying the pricing issue early on, we were also able to keep with our schedule.
  1. Make it Fun. The process of taking on a major construction project and move can be extremely stressful. This is especially true when the person running the transaction already has a full-time job at the company like CFO, COO, head of procurement or managing partner. On the positive side, there are not many endeavors that can impact a company and its employees so positively as new space. You only get the opportunity to re-imagine your offices once every 10-15 years in many cases.  Embrace the opportunity and take advantage of it.One key to keeping it fun and positive is to create a team environment with your designers, project manager and contractors.  While many people dread the weekly progress meetings at the job site, we looked forward to them.  We had great channels of communication and had a lot of fun working together.  Our contractor and designers still come over to check on us months after we moved in because they felt like valued members of our team and took immense pride in what we all built together.  As a result, when problems arose- which they ultimately will- our team members jumped in and fixed things.Understand that problems will arise during the process.  Most are fixable. While perfection is a laudable goal, even Vince Lombardi knew it was not realistic.  As he told his players during a famous pep talk: “Gentlemen, we will chase perfection, and we will chase it relentlessly, knowing all the while we can never attain it. But along the way, we shall catch excellence.”  And ending up with excellent space is not a bad outcome.

Conclusion

We’ve lived through the same move process that we counsel our clients about every day.  In the process, we learned a great deal and reaffirmed a lot of what we thought we knew.  While there were certainly hiccups along the way, we got exactly what we wanted.  By sharing our experiences with you, we hope that you will not only end up with exactly the space you want, but you will also enjoy the ride.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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Dual Agency Brokerage Under Attack in California

Mary Smith, a salesperson at ABC Brokerage Company, is the listing agent for space in a building owned by Big Owner. In the marketing flyer for the space, Mary states that the space is 20,500 sf even though she knows it is not that large.  XYZ Company, a tenant, hires Bob Jones, also an agent at ABC Brokerage Company, to represent it in its search for space.  After a lease is signed for the subject premises, it turns out that, unbeknownst to Bob Jones and the XYZ Company, the space is only 16,000sf.  Does XYZ Company have a claim against its brokerage firm, ABC Brokerage Company, based on the actions of its agent, Mary Smith?  It might depend on what state you are in.

A recent California Supreme Court case held that, in a dual agency situation (i.e., where the same brokerage firm represents both the seller and buyer or landlord and tenant in the same transaction), the agents of the brokerage firm owe fiduciary responsibilities to both of the firm’s clients in the transaction and not just to the client they are specifically representing.  The case, Horiike v. Coldwell Banker, involved the purchase and sale of a mansion in Malibu.  However, the holding has important precedential value for commercial real estate transactions in California as well.

In Horiike, the home seller’s agent, Chris Cortazzo of Coldwell Banker, failed to warn the buyer that the square footage of a home identified in a sales brochure was incorrect.  The buyer purchased the home based on the erroneous information.  At the trial, the buyer sued both Mr. Cortazzo and Coldwell Banker.  The trail court threw out the suit against Mr. Cortazzo because it determined that Mr. Cortazzo was exclusively representing the seller and, therefore, had no fiduciary duty to the buyer to warn him of the inaccuracy in the sales flyer.  The court then instructed the jury that, to find Coldwell Banker liable to the buyer, it would have to determine that the agent at Coldwell Banker representing the interests of the buyer in the transaction acted wrongly.  Because the buyer’s agent, Chizuka Namba, also of Coldwell Banker, was not aware that the square footage reference in the brochure was incorrect (and the buyer did not even name Ms. Namba in the suit), the jury found in favor of the defendant.  The buyer appealed the case.

The California Court of Appeals reversed the lower court’s findings and held that Mr. Cortazzo, as a salesperson working under Coldwell Banker’s license, owed a duty to the buyer “equivalent” to the duty owed to him by Coldwell Banker.  The obligations and fiduciary responsibilities of the individual sales agents of the Coldwell Banker were found to be derivative of the obligations and responsibilities of the firm they worked for and under whose license and direction they operated.  Thus, because the buyer was a client of Coldwell Banker, all of its agents had the same fiduciary responsibility to that client regardless of who they were representing in that transaction.  This responsibility included the requirement that Mr. Cortazzo “disclose known facts materially affecting the value or desirability of the property to both parties.”  This duty to warn was expressly contained in the “Disclosure and Consent to Representation of More Than One Buyer or Seller” which the parties signed as required under California law because Coldwell Banker was representing both the buyer and seller in the transaction.

