REE6932_Case Study 2 Outline.docxCase Study 2The Holt Lunsf.docx

REE6932_Case Study 2 Outline.docx
Case Study 2
The “Holt Lunsford Commercial” Case
Read the “Holt Lunsford” case study and answer the below
questions. Please submit your write up as a Word file labeled as
well as your calculations in an Excel file You are required to
write at least 3 pages (font: 12; line spacing: 2).
· Based on the information provided in the case study, do you
recommend Staton Tees to remain in the Welch building,
irrespective of financing method, or relocate to a newly built
facility in a different location? Discuss your rationale based on
considerations, for example, with regard to the long-term
strategy, operational needs of the firm and property market
conditions.
· Assuming that Staton Tees decides to remain in the Welch
building, which financing method should they choose? To make
your recommendations, discuss
1) Strategic considerations with regard to the financing options.
2) Financial considerations by conducting a (simplified) DCF
for each financing option:
· Use the information provided in the case study and following
the outline of the lease vs. buy analysis in the textbook (page 62
to 65).
· Lease option: Assume a 10-year NNN lease with occupancy
cost of $4.5 per SF ($3/SF rent; operating expenses of $1.5/SF)
and a 3% inflation adjustment every 3 years. There are no initial
transaction costs related with leasing.
· Buy option: Assume a purchase price of $4,048,300 purchase
price and short-term debt financing with a 75% LTV mortgage
(2% closing costs) at 4.5% interest only for 5 years. The going
out cap rate is 7.5% and 2% closing costs occur at the time of

sale.
· Staton Tees’ pre-tax required rate of return is 20%
(opportunity cost). Assume a discount rate of 10%.
· Staton Tees does not account for the impact of depreciation
and interest expenses on taxable income. Without calculating it,
briefly discuss how accounting for tax savings could impact the
decision to lease vs. buy.
1
Case #2 Holt Lunsford Document.pdf
9 - 8 0 4 - 0 1 2
R E V : A P R I L 2 2 , 2 0 1 3
_____________________________________________________
_____________________________________________________
______
Professor Arthur I Segel and John H. Vogel, Jr, Adjunct
Professor at the Tuck School of Business at Dartmouth College,
prepared this case. For a
related case, see “Shady Trail,” HBS No. 899-143. HBS cases
are developed solely as the basis for class discussion. Certain
details have been
disguised. Cases are not intended to serve as endorsements,
sources of primary data, or illustrations of effective or

ineffective management.
Copyright © 2003, 2004, 2005, 2006, 2008, 2010, 2012, 2013
President and Fellows of Harvard College. To order copies or
request permission to
reproduce materials, call 1-800-545-7685, write Harvard
Business School Publishing, Boston, MA 02163, or go to
http://www.hbsp.harvard.edu.
No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any
form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—
without the permission of Harvard Business School.
A R T H U R I S E G E L
J O H N H . V O G E L
Holt Lunsford Commercial
Holt Lunsford glanced at his remaining schedule for the day and
heard his stomach growl.
Sandwiched between an 11:00 a.m. conference call and an
afternoon strategic planning session was a
lunch meeting with his long-time client and friend, Ned Staton.
Lunsford, CEO of the Dallas-based
commercial real estate services firm Holt Lunsford Commercial
(HLC), was looking forward to
sharing some good ol’ Texas-style barbeque—and some real
estate advice—with Staton. Two days

earlier, Staton, who owned Staton Tees, a wholesale T-shirt
distribution business, had called
Lunsford seeking a solution to a classic real estate dilemma:
should a company own its headquarters
facility, or lease it?
Holt Lunsford Commercial provided property management,
leasing, development and other real
estate-related services to owners and tenants of industrial and
office buildings. Lunsford founded the
firm in Dallas in 1993, and soon had established a prominent
regional presence, opening satellite
offices in both Houston and Fort Worth, Texas. By 2012, Holt
Lunsford Commercial was responsible
for the management or leasing of over 44 million square feet of
property, and the rapidly growing
firm employed over 100 people, including an increasing number
of MBAs, a group Lunsford liked to
call his “young guns.”
As he prepared for the lunch meeting with Staton, it occurred to
Lunsford that he’d better bring
along one of those MBAs. There were numbers to crunch, sure,
but this lunch with Staton, one of the
firm’s smallest but most loyal customers, might provide a
number of valuable lessons. In their earlier
phone call, Staton had explained his predicament to Lunsford.
Staton’s lease of Welch Center, the
100,000-square-foot warehouse/office property that served as
headquarters for Staton Tees, was due
to expire at year’s end. Staton wanted to know if he should
renew the lease or perhaps pursue other
options, such as buying the property outright, or even
developing a build-to-suit facility. Lunsford
had previously negotiated several leases on Staton’s behalf, but
had yet to help Staton purchase or

develop any facilities, so the lunch could ultimately expand
their business relationship.
For exclusive use at Florida International University, 2015
This document is authorized for use only in REE6932- Special
Topics Real Estate by Dr. Julia Freybote, Florida International
University from October 2015 to April 2016.
804-012 Holt Lunsford Commercial
2
Lunsford approached Celia Marquez, a “young gun” he hoped
might one day help launch a Holt
Lunsford Commercial office in Memphis, Tennessee, or perhaps
Atlanta, and said, “Hey Celia, are
you in the mood for some barbeque?”
The Commercial Real Estate Service Industry
As markets began to stabilize in 2009, commercial real estate in
the United States had a value of
approximately $11 trillion.1 Often sitting between owners and
users of properties were third-party
firms like Holt Lunsford Commercial offering a range of
management and transaction services. Over
10,000 such firms existed and competed in a $50 billion market,
offering real estate services to
corporate and institutional property owners, investment
advisors, and tenants like Staton Tees.2
Leading the way were global, public full-service companies CB
Richard Ellis, Colliers International,
and along with Jones Lang LaSalle, which continues to grow

