Banking & Finance and Environment and Real Estate & Retail

Heart or head?: Intellect, emotions play role in most biz-location decisions

September 17, 2007

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Land to the south was swampy, while land to the north was dry. Thus, the lion's share of settlement headed in that direction-a momentum that continues into the 21st century, long after the last bits of Marion County wetland were drained and paved.

Office moves

According to Smith, who, during the last 25 years, has worked with some 1,500 clients and handled more than 15 million square feet of space, that mix of realism and emotionalism often comes into play during the search for administrative digs.

On the analytical side, the decision is influenced by access to major thoroughfares, the age of the building and the condition of its internal systems (from fire suppression to environmental controls), and the quality of the facility's management. Also, proximity of amenities such as banks, restaurants and dry cleaners play a part.

"Right now, everybody's pressed for time, and having access to those things is often beneficial to tenants," Smith said. "The ability to handle things like dry cleaning, being able to grab a bite quickly, being able to do your banking efficiently, those are things that are probably more important today."

Interestingly, on-site fitness centers and office park walking paths can also be a big plus-even if all the tenants' employees do is stare at them through the windows.

"If they're like me, they don't necessarily use them, but they sure have an interest in them when they're making a decision," Smith said.

Potential tenants interested in new construction are also interested in a range of new amenities, including more efficient environmental control systems, higher ceilings, and more and larger windows. Those last two items might soon conflict with a nascent drive to create more energy-efficient structures.

"There's a lot of talk of green buildings, though there's not as much building of them in our market," Smith said. "I've talked to several developers who've threatened to go green, but I've yet to see one actually build a 100-percent green building."

The process of selecting office space has become more sophisticated over the years, with ever-increasing emphasis on demographic research and financial analysis. But at the end of the day, human hunches can still make-and sometimes break-deals.

"I can't tell you how many times that's happened," Smith said. "I have clients to whom I've made recommendations, and they've done the exact opposite because they were smitten with a particular building."

That human factor, though sometimes maddening, at least reassures Smith that he won't be replaced by an algorithm.

"Part of the reason I enjoy the business is because it does allow for creativity," he said. "Otherwise, computers would do all the work and they wouldn't need me."

Retail locations

In spite of the relentless rise in consumer spending and the full parking lots at major malls, Mark Perlstein, principal partner at Indianapolis-based Sitehawk Retail Real Estate, says the biggest trend retailers must consider is a rising aversion to shopping. Or rather, to lengthy shopping trips.

"The customer today looks for convenience," said Perlstein, who specializes in high-end specialty retail developments and urban revitalization projects. "They want to get in, they want to get their shopping done, and they want to leave."

Which explains why retailers ranging from big-box stores to national restaurant chains to local startups are increasingly obsessed with finding just the right places to corner those fickle buyers.

"They can get very precise," Perlstein said. "I know that Dunkin' Donuts, which is coming into the market with multiple stores, has got its brokers actually counting cars [at potential locations] from about 5:30 to 8:30 in the morning. Actually standing out doing car counts on certain sides of the street. They can turn that into projections of sales volumes."

These days, companies seeking new Indianapolis locations present Sitehawk with very specific lists of demographics they wish to attract. The company attempts to find matches using its own extensive demographic information and knowledge of the local market.

"We do a lot of computer work," Perlstein said. "We have a full-time demographer and mapping person that basically creates any of our statistics or data that we need, whether it's aerial programming, color demographic profiles, or what we call polygon statistics-breaking down polygon trade areas for people. We do all that, and it's become very much a part of our business."

The process can be time-consuming and complicated, but ignoring such data-or failing to seek it in the first place-can spell disaster in today's cutthroat retail market.

"It's suicide," Perlstein asserted. "I've been doing this for 24 years, and all too often I've seen a retailer that locates in a certain location because they think it's good or pretty. I will tell my wife that in the next 12 to 18 months they'll be gone. And about 90 percent of the time I'm correct. They just didn't do their homework."

Not that all decisions involve complex computer models. Coffee shops, for instance, inevitably locate beside major thoroughfares used by inbound morning commuter traffic, while liquor stores just as inevitably opt for the outbound "going home" position. And Perlstein was once told by the chairman of Costco (a corporate client), that when it came to picking sites, "I just need to know which way the wind blows."

Retail development, he contended, almost always spreads in the same direction as a locality's prevailing winds.

"It's a very strange thing that I never really knew about until it was brought up to me several years ago," he said.

Perlstein thinks the technique is broadly, eerily accurate-though he won't toss out his demographic research and computer models in favor of watching The Weather Channel.

Locating industrial

If there's one area of corporate real estate in which emotion has no place, it's in the selection of industrial space-especially warehousing and distribution square footage, of which Indianapolis has plenty.

"There's plus or minus about 11.5 million square feet of brand new speculative space that is either sitting vacant, offered for sublease, or under construction [in the Indianapolis metro area]," said Jeremy Woods, senior director of industrial services at Summit Realty Group. "And that's just Class A industrial product. That's a lot of space by any measure."

The list of renter concerns is far different from those seeking retail or office square footage. Highway access is a big issue, as is access to a friendly nearby labor market from which to draw workers. Based on those concerns, it's no surprise that the area around interstates 70 and 465 near Indianapolis International Airport has become a warehousing and distribution sweet spot.

Other renter concerns include such nuts-and-bolts issues as ceiling clearance, availability of adequate parking for trailers and cars, fencing to secure the facility, and the rental cost per square foot. Rates may vary by a paltry-sounding 10 cents from one location to another, but the price quickly adds up for customers seeking, say, a 600,000-square-foot facility.

Speculators, as well as companies planning to build from scratch, must also consider real estate tax abatements-almost a prerequisite for communities wishing to attract the speculative building of such facilities.

"That is what allows developers to come in and build the inventory on a speculative basis so that when the consumer or the tenant comes into the 'store,' so to speak, they've got the loaf of bread they want to buy," Woods said. "They don't want to wait in the store until the bread is stocked. They want to pick it off the shelf and take it. That's what we've got. We've got a storehouse of inventory for the tenants to come in and essentially purchase or occupy."

If it seems as if Indianapolis has a lot of warehouse space, it's because it does. The reason is transport. The city is intersected by more interstates than any other major municipality. Ironically, Woods says, Bloomington is actually better-placed to be a transport hub. Unfortunately for that city, it lacks the highways that would make it a workable supply depot.

"You can't get anywhere from there very quickly," he said.
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