Coldwell Banker felt it was entitled to retain the two significant commissions it made on this transaction even though (1) the buyer had relied to his detriment on the firm’s misleading marketing brochure and (2) the firm’s employee (Mr. Cortazzo) knew the square footage was overstated. It argued, in effect, that the home buyer did not truly hire Coldwell Banker; he only hired the broker at Coldwell Banker who was working with him.  Thus, it was Coldwell Banker’s position that the only person at the company who was obligated to protect the buyer was Ms. Namba, the agent working for him, even though its other agent, Mr. Cortazzo, knew the sales brochure he had prepared was inaccurate.  The holding in the Horiike case is largely dependent on the statutorily required disclosure form that all of the  parties were required to sign under California law because Coldwell Banker was acting as a dual agent in the transaction.

Needless to say, this case is causing considerable distress in the brokerage community for firms who typically act as dual agents in the market.  If in fact a landlord broker has a fiduciary duty to warn a tenant about problems with a given property or the creditworthiness of the landlord, it could be difficult for him to aggressively market the building and advance the landlord’s interests.  Likewise, would a tenant broker whose firm also represents the landlord be required to inform the landlord that the tenant is having financial difficulties?

The Horiike case is specific to California.  What would the outcome of the case be in Pennsylvania?

Pennsylvania contemplates two types of dual agency situations. The first, involving a “dual agent” is where the very same agent represents both the landlord and tenant (or buyer and seller) in the transaction. The second, involving a “designated agent”, is where, though the same brokerage firm represents both parties to a transaction, the firm designates different agents within the firm to represent the interests of each party.

Section 35.314 of the Pennsylvania Code (Duties of Dual Agent) addresses the first scenario.  In this instance, the dual agent in Pennsylvania may take “no action that is adverse or detrimental to either party’s interests in the transaction.”  Because any negotiation is a zero sum game where a dollar earned by one party is a dollar taken from the other party, a dual agent would be hard pressed to do anything in a transaction other than introduce the parties and then let them hash out their own deal. Clearly he could not advocate for the financial interests of one client without necessarily being adverse to the interests of the other client.

Section 35.315 of the Pennsylvania Code (Duties of a Designated Agent) deals with the second scenario where the brokerage firm designates one agent to represent one party (i.e., the seller or landlord) and another of its agents to represent the other party (i.e., buyer or tenant).  Subsection 35.315(e)(1) states that each designated agent owes: “Loyalty to the principal with whom the designated agent is acting by working in that principal’s best interests.”  Thus, if the Horiike case were tried in Pennsylvania, it is likely that Coldwell Banker would have prevailed because Mr. Cortazzo would be statutorily required to act solely in the best interests of the seller.  He would have no fiduciary duty to the buyer and arguably, by informing the buyer of the incorrect square footage, would be breaching his fiduciary obligation to act in the seller’s best interests.  Thus, unlike in California, where all the brokers in your firm have duties to protect your interests, in Pennsylvania, only the agent working for you has your back.

Conclusion

In Philadelphia where two or three firms dominate the landlord listings, dual agency scenarios have become more and more common leading to more frequent opportunities for conflicting loyalties within a firm.  In these instances, the tenant needs to understand that it isn’t hiring a brokerage firm; it is only really hiring the agent working on its deal.  In fact, there may be situations where some of the agents at the tenant’s brokerage firm could be obligated to act against the tenant’s interests.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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Office Market: Why Philadelphia’s West Market Corridor Will Stay Strong

A few years ago, a lot of people were pointing to 2017-18 as the time when the Central Business District (CBD) office market might start to soften up, providing relief to tenants who might be looking for space. A “perfect storm” of factors all indicated that vacancy should be picking up this year and into 2018. That really hasn’t happened. We’ll explain why.

First let’s summarize the tenant friendly future we were contemplating back in 2014-2015; then we’ll discuss how five unexpected things helped change the market we were expecting.