through regional acquisitions, such as
the purchase of Dallas based The Staubach Co. in 2008. (See the
Appendix for a summary of major
industry trends.)
Commercial real estate service providers pursued a number of
activities. Property management
services included managing tenant relationships on behalf of
owners, facilities operations and
security, as well as property maintenance, landscaping, and
repairs. Transaction services included
leasing, tenant representation, and the brokering of acquisitions
and dispositions. Additional services
included project development, construction management, and
financial planning. Service firms
typically operated under 30-day contracts as dictated by their
institutional clients, although property
managers, for example, were rarely changed unless the
buildings were sold.
Commercial real estate service firms typically earned revenues
by generating transaction
commissions or by charging service fees. Leasing commissions
on industrial buildings were 4%–
6.75% of the total lease value. Holt expected to earn about 5%
on average. Tenant representation
yielded 3%–4.5%. For Staton, HLC typically charged 3%. For
property management of industrial
buildings, such as the Welch Center, HLC charged about 2%.
For office buildings it would be closer
to 5%. Acquisition and disposition services might earn a
provider as much as 3% of a purchase or
sale, but competition in the Dallas market had compressed this
rate below 1%, especially for larger
transactions. Finally, providers who offered development
services, like construction management,

earned 3%–5% of costs (averaging 4%), excluding soft costs
such as marketing, legal, and architect
fees. Earnings before interest, taxes, depreciation, and
amortization (EBITDA) margins for firms
offering property management and brokerage services often
ranged between 10% and 13%.3
The real estate services business was both cyclical and seasonal.
During 2012, the United States
was slowly emerging from an economic slump. Space market
vacancies were starting to decline, but
as companies looked for ways to increase profits in a tough
economy, some real estate firms moved
away from third party real estate service providers and took the
assignments in house. Competition
remained tough as service companies pursued owners who
needed to outsource both property
management and leasing responsibilities.
1 Andrew Florence, Norm Miller, Jay Spivey, Ruijue Peng,
“Slicing, Dicing, and Scoping the Size of the U.S. Commercial
Real
Estate Market.” Journal of Real Estate Portfolio Management.
Vol. 16 No. 2 2010, p. 111, http://www.costar.com, accessed
Jan 4,
2013.
2 Bryan A. Maher, Alex Brown, “Trammell Crow—A Leader in
a Fragmented Business Services Industry,” March 30, 1999, p.
2,
available from Thomson Financial, http://www.investext.com,
accessed July 17, 2003.
3 Andrew Jones, “Trammell Crow Company—Outsourcing
America,” Morgan Stanley, October 7, 1999, p. 8, available

from
Thomson Financial, http://www.investext.com, accessed July
17, 2003.
Holt Lunsford Commercial 804-012
3
Holt Lunsford Commercial Story
Holt Lunsford began his real estate career in Dallas with
Trammell Crow Company in 1986. After
a successful leasing career focused on the industrial sector, he
left Trammell Crow in May 1993 at the
age of 29 and launched his own real estate business, Holt
Lunsford Commercial. It was a daring
entrepreneurial move for Lunsford, his wife, and children, but
he was confident that the reputation
and relationships he had built with institutional customers and
tenants while at Trammell Crow
would help him succeed. “I always wanted to own my own
business,” said Lunsford. “I wanted to
get in with a good company that would train me, then eventually
strike out on my own.”4
Lunsford met Staton, the T-shirt distributor, while working for
Trammell Crow. The relationship
started with the two men “on opposite sides of the table” but

soon developed into a close friendship
enjoyed by both families. When Holt Lunsford Commercial first
opened its doors, Staton gave
Lunsford a $100 gift certificate for office supplies and asked
Lunsford to handle tenant representation
duties for his T-shirt distribution business. Although tenant
representation would not be the major
focus of Holt Lunsford Commercial, Lunsford happily agreed to
Staton’s proposal, and Staton Tees
became his first client.
Leasing and property management on behalf of large
institutional property owners soon became
Holt Lunsford Commercial’s core business. By 1997, the firm
managed or leased over 5 million
square feet of space. Two years later, Lunsford opened a new
satellite office in Houston, and the firm
entered a period of accelerated growth, with revenues increasing
at 35% annually. In 2009, Matt
Carthey, another “young gun” who embodied the culture of Holt
Lunsford Commercial opened an
additional office in Fort Worth. By 2012, the firm managed or
leased 44 million square feet of space
and was the second-largest commercial real estate manager in
the Dallas metropolitan region.
Gross revenues of the service firm were $12 million, with 31%
coming from the Houston and Fort
Worth offices. Revenues were earned from an array of different
services (see Figure A). The largest
expense was employee compensation. Salaries, bonuses,
commissions, and benefits totaled
approximately 60% of the revenues. For most employees about
half of their compensation was base
pay and 50% was incentive pay. In 2012, the balance sheet was
healthy and the firm remained a

private entity, with Lunsford as sole owner.
Figure A Holt Lunsford Commercial Revenue Distribution in
2012
Property Management 41%
Leasing 32%
Acquisitions & Dispositions 13%
Development & Construction 7%
Tenant Representation 5%
Other 1%
Source: Company data
4 Betsey Craig, “2001 Alumni Awards: Young Alumnus of the
Year,” Abilene Christian University Alumni Magazine Web
Edition,
Winter 2002, http://www.acu.edu/acu-
today/winter2002/cover03b.html, accessed August 2, 2003.