What we were expecting and why

New Inventory. The pending development of FMC Tower and Comcast Innovation and Technology Center, together with the redevelopment of 2400 Market Street was scaring a lot of Center City landlords. With approximately 2,000,000sf of new office space coming onto the market, they understandably worried how this was all going to be absorbed. Certainly, Comcast was going to take most (and, as it turned out, all) of the new Innovation Center but most people expected that, in doing so, they would vacate the approximately 600,000sf of space they were currently leasing at Two and Three Logan and other buildings. FMC would soak up a large part of the new FMC Tower but there was still 200,000sf of space to fill in the new building. FMC’s departure from Mellon Bank Center would also create a 200,000sf vacancy there.

Center City landlords had already dodged (at least temporarily) a major bullet when GlaxoSmithKline vacated approximately 800,000sf of CBD office space in 2013 to relocate to the Navy Yard. To their relief, none of this vacated office space came back on the market as Three Franklin Plaza was sold to a charter music school and One Franklin Plaza was mothballed (it’s currently in redevelopment and ultimately 200,000sf of office space will soon add to available inventory). Could they dodge another bullet of excess inventory in 2017-18?

Significant Center City departures and downsizings. Some major corporations and space occupiers had announced they were leaving the City or were at least going to be downsizing significantly. Among the big users that left the City were Sunoco and Dow. Those significantly downsizing their Center City presence included BNY Mellon and Cigna. Landlords were justifiably concerned that these pending vacancies would put further downward pressure on rents.

More efficient space trends. It’s well recognized across the industry that companies are consuming much less space per employee as they move to new, more efficient utilization concepts such as open plan environments, smaller offices, hoteling and telecommuting. Law firms, for example, who used to plan for 750-850sf/attorney in the early 2000s are now down to 600-650sf/attorney in many cases. Large corporations who used to have a ratio of offices to open seating of 3 or 4 to 1 are now flipping the paradigm to 1 to 3 or 4. When companies use less space, it drives down demand putting even more downward pressure on rents. This trend is probably not going to change any time soon and, as existing leases continue to expire, more and more firms will be implementing these space saving programs. Landlords had more reason to worry.

Well, they shouldn’t have worried. 

What changed?

Here are five unexpected events that helped save the CBD office market for landlords.

  1. Comcast grew faster than expected.While nothing definitive has been decided, it does NOT look like Comcast will be vacating most of the office space it currently occupies outside of their two-building urban campus. The 500,000-600,000sf of space that many landlords feared would open in Two Logan and Three Logan may only be a fraction of that now. Comcast will not only fill up it’s beautiful new Innovation and Technology Center, but it appears they will also still need several hundred thousand of square feet of overflow space on top of that. Even if Comcast goes ahead with their third tower currently on the drawing board, that will be at least four or five years down the road and Comcast will need interim space to house their growth while that building gets developed.
  2. Aramark moved west.Facing a 500,000-square-foot office development down the street at 2400 Market, West Market Street landlords were praying that an out of town tenant would come along and soak that up before their own tenants defected there. They got the next best thing. Aramark surprisingly announced that it would be relocating its headquarters from Aramark Tower at 11th and Market into approximately 300,000 square feet at 2400. While this move was clearly a blow to the East Market Street sub-market, it was a Godsend to the landlords on West Market Street. Though there’s still close to 200,000 square feet of office space available at 2400 Market, this big office project won’t have the negative impact on West Market Street that many initially feared.
  3. WeWork loves Philadelphia.If corporate tenants were taking less office space and no big, new companies were moving into town, landlords needed some sort of miracle to absorb the pending vacancies. Enter WeWork. They have quietly leased close to 100,000sf of space between 1900 Market Street and 1601 Market Street that won’t be occupied by their own employees. It will ultimately be occupied by lots of entrepreneurs, small businesses and even large companies with temporary staffing needs. In many cases, these occupants would never have ended up in these buildings because they are too small, don’t have the credit or wouldn’t commit to long enough lease terms. By packaging up all of these types of users under one roof, they have increased demand for Class A office space across the country. With WeWork, the whole is more than the sum of its parts.
  4. Spark Therapeutics came out of nowhere.Remember all that new space in FMC Tower that was going to draw existing tenants from the trophy towers along West Market Street? Well, a firm very few people had ever heard of, Spark Therapeutics, who has been quietly knocking the cover off the ball in University City, just leased 75,000 square feet of space at FMC Tower and are rumored to be taking a bunch more at Schuylkill Yards. They are a Philadelphia success story that landlords around town should be lining up to thank.
  5. Two distinguished law firms finally join their friends along West Market.Back in the late 1980s and early 1990s, the center of the universe for Philadelphia’s law firms moved from South Broad Street to the shiny new, trophy towers being built along West Market Street and north 18th Street. There had been some holdout firms in non-mainstream locations including Montgomery McCracken at 123 South Broad Street and Berger Montague at 1622 Locust Street. Well, they are now unexpectedly joining their friends on West Market and soaking up another 100,000 square feet of space in the process.

Predicting markets, or anything for that matter, is an inexact science. We all assess the facts, weigh the probabilities and make an educated guess about the future. Sometimes, however, unexpected variables enter the equation and change everything. Real estate markets rise and fall as ours has and will continue to do in the future. We’re in a tight market that will eventually turn. Maybe just not as fast as we all thought.

This article was published in the Philadelphia Business Journal on February 23, 2017.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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The Sins of Our Past May Be Coming Back to Haunt Us

The Great Recession of 2008 seems like a distant memory to many of us.  The Dow Jones is flirting at 20,000 up from a low of 6,300 and the real estate market, which many blame for the demise of the global economy back then, has been humming along for five years.  What could possibly go wrong?  Apparently, a lot.

Commercial mortgage backed securities (“CMBS”) were all the rage back in the early 2000s and represented a significant portion of all commercial real estate loans in the United States.  Because it was incredibly easy for lenders to get the loans they originated off their books by securitizing them, money was flowing freely back in 2006 through 2008 and underwriting standards became somewhat lax.  Guess what?  All those 10 year loans that were originated during the boom years of 2006-2008 are starting to come due and the lending environment isn’t going to be as generous when it comes time to refinance.  Stricter loan underwriting requirements post-2008, new CMBS risk retention regulations under Dodd Frank which come into effect later this month, and the specter of rising interest rates announced by the Fed earlier this week all may make life very interesting to property owners.

A Wall Street Journal (WSJ) article, Trouble Brewing in Commercial Real Estate, published on November 15, 2016, reveals that we are starting to see the first signs of trouble on the horizon.  According to the article, commercial property sales volume was down 8.6% in the first nine months of 2016 as compared to 2015.  Another alarming statistic is the significant increase in the rate of delinquencies on commercial mortgage loans.  Close to 5.6% of the almost $400 billion of commercial mortgage loans packaged into securities were more than 60 days late in payment as of September 2016 as compared to 4.6% earlier in the year. That’s close to $25 billion of debt that could be on the brink of foreclosure.

Again, per the WSJ article, Morning Star Credit Ratings LLC predicts that “borrowers won’t be able to pay off roughly 40% of the commercial mortgage-backed securities loans coming due next year.”  Much of the increase in property values over the past 10 years has been driven not by rent growth, but by record low interest rates which have enabled owners to pay more for assets.  Think of a $1,000 government bond that pays $40 in annual interest when issued (4%).  When interest rates fall to 3%, that same bond may sell for $1,333.  It’s the same thing with real estate.  A Class A office building that throws off $500,000 in net operating income may be worth $6,250,000 when cap rates are 8%; however, if cap rates for that type of asset drop to 7% due to declining treasury rates, that same asset may be worth $7,142,857.

Just as property values steadily rose as market interest rates fell over the past eight years, they are likely to fall should interest rates rise in the months ahead as has been signaled by the Fed.  Simply put, many buildings have changed hands over the past five years at prices that, all else being equal, wouldn’t make sense if interest rates were 200 basis points higher.  Absent improvements in the asset fundamentals such as increased occupancy and/or rental rates, the assets won’t be worth as much in a higher interest rate environment as they were before and will not be able to service the debt on higher interest rate loans. Making matters worse, the net available loan proceeds from CMBS transactions won’t be as plentiful going forward if Dodd-Frank is not repealed.  Issuers of CMBS will now be required to retain 5% of the securities they create.  With less available loan proceeds and declining market values for properties, many property owners may find that they have trouble raising the loan proceeds necessary to refinance their existing loans.  Stricter loan reserve requirements and tighter loan to value ratios will further burden owners looking to refinance their properties.