4
The Organization
Lunsford wanted Holt Lunsford Commercial to be a principled
company that satisfied its
customers and “glorified God” through its behavior with
employees and vendors. At quarterly town
hall-style meetings with staff, Lunsford often credited the
firm’s success to its eight corporate tenets,
which emphasized honesty and customer service. (See Exhibit 1
for tenets.) “Our value system is our
corporate DNA,” said Lunsford. “If you do the right thing for
people, they will entrust their assets to
you and that trust develops efficient, healthy relationships.”
Lunsford built a relatively flat organization. As part of a
succession plan, he had recently hired
Chief Operating Officer, Sam Gillespie (See Exhibit 2 for a
company organizational chart.) Gillespie
had been a partner with Trammel Crow Company and shared
similar styles and values as Lunsford.
Most of the key employees, however, had been with Holt
Commercial for a long time, including Jim
Brice who headed the Dallas and Houston Industrial Division
and had been Holt’s first employee.
Each office was organized into service lines, and nearly every
employee’s compensation was tied
in some way to individual production and performance. In the
leasing group, employees were
known as “marketing representatives” rather than “agents” or
“brokers”5 and served as a single
point of contact for property owners and tenants, handling lease
transactions, rent processing, and
the preparation of financial statements and reports. Lunsford

encouraged the marketing
representatives, many of whom were MBAs, to “get out in front
of the client,” and e-mailing
proposals was expressly forbidden. Celia Marquez, the recent
MBA hire that Lunsford had invited to
lunch, was assigned to the Staton Tees account, among others.
The firm had added professionals rapidly since its founding, and
while the relocation of
employees to Houston and Fort Worth had drained personnel
resources in Dallas, it had also helped
ensure cultural continuity across the firm. The satellite offices
had significant autonomy, as Lunsford
believed customers and tenants received higher quality service
from individuals within their local
market. Carthey described what it was like to open the office in
Fort Worth: “After I learned the HLC
platform and excelled in a leasing role, the opportunity to
explore a new market and open a new
office was an exciting challenge. Although Fort Worth had an
institutional presence, we quickly
determined our future client base would have more diversity
with a higher mix of local owners than
Dallas or Houston. The good news for our team was that we
had the support from existing
institutional clients that grew with us while we cultivated local
relationships that are paying off
today. I think opening an office in Fort Worth has shown that
HLC’s platform, while well suited to
support some of the largest institutional owners in the country,
is flexible enough in its processes to
accommodate owners on a local and regional level.”
As an additional venture, Lunsford started Frontier Equity as a
subsidiary of Holt Lunsford
Commercial for the acquisition of office and industrial

properties. Frontier Equity focused on small
and large cap properties in the Texas market with a 3 to 10 year
investment horizon. There were two
areas of opportunity that weren’t in direct competition with
HLC’s clients: most institutional
investors were only willing to take on properties with low risk
profiles and wanted a “baked cake,”
meaning the property was already developed and leased.
Secondly, many large investors would
only purchase large properties. Frontier Equity found
opportunities to buy smaller properties large
investors would not pursue, due to scale, and aggregate them.
Investing in value-add properties was
an advantageous way to create wealth for Lunsford and his
partners. The service business informed
5 In order to legally earn commissions for leasing space, these
marketing representatives needed to be licensed real estate
agents or brokers.
5
their investment decision and created high returns on a risk
adjusted basis. The program was
accretive to the growth of the service business as the majority

of the investments were eventually sold
to their institutional clients. As Holt Lunsford Commercial
grew, so did Frontier Equity. Lunsford
was intent on imbuing the same ideas and values into the equity
division of Holt Lunsford
Commercial as he was the leasing division.
Clients
Holt Lunsford Commercial’s primary customers were a select
group of nationally focused real
estate advisory firms including TA Associates Realty, Invesco
Realty Advisors, and the Principal
Global Investors, each of which acquired properties and
provided asset management services on
behalf of institutional owners like pension funds and insurance
companies. Over 60% of Holt
Lunsford Commercial’s revenues were derived from the firm’s
top four advisory firm clients.
Working with these advisory firms posed several challenges for
Holt Lunsford Commercial,
including the threat of being replaced by another third-party
service provider. “What keeps me up at
night is that all of our property management and leasing
contracts are 30-day contracts,” explained
Lunsford. “We’re constantly on the hot seat to please and serve
clients well.”
Invesco’s Michael Kirby was one of Lunsford’s clients. In 2012,
Dallas-based Invesco Realty
Advisors managed $12 billion in real estate assets for
institutional owners, $7 billion of which was
placed in 375 direct investments across 30 states. Said Kirby:
At the end of the day we have to make sure we have the best
available property

management and leasing talent serving an investment and
helping to maximize returns. Our
preference is to work with large players like our national
preferred service providers Jones
Lang LaSalle and CB Richard Ellis, because it creates a
tremendous amount of efficiency. Holt
Lunsford Commercial are a niche player with a particular
strength in Dallas and Houston, and
they are respected regionally, so we gave them one or two
investments and have entrusted
more business over time. Holt in particular is a unique person
who is very ethical and hard
working, and I like the fact that if there is an issue, I can speak
to him personally.
In Dallas, Holt Lunsford Commercial faced competition from
global real estate service firms CB
Richard Ellis, Colliers, and Jones Lang LaSalle, each of which
boasted over 500 offices in over 60
countries. But Lunsford was undeterred:
I know the institutional owners would often prefer to work with
national service providers
who are in many cities, but we’ve been so strong locally they
can’t ignore us. These institutions
won’t give their business to just anybody. You have to be a
certain size. Sometimes you will see
an advisory fund manager choose a name-brand national service
provider to protect their
job—they’d rather see an asset suffer and keep their job than
take a chance on a regional player
like us and potentially lose it. But you have to ask yourself why
is it that these pension funds
and advisory firms do not choose the same provider in each
market. The answer, I think, is
there is no dominant service provider with consistent behavior

across multiple cities.
It was necessary to clearly and consistently communicate
financial results for each property to the
advisory firms. “Our clients have stringent reporting
requirements,” said Lunsford. “Pension funds
are on top of the chain, and they drive this. We’re at the low
end of the food chain. You have to
provide accurate and consistent reports for all properties out of
every office, or you might get
replaced.” (See Exhibit 3 for a diagram illustrating real estate
investment process flows.)
6
Proper reporting was a virtue, but successful lease-ups and
avoiding vacancies were both crucial
to the long-term success of a service provider like Holt
Lunsford Commercial. Lunsford viewed the
more than 1600 industrial and office tenants that had signed
leases with Holt Lunsford Commercial
as a second key group of customers. Close relationships with
prospective tenants were particularly
beneficial when trying to secure more leasing business from the
advisory firms and when negotiating
lease expansions or renewals. In addition, tenants like Staton

often brought development proposals to
Holt Lunsford Commercial, and increasingly Lunsford was
hearing about intriguing, “off-market”
real estate investment opportunities, but he wondered if raising
and deploying capital would clash
with his firm’s service provider model.
The Lunch Meeting
Lunsford and Staton agreed to have their lunch meeting at
Dickey’s, a popular cafeteria-style
barbecue restaurant in North Dallas. Lunsford and Marquez
arrived first and both cracked a smile
when Staton drove into the parking lot. His friend was driving
what appeared to be a freight truck
crossed with a sports car. After inspecting the SportChassis
Freightliner, which featured studded
chrome hubcaps, leather seats, and a DVD entertainment
system, they entered Dickey’s, ordered
lunch and began to talk business, with Marquez taking notes.
Staton started the conversation. Staton Tees’ lease of its
headquarter facility, Welch Center, was
due to expire in nine months, he explained. The owner of the
building had indicated a desire to
negotiate a lease renewal, and had also offered to sell the
property to Staton. But if he was going to
own his headquarters, Staton asked, perhaps he ought to simply
develop a customized build-to-suit
facility? Was it the right time to even consider relocating?
Lunsford chuckled. With so many options on the table, it was
sure to be a long lunch.
Staton Tees

Ned Staton founded Staton Tees in 1981, in Baton Rouge,
Louisiana, to service the emerging
T-shirt printing industry. By 2012, Staton was the largest
distributor of Hanes products and generated
over $200 million in total sales. The firm warehoused
sportswear in a variety of styles and colors and
distributed on an “at once basis”6 to screen printers and
embroiderers seeking to avoid the
inconvenience of mill purchase requirements and long delivery
times.
Staton’s first warehouse was a 600-square-foot (20 feet by 30
feet) storeroom leased for only $100 a
month. “Flexibility with our real estate was very important
early on,” said Staton. “Leasing was our
only option because we didn’t have many assets, so we always
tried to sign one-year leases. We’ve
probably moved 40 times.”
After several years of rapid growth, which included the opening
and closing of several
distribution centers, Staton moved the firm’s headquarters to
Dallas in 1987. Growth continued, and
in 1993, Staton assigned his tenant representation business to
Lunsford. Holt Lunsford Commercial
secured and managed leases on behalf of Staton Tees in five
cities—Dallas, Memphis, Orlando, Los
Angeles, and Chicago—and was responsible for a total of
506,600 square feet of warehouse space.
Lunsford’s Dallas team remotely handled tenant representation
work outside of Texas for Staton,
traveling when necessary, and since being hired, Marquez had
increasingly been responsible for the
account.

6 All orders were shipped to customers within 24 hours of
receipt.
7
Real estate occupancy costs represented around 4% of Staton’s
cost structure. “We have very
specific needs,” explained Staton. “A big box, not too deep,
with lots of dock doors across the front.
In all of our warehouses except Dallas, we don’t need office
space, just a small shipping and receiving
area. Ceiling height does not matter; about 18 feet would work
fine.”
By 2012, Staton was considering adding more industrial space
in the Northeast, perhaps in
Philadelphia, but his mind had also turned to other matters. He
wanted to spend more quality time
with his family, traveling, and pursuing his hobby flying
airplanes. Fortunately, Staton’s home, his
son’s school, and the private airport were within two miles of
his Welch Center office, making the
commutes convenient.
Welch Center

Built in 1989 on a 5.5 acre site,7 Welch Center was a 102,718-
square-foot front-load, dock-high
industrial bulk warehouse, with a 24-foot ceiling floor to joist.
(See Exhibit 4 for industrial property
classifications.) The building had a concrete truck court (120
feet)8 and 107 parking spaces for
employees.9 Although the building was designed to hold two
side-by-side tenants, Staton Tees
occupied the entire facility. Inside, there were approximately
15,000 square feet of office space on the
ground floor devoted to the firm’s corporate headquarters, call
center, and customer pick-up area.
(See Exhibit 5 for truck court and building picture and Exhibit 6
for site layout.)
The building was in good condition, except for the roof, which
had an estimated remaining life of
five years. Built-up roof systems used in Dallas traditionally
cost $4.00 per square foot to replace. The
offices had recently been renovated, and major truck-court
repairs were completed in 2010.
Welch Center featured slightly above average column
spacing,10 fluorescent strip lights, sprinklers,
super hard floors for stacking pallets, and 30 skylights that
could be opened to release smoke if a fire
occurred. Staton Tees did not use sophisticated racking systems
on the warehouse floor, choosing
instead to stack T-shirt boxes up to eight feet high and to
arrange merchandise in rows. Order
fulfillment process control was vital, as any errors that occurred
when items were “picked” and
“packed” inevitably led to merchandise returns, each of which
cost the firm around $20.
Welch Center was located in North Dallas in Metropolitan