What does this mean for tenants?  Their lease could become a very valuable piece in their landlord’s attempt to reposition the asset.  The difference between a vacancy and a long-term lease could translate into significant differences in the building’s valuation by lenders and potential buyers.  That means the tenant could have significant leverage when it comes time to renew its lease or cut a deal for a new lease.  A pending loan maturity for the landlord may also provide an opportunity for a tenant to restructure its lease in advance of the natural expiration on favorable terms.

The problem of course is that some landlords may not have the ability or incentive to strike very aggressive rental deals.  While the landlord may recognize that a material vacancy could cause it to lose the building to its lender, striking too aggressive a deal with a tenant on a new or extended lease may reduce the building’s value to less than the underlying debt resulting in the same outcome.  Any deal that doesn’t maintain an asset value in excess of the underlying debt isn’t worth doing if the loan is non-recourse.  This is especially true if, as is typically the case, the lease deal requires the landlord to come up with additional capital for tenant improvement allowances, building improvements and transaction costs.

Tenants not only need to understand how their landlord’s loan situation will affect their bargaining leverage when it comes time to negotiate a new lease or renewal, they need to make sure that the landlord can carry out the financial obligations it commits to in its lease.  We all know that a key issue in most lease negotiations in lease security for the tenant’s obligations including letters of credit or cash security deposits.  However, with mortgage loan defaults steadily rising and storm clouds forming in the distance, it may be time for tenants to start focusing more on the landlord’s credit; especially when the landlord is a single purpose entity whose only asset is the building.  Should the loan go into default or the landlord lose its equity in the building, the tenant may find that, absent a good non-disturbance agreement with the lender, it is out of luck.

Conclusion

Everything has been going gangbusters for the real estate market the past five or six years.  Unfortunately, a sleeping giant is starting to awake from a ten-year nap and it may cause major problems for landlords across the country.  Real estate goes in cycles and we have been riding a long upturn.  If and when things turn, and there are indications that it will, tenants need to be prepared to both take advantage of the opportunity and protect themselves from the risks.

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How Do You Feel Now?

Your broker just helped you find terrific space in a new building and you’re feeling great about the whole transaction.  He has assured you that he pushed the landlord to the limit and got everything he could have out of the deal; taking full advantage of the leverage you had as a large tenant.  However, a month after you move into your new space, you find out the landlord has now hired your broker to represent them in the sale of the building.  What are you thinking now?

In many professional service businesses, the ultimate compliment is when the other side hires you based on your performance in a transaction.  Many attorneys have built significant books of business by outperforming their counterpart in the courtroom or at the negotiating table.  Sometimes it’s only by seeing your advisor’s work in the context of a competing advisor that you can put their relative performance in perspective.

The problem is that law is very different from brokerage in two key respects.  First, in law, a client can prevent its attorney from representing an adverse party. Before an attorney can represent a new client whose interests are adverse or potentially adverse to an existing client, the existing client must sign a formal conflicts waiver consenting to the new representation.  The legal profession abhors conflicts of interest, actual or perceived, and, therefore, has strict safeguards to ensure that a client never has to worry about the loyalties of its counsel.  In brokerage, however, a client is only entitled to notice of a conflicting representation; it cannot prevent it.  Second, when one party loses a major lawsuit and then decides to hire the opposing attorney who beat them in the courtroom, there is no question as to their motivation.  They simply want to retain the best advocate so they don’t lose the next time.  Motive is not always so clear when your landlord hires your brokerage firm after your lease deal is completed.

Example: An example will help illustrate this problem.  Let’s present two different hypotheticals.  In the first, ABC Company is suing XYZ Company for breach of contract and seeking $100M in damages.  ABC Company hires Sarah Smith, Esq., as its attorney and she wins the case by securing a plaintiff’s verdict for $75M.  In the second hypothetical, ABC Company agrees to settle the above lawsuit for $75M based on the strong recommendation and counsel of attorney Smith.  In both hypotheticals, following resolution of the case, XYZ Company approaches attorney Smith and asks her to represent them in future cases not involving ABC Company. 

If you are the General Counsel of ABC Company, do you feel differently under scenario 1 and 2 when told by Smith that she will now be representing XYZ Company?  In scenario 1, it’s clear that you won the case and the only reasonable explanation for why XYZ Company would be hiring Smith is because she got a better outcome than their attorney did.  However, in scenario 2, it’s not so clear.  Is Smith’s emphatic recommendation that you settle the case now called into question by the fact that the other side is hiring her?  Even if it was the right risk assessment and Smith’s legal judgment was unassailable, wouldn’t the General Counsel now have no choice but to wonder about the objectivity of the advice?  Is Smith being rewarded by XYZ Company for engineering the settlement?  Certainly, XYZ Company had to shell out $75M; however, maybe they were very worried that it could have been a lot worse.