Business Park (Metropolitan), at the
intersection of Interstate 635 and the Dallas North Toll Road,
two main thoroughfares in North
Dallas. Customers from around the Dallas/Fort Worth area
could easily identify the address and
conveniently pick up their orders. Due to its proximity to high-
end residential, upscale retail, and
office properties (see Exhibit 7 for aerial photo) and lack of
available land for development in the
area, the industrial sector at this location had seen some
transition to alternative uses such as
furniture outlets and wholesale showrooms. There was even a
Starbucks coffee shop in the
neighborhood, attached to a converted warehouse inhabited by
The Great Indoors, a home
furnishings retailer. Pressure to convert these warehouses had
pushed rental rates above traditional
industrial rates and solidified values for all owners of
Metropolitan property. Some buildings with
7 One acre is equal to 43,560 square feet.
8 Warehouses typically have one truck bay or dock for every
10,000 square feet of floor space. Welch Center had 12 truck
docks
on the east-facing side of the building near the street, and seven
railway loading docks on the west-facing side. The rear doors
and the railway were no longer in use; therefore the building
would be classified as a “front-loader.” A modern cross-docking
facility would have trucks bays on both sides of a warehouse to
maximize throughput.
9 Industrial buildings typically have one parking space for
every 1,000 square feet of warehouse space.

10 The column spacing was 42.5 feet by 42.5 feet. Standard was
40 feet by 40 feet for comparable warehouses.
8
more prominent addresses had sold for as much as $50 per
square foot to furniture companies that
could better take advantage of the high traffic count and visible
addresses.
Dallas Industrial Property Market
The Dallas/Forth Worth industrial market consisted of
approximately 714 million square feet of
warehouse and manufacturing space, making it the third-largest
U.S. supplier in 2012, behind only
Chicago and Los Angeles. (See Exhibit 8 for the leading U.S.
industrial markets and for sector
performance data.) With a central location in the southwest
United States and excellent thoroughfare
systems, Dallas had become a major distribution hub for the
flow of goods to the consumer. The city’s
demographics and legal/regulatory frameworks made it an
attractive market for corporations
needing industrial space. Dallas ranked ninth in the nation in
total population (over 1.2 million

people), and during the last decade, Texas led the nation in job
creation, averaging approximately
115,000 new jobs per year. Notably, Texas had no personal or
corporate income tax.
Nationally, and in Dallas, just-in-time inventory management
had reduced storage requirements
for many firms and relieved pressure on demand for industrial
space, although new facilities with
large truck courts able to accommodate increasingly larger
trucks (up to 54 feet in length), and with
cross-docking capabilities were highly sought after. Many
manufacturers had begun outsourcing
distribution activities to third-party logistics firms, which
operated massive modern facilities out of
regional hubs. This had changed the complexion of the tenant
pool in Dallas and across the U.S., as
service providers like Holt Lunsford Commercial increasingly
worked with third-party logistics firms
rather than with wholesale distributors like Staton Tees that
targeted one specific industry.
Institutional investors seeking consistent returns in a stable
industrial market had long favored
Dallas, and the flight of capital from stocks and into real estate
in the early twenty-first century had
heightened this interest. Industrial properties were often
considered defensive investments. Short
construction cycles allowed industrial developers to quickly
curtail efforts during recessions, limiting
oversupply and vacancy problems. Conversely, these short
construction cycles often meant the
industrial property class was first to recover during economic
rebounds. In Dallas, investors seeking
stable yields had pushed pricing for core warehouse/distribution
buildings to $34–$55 per square

foot in 2012.11 Welch Center was considered a Class “A”
building, and if fully leased at market rates,
might fetch between $38–$42 per square foot on the open
market.
Despite its favorable characteristics and the capital frenzy, the
Dallas industrial market was not
immune to the tenant-demand problems that had plagued many
U.S. commercial real estate markets
starting in 2008-2009. During 2009 Dallas-Fort Worth
experienced negative industrial absorption of
3.3 million square feet – meaning that space vacated by tenants
exceeded newly leased space, on a
square foot basis – and the citywide vacancy estimate for
distribution and warehouse space was
12%.12 By contrast, 2007 vacancy rates were 8.4%, and in
2012 conditions were improving and rates
were at a more acceptable 9.7% by the third quarter.13
With the supply-demand imbalance, and real estate uncertainty
on the horizon, many options
were available to tenants. Rents remained low (see Exhibit 9 for
Dallas industrial market rental and
investment sales data), debt was inexpensive, and build-to-suit
industrial construction had recently
increased in popularity as corporations sought new, customized
space. In 2012, FedEx and Subaru
11 Company document.
12 CoStar, Dallas/Ft Worth Industrial Market Report, Q3 of
2012, http://www.costar.com, accessed 7 January, 2013
13 Ibid.

9
had pursued this option, and Amazon had recently completed a
new one-million-square-foot built-
to-suit distribution warehouse in both Dallas, Texas, and
Jeffersonville, Indiana.14
Staton’s Options
During the lunch meeting, Lunsford and Staton discussed trends
in the Dallas industrial market
and strategies for Welch Center, while Marquez scribbled down
projections for three different
options: renewing the Welch Center lease, buying the building
at the conclusion of the current lease,
and abandoning the property to pursue a build-to-suit option.
(See Exhibit 10 for Marquez’s
analysis.)
The lease-renewal option Lunsford and Marquez estimated the
market-lease rate for Welch
Center to be $3.35NNN per square foot, upon renewal. This
“triple net” rental rate was exclusive of
taxes, insurance, utilities, and common area maintenance fees,
which would add an additional $1.15
per square foot in year one, bringing Staton’s total expected
occupancy costs in 2013 to $4.50 per
square foot. For long-term leases of five years or more, annual

rent bumps of 3% would typically be
built into the rental agreement to adjust for inflation; however,
the Dallas market usually only
afforded property owners rent bumps in three- to five-year
increments. Marquez assumed there
would be an inflation adjustment every three years if Staton
signed a new 10-year lease.
Leasing had several benefits for business owners like Staton.
Many companies chose to lease space
and treat the expense as an operating cost, while focusing assets
on their core product or service
offering.
Flexibility was important. Changes in standard fulfillment
processes, along with new technologies
and equipment, could cause an industrial firm’s space needs to
vary. For instance, clear heights for
newly constructed warehouses had risen from 28 feet to 32 feet,
which allowed additional product
storage and reduced required floor area, but it also necessitated
the purchase of special materials-
handling equipment to reach higher racking systems. A
company’s space requirement could also
change with the adoption of new distribution strategies, such as
moving from a centralized approach
with large, regional centers to a decentralized plan with many
small local centers. Staton had
considered these alternatives but did not anticipate any
immediate changes to his logistics and
distribution processes.
The buy option Staton wanted to explore the benefits of
ownership
The current owner of Welch Center was a well-known

institutional property owner. The owner
had purchased the building as part of a larger portfolio
purchase, with several similar properties, and
was now looking to unload some of the properties and reallocate
funds. The owner had expressed a
desire to sell the property for $39.41 per square foot, or
$4,048,300. Lunsford estimated the required
equity to be $1,012,075, assuming 75% leverage and a loan of
$3,036,225. In addition, there would be
closing costs of approximately 2% of the loan amount, or
$80,966, for the engineering, appraisal, legal
and loan origination fee. Staton’s total out-of-pocket expense
would be $1,093,044. To Staton that
represented a significant but doable investment.
If Staton chose to purchase the building, Lunsford could help
him obtain debt financing. Interest
rates were at 55-year lows and owners were seizing the
opportunity to refinance existing commercial
mortgages, and to originate new ones. Lunsford estimated the
cost of short-term bank debt financing
14 CBRE, US Industrial Marketview, Q3 of 2012,
http://www.cbre.us/AssetLibrary/USIndustrialMarketView_Q32
012.pdf,
accessed January 7, 2013.

10
at 4.5% for a five-year interest-only note.15 Bank debt was less
expensive than permanent financing
from other capital sources, but typically was full recourse, and
thus would require a personal
guarantee from Staton. A pre-payment penalty equal to 1% of
the total loan amount would apply, if
Staton paid off the loan during the first four years.
Lunsford asked Marquez to prepare a 10-year pro forma
analyzing a purchase of Welch Center by
Staton. It was debatable what the highest and best use of Welch
Center would be after 10 years;
however, to determine expected residual value, Lunsford and
Marquez estimated a year-10 inflation-
adjusted rent of $4.37NNN per square foot16 and assumed a
7.5% exit cap rate, along with 2% closing
costs. Staton wanted to know if he could lower his annual total
occupancy costs by buying Welch
Center instead of renting. He expected a 20% pretax return on
his investment. To make it an apples-
to-apples comparison, Staton indicated that if he invested the
equity to purchase real estate in his
business, for proforma purposes, he assumed he could refinance
at the same 4.5% interest rate. But
there was a risk. Public companies facing this dilemma—and
pressure from shareholders—had
increasingly moved away from ownership and toward leasing,
often utilizing sale-leaseback
mechanisms to redeploy capital and use it more productively.17
Lunsford was unsure whether this
same argument should be applied to Staton’s privately held
firm.

The build-to-suit option The third option Staton was
considering was to leave Welch Center
in favor of a new facility that Holt Lunsford Commercial would
develop to suit the needs of Staton
Tees. The building could be financed and owned by an
institutional investor client of Lunsford’s and
then leased to Staton, or Staton Tees could itself own the
building. “The building would have all-new,
customized systems and since it would be Staton’s headquarters,
they could use this as an
opportunity to recharge the corporate image,” said Lunsford.
Staton told Lunsford that while he generally liked Welch
Center, he did have some customization
ideas for a new facility if they were to pursue the build-to-suit
strategy. First, Staton wanted to
increase his corporate office space to 20,000 square feet, but
build the office space two stories high
within the warehouse to maximize floor space dedicated to
fulfillment activities. A specialized truck
bay and a pleasing outdoors environment for employees, like the
one found at Welch Center, were
also on his wish list.
Lunsford had identified a 315,000-square-foot parcel of land in
the Colony Crossing area, 20 miles
north of Dallas, on which Holt Lunsford Commercial could
develop a 110,000-square-foot facility.
The land would cost $2.50 per square foot, making the effective
land cost $7.16 per square foot of
building, given the 35% coverage ratio.18 Lunsford estimated
he could build a 28-foot-clear
warehouse that met Staton’s specifications in six months using
tilt-up construction techniques. The
facility would have 90,000 square feet of warehouse space along

with a 10,000-square-foot office
footprint built two stories high. Total construction costs (not
including land) would be $33.43 per
15 Staton would have to pay off the principal or secure new
financing after five years.
16 Lunsford assumed 3% annual inflation with rent bumps at the
end of years three, six, and nine.
17Dirk Brounen and Piet Eichholtz, “Corporate Real Estate
Ownership Implications,” 2003, p. 5, www.landecon.cam.ac.
uk/property/Braunnen_Eichholtz.pdf, accessed August 23, 2003.
18 As a rule of thumb, industrial buildings covered one-third of
the total land plot, with an additional one-third allocated to
parking and the truck court and the final one-third devoted to
green space. In practice, and especially in Texas, the amount of
green space was often significantly less.
11
square foot, which includes $4 per square foot in soft costs,19
and a 4% developer fee on construction
costs. Ongoing operating costs would be similar to those of the