Brokerage is a lot more like hypothetical 2 in the foregoing paragraph.  Assume a broker negotiates a 100,000sf lease on behalf of a tenant to take half of a building. Two months later the landlord engages the tenant’s broker to be the listing agent on this Tenant’s building as well as two of its other properties.  Even if the tenant’s broker negotiated a very strong deal for its client, the lease created significant value for the landlord and may have turned a distressed investment into a viable one.  Like with the hypothetical involving the litigation settlement, it’s not clear that there was a winner or a loser in this lease transaction, therefore, it’s not entirely clear why the landlord engaged the broker after the fact.  Was the engagement an acknowledgement that the landlord was very impressed by the performance of the tenant’s broker or firm or is it a reward for bringing the landlord a very valuable deal that still had some fat in it?

When the landlord hires the tenant’s broker after they conclude a lease deal, it creates two major problems for the tenant.  First, it raises doubt about the broker’s objectivity and loyalty during the transaction and, therefore, creates questions about whether the lease deal was really as good as the tenant thought it was.  Second, the tenant’s broker now works for the landlord. That means when it comes time to renew its lease, its broker is completely conflicted and can no longer, credibly, represent the tenant.

Most tenants hire a broker because they want to make sure they are getting the most aggressive economic terms on their lease deal.  For many companies, real estate can represent one of its largest line item expenses.  Thus, lease negotiations can have a major impact on a company’s bottom line.  Because leasing is a zero-sum game between the respective economic interests of the landlord and tenant, the tenant needs to know that its broker’s loyalties are not compromised.

Unfortunately, in full service brokerage (where a firm represents both landlords and tenants), every tenant transaction represents an opportunity for the broker to impress the landlord or curry favor with them for future business.  Even if the broker does not currently represent that landlord, you can be 100% sure that it would love nothing more than to represent the landlord in the future because that’s where the real money is. Whereas most tenants only need a broker’s services once every five or 10 years, landlords need their services every day.  This inherent tension between what is best for the tenant and what is best for the broker’s long term financial interests creates problems for the tenant client regardless of how the broker resolves the internal conflict.  Once the tenant’s broker is hired by the landlord—regardless of the reason– the tenant is left to wonder.

Conclusion

Following a major lease transaction, it is not uncommon to see the landlord engage the tenant’s broker (or brokerage firm) as a listing agent, sales agent or managing agent either on the building in question or some other assets in the landlord’s portfolio.  The problem for a tenant in these situations, just as it was for the General Counsel in our above example, is that it may now be left to wonder about the objectivity of the advice it received and the merits of the deal it agreed to.  The legal profession prohibits conflicts of interest (unless expressly authorized by the parties) so that clients never have to second guess their decisions.  Unfortunately, because no such protections exist in brokerage, tenants are too often left wondering and with a bad feeling.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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What a Beer Run Means to the Future of Real Estate

Early in the morning of Oct. 25th, a truck pulled out of the Anheuser-Busch facility in Loveland, Colorado with 2,000 cases of Budweiser. Nothing seemed unusual, but this trip was anything but routine. This trip was Uber’s first real traffic test of a fully self-driving truck. The truck would make its 120-mile journey through Denver without incident – and without a driver.

otto-truck

Just last September Uber deployed a fleet of autonomous cars on the streets of downtown Pittsburgh as part of their goal to eventually replace Uber’s 1.5 million drivers. We all know that Google has had self driving cars on the road for years. The Google cars have logged 2 million miles with a safety record far better than any flesh and blood driver.

But neither Uber nor Google wants to sell you a car. They have much bigger plans. They want to rent you a car by the trip, and they see self driving technology as a means to get you to car share. Car sharing is the goal.

It’s hard to say when you will take your first drive in an autonomous car. Many technical challenges remain. One of the reasons Uber selected Pittsburgh as their test city was because it has more than the occasional snowy day. Snow is the Achilles’ heel of autonomous vehicles since something as simple as a light layer of snow dramatically reduces the effectiveness of the car’s sensors.