Welch Center facility.
Lunsford believed he could help secure a similar financing
arrangement to the one he suggested
for Staton’s possible purchase of Welch Center. Assuming 75%
leverage, Marquez’ calculation
showed the required debt to be $3,348,600. With a strong tenant
like Staton, Lunsford said he could
easily recruit one of his institutional investor clients to cover
the required $1,116,200 in equity.
Lunsford told Staton he would likely need to commit to a ten-
year lease with an inflation bump at a
$3.45 NNN/sf rent in return for the new customized building.
Alternatively, Staton or his firm could
provide the equity and own the new building outright.
Conclusion
After finishing their barbecue lunch, they each grabbed a cup of
Dickey’s complimentary soft-
serve vanilla ice cream and walked outside. The scorching
Texas summer sun welcomed the trio, and
began melting their desserts, forcing a quick goodbye. Lunsford
and Marquez were needed back at
the office for Holt Lunsford Commercial’s afternoon strategic
planning session. With a final
handshake, Marquez promised Staton she would run some
additional calculations, while Lunsford
agreed to mull over all of Staton’s potential options, and to
have a final recommendation to him by
the end of the week.
19 Soft costs included interest, taxes, and marketing
expenditures, as well as architectural, engineering and legal
fees. Hard

costs included site development, shell construction, and
finishing costs.
12
Exhibit 1 Holt Lunsford Commercial’s Eight Tenets
HOLT LUNSFORD COMMERCIAL
VALUES
“To be the preferred professional real estate service
provider in the industry. This culture will perpetually
diversify and expand our customer base, thereby insuring
the security and financial growth for each team member.”
Truth: Always tell the truth. Relationships with family, co-
workers and customers will be guided by a relentless
commitment to honesty.
Customer Service: Servanthood must dominate our thinking
and actions. The customer always comes first. Internal and
external customers are the reason we exist.
Expertise: A commitment to professional expertise will set us
apart from our competition. We must be our best individually to

be the best corporately.
Growth: Our culture will promote and reward spiritual, personal
and vocational growth.
Learn: Mistakes are tolerated when performed towards
customer service. Ask questions – life is too short to always
learn
by mistakes.
Performance: Financial rewards tie to performance.
Fun: Have fun – enjoy yourself, co-workers and job.
”A happy heart makes the face cheerful.”
Golden Rule: Do unto others as you would have them do unto
you. All human beings are worthy of respect and our actions
must reflect a spirit of empathy.
Holt Lunsford
President
Source: Company document
E
x

h
ib
it
2
H
o
lt
L
u
n
sf
o
rd
C
o
m
m
e
rc
ia
l’
s
O
rg
a

n
iz
a
ti
o
n
a
l
C
h
a
rt
S
o
u
rc
e
:
C
o
m

p
a
n
y
d
o
cu
m
e
n
t
8
0
4
-0
1
2
-
13
-

14
Exhibit 3 Direct Institutional Investment in Real Estate
Institutional Owners
(Pension Funds, Insurance Companies, Endowments)
Investment Advisory Firms
Service Providers
(Leasing, Property Management)
Property Users
(Tenants, Third-Party Logistics Firms)
Cash Flow From
Operations (CFO)
Direct Investment
&

Pay for Performance
Source: Casewriter
15
Exhibit 4 Classification of Industrial Properties
Primary/Secondary Categories % of Total a Size (sf) Ceiling
Height % Office Truck Docks (/sf)
1) Warehouse Distribution 55%
Regional Warehouse Up to 100,000 16’–24’ Up to 25% 1:
5,000–15,000
Bulk Warehouse Over 100,000 20’+ Up to 10% 1: 5,000–
10,000
Heavy Distribution Over 100,000 24’ Below 5% Below 1:
5,000
Refrigerated Distribution Any 20’–30’ Up to 15% 1: 7,000–
10,000

Rack-Supported Warehouse Any 60’+ Below 5% 1:5,000
2) Manufacturing 30%
Light Manufacturing Up to 300,000 14’–24’ Up to 20% 1:
10,000–15,000
Heavy Manufacturing Can exceed 1 million 16’–60’ 10%
Varies
Airport Hangar Any Up to 100’ 5% Minimal
3) Flex 9%
R&D Flex Up to 100,000 10’–18’ 25%–75% 1: 20,000
Office Showroom Up to 150,000 16’–28’ 30%–40% 1: 10,000
4) Multitenant <5% Up to 120,000 16’–24’ Up to 50% Various
5) Freight Forwarding <5%
Truck Terminal Up to 100,000 12’–16’ 5% 1: 500
Air Cargo Up to 100,000 Up to 30’ 10% 1: 5,000
6) Data Switch Center <5% Any 14’+ 1% Usually 0
aThe United States had an estimated 20 billion square feet of
industrial property in 2012.

Creation Storage
Di stribution
Data Switch
Center
Regional
Warehouse
Rack-Sup ported
Warehouse
Tr uck Ter minal
Heavy
Distribution
Refrigerated
Distribution
Multitenant
Bulk
Warehouse
Air Cargo
Office

Sho wroo m
Light
Man ufact uring
R&D Flex
Airport Hangar
Heavy
Man ufact uring
THE SUPPLY CHAIN
Source: Guide to Classifying Industrial Property, 2nd ed.
(Urban Land Institute, 2003).
a “Total Industrial Market Statistics”, 3rd Quarter, 2012,
www.costar.com
8
0
4
-0

1
2
-
1
6
-
E
x
h
ib
it
5
W
e
lc
h
C
e
n
te
r
P

ic
tu
re
S
o
u
rc
e
:
C
o
m
p
a
n
y
d
o
cu
m
e
n
t.