Legal issues loom as well. An autonomous car can be programmed when faced with an unavoidable accident to impact with, say, the bicycle or the dump truck. In one instance the bicyclist is severely injured and the passenger in the autonomous vehicle is not. In the other instance the dump truck driver is unhurt but the automobile passenger is on the way to the hospital. Besides the moral conundrum, this presents a legal liability Catch-22 for any autonomous vehicle manufacturer. The developers of self driving cars have asked Congress to decide how the cars should the programmed.

There is no doubt that the technical and legal obstacles will eventually be resolved. There’s also little doubt that self driving cars will lead to an explosion in car sharing. One study by Barclay’s Bank predicts that the technology will cut car ownership in half in 25 years. The catalyst for this shift will be the dramatically lower cost of car sharing which will have been made convenient by self driving technology. The last chapter in America’s love affair with car ownership is about to be written. But how will sharing self driving cars affect real estate?

Real estate has historically been highly resistant to technological change. The big inventions of the last 30 years were the personal computer and the cell phone. Those changed how we work, but not so much the buildings where we work.

You have to go back over 100 years to find a technology that transformed real estate. In the early 1900’s three new technologies coalesced to create the large scale, high density commercial real estate that we take for granted today: (1) the development of low-cost load bearing steel by Henry Bessemer; (2) the development of electric powered air conditioning by Willis Carrier; and (3) the invention by Elisha Otis of an elevator that someone of sound mind would actually use.

Will shared self driving cars be more like the personal computer and cell phone, greatly impacting our lives but having no impact on real estate? Or will they change the real estate paradigm?

Probably somewhere in between.  Let’s break it down:

Urban commercial districts. All people who commute to work in an urban center want to reduce that tortuous twice a day ritual.  Autonomous cars promise to do just that by not only doing the driving but by coordinating movement among vehicles to make those inexplicable slowdowns on the highway a thing of the past. It’s not a leap to say that an easier and quicker commute is likely to increase the demand for office space in urban areas.

There is another impact to consider. When you get to work your shared self driving car will not park itself but will go off to shuttle other people and goods until you’re ready to head home. Demand for parking will plummet freeing up additional land for development.

Suburban office. One of the results of the recent trend of “densifying” office space is that many suburban office parks now have inadequate parking. A design that provided 3.5 parking spaces for every 1000 square feet of office space worked perfectly for years, until we started putting five or six employees in that same 1000 square feet. Many suburban buildings will ultimately be saved from the brink of obsolescence by car sharing. Some suburban office parks in high demand areas will even flourish as they are able to convert now unneeded seas of asphalt into more office buildings.

Retail. The Internet has savaged traditional retail. And the self driving car will likely make it worse. Amazon, Google and Uber all envision a world where autonomous vehicles will provide you with near instant gratification right to your door. “Two day shipping” will be a hardship you tell your grandchildren about. If you can get your purchase delivered to you in a self driving car in under an hour, why have bricks and mortar retail?

Industrial/warehouse. The trucking industry is expected to be an earlier adopter of autonomous vehicle technology. An autonomous truck can drive 24 hours a day with no labor costs and far fewer accidents. Lower freight cost will allow the industrial and warehouse industries to locate further away from the customers they serve. That means a single location can economically serve a larger area with resulting consolidation. Further, with lower transportation costs, locations next to major highways may not be able to charge the premiums they have historically demanded.

Housing. If you had a safe, inexpensive chauffeur at your disposal 24 hours a day, where would you live? Would you finally get that hobby farm? Maybe you love living in the city, but with shared self driving cars, how much of a premium would you be willing to pay for a home that has off street parking?

Coupling self driving technologies with car sharing will dramatically increase the convenience of travel and slash the cost of getting there. Imagine a world where as soon as you step into a car you can start your workday, read a book or catch up on the latest episode of your favorite TV show. Imagine a world where computer guided cars communicate with each other to eliminate congestion and traffic jams.

The “rules of the road” are about to be rewritten. The popularization of the automobile in the early 1920s, and the expansion of the interstate highway system in the 1960s each effectively shrunk time and space, and as a result each changed the American landscape. Get ready for another paradigm shift brought to you by the shared self-driving vehicle. Please fasten your safety belts.

This article was written by Judson Wambold and published in the November 21, 2016 Philadelphia Business Journal.

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