8
0
4
-0
1
2
-
1
7
-
E
x
h
ib
it
6

W
e
lc
h
C
e
n
te
r
S
it
e
L
a
y
o
u
t
S
o
u
rc
e

:
C
o
m
p
a
n
y
d
o
cu
m
e
n
t.
8
0
4

-0
1
2
-
1
8
-
E
x
h
ib
it
7
A
e
ri
a
l
P
h
o
to

g
ra
p
h
o
f
M
e
tr
o
p
o
li
ta
n
B
u
si
n
e
ss
P
a
rk
i

n
N
o
rt
h
D
a
ll
a
s,
T
e
x
a
s
S
o
u
rc
e
:
C
o

m
p
a
n
y
d
o
cu
m
e
n
t.
19
Exhibit 8a Leading U.S. Industrial Markets
Market

Inventory
September 30,
2012 (SF)
New Construction
3rd Quarter 2012
(SF)
Under
Construction
(SF)
Absorption
3rd Quarter
2012 (SF)
Vacancy Rate
(%) Sept 30,
2012
Average
Warehouse
Rents (US$PSF)

Chicago, IL 1,309,885,647 966,624 4,502,026 524,550 10.0%
$3.62
Los Angeles, CA 881,945,200 388,200 1,676,761 1,621,100
4.4% 6.11
Dallas-Ft.Worth, TX 714,134,535 - 3,785,480 3,097,455 9.7%
3.05
Atlanta, GA 607,222,547 1,275,640 3,961,417 2,506,050 12.7%
3.19
Detroit, MI 554,390,591 - 623,428 781,685 11.9% 3.86
Houston, TX 478,248,624 940,310 2,227,159 930,803 5.2% 5.24
Cleveland, OH 477,951,401 - 174,258 (1,439,030) 9.4% 3.29
Philadelphia, PA 408,069,656 1,481,473 3,309,530 797,162
10.2% 4.11
North, NJ 373,897,568 180,000 - (703,593) 8.3% 6.16
Central NJ 353,683,438 - 358,590 1,639,890 9.4% 4.42
Indianapolis, IN 281,555,710 852,913 3,525,273 876,724 5.2%
3.63
Cincinnati, OH 274,600,585 - 1,166,338 (117,902) 9.5% 3.22
Phoenix, AZ 270,299,123 80,000 3,636,000 698,718 13.3% 5.07
Seattle, WA 264,723,872 - 375,000 860,484 6.4% 6.02
St. Louis, MO 263,840,720 - - 221,591 8.7% 3.82

San Jose, CA 252,752,739 - 111,100 289,165 10.7% 6.24
Milwaukee, WI 245,127,494 468,000 222,000 1,334,942 6.5%
4.13
Baltimore, MD 224,535,228 74,562 1,053,235 (269,651) 10.8%
4.72
Denver, CO 215,649,622 320,072 945,271 817,071
7.8% 4.63
Orange County, CA 200,097,900 - 596,500
345,500 4.6% 6.96
U.S. Total 8,652,612,200 7,027,794 32,249,366 14,812,714
8.87% 4.57
Source: “North American Industrial Real Estate Highlights,”
Colliers International, 2012.
Exhibit 8b U.S. Industrial Market Statistics
Source: Company Document

20
Exhibit 9a Dallas Bulk Distribution Sales and Rental Rates
(Third Quarter, 2012)
Type Year Built Clear Height
Sales Price Per
Square Foot Lease Rates
Class A 1990–2013 24’–32’ $34–$55 $3.00–$3.50 NNN
Class B 1975–1989 20’–24’ $28–$37 $2.75–$3.00 NNN
Class C 1960–1974 16’–20’ $23–$28 $2.25–$2.75 NNN
Source: Company document.
Exhibit 9b Dallas Bulk Distribution Leasing and Absorption
(Third Quarter, 2012)
Year Total Leasing Net Absorption
2012 38,824,259 SF 4,775,207 SF
2011 43,656,580 SF 9,491,777 SF
2010 52,177,944 SF 1,873,907 SF
Source: “Final Figures at a Glance”, The Dallas/Ft Worth
Industrial Market, 3rd Quarter, 2012, www.costar.com

8
0
4
-0
1
2
-
2
1
-
E
x
h
ib
it
1

0
F
ir
st
-Y
e
a
r
O
cc
u
p
a
n
cy
C
o
st
s
E
x
e
rc
is
e

O
p
ti
o
n
S
F
R
e
n
t/
S
F
U
p
-f
ro
n
t

E
q
u
it
y
C
o
st
A
n
n
u
a
l
M
o
rt
g
a
g
e
o

r
L
e
a
s
e
P
a
y
m
e
n
ts
2
0
%
A
n
n
u
a
l
P
a
y

m
e
n
t
o
n
E
q
u
it
y
a
T
o
ta
l
C
o
st
A
n
n
u

a
l
C
o
st
/S
F
L
e
a
s
e
—
W
e
lc
h
C
e
n
te
r

1
0
2
,7
1
8
$
3
.3
5
N
/A
$
3
4
4
,1
0
5
N
/A

$
3
4
4
,1
0
5
$
3
.3
5
B
u
y
—
W
e
lc
h
C

e
n
te
r
1
0
2
,7
1
8
N
/A
$
1
,0
1
2
,0
7
5
$
1
3
6
,6

3
0
$
2
0
2
,4
1
5
$
3
3
9
,0
4
5
$
3
.3
0

B
u
il
d
-t
o
-S
u
it
—
C
o
lo
n
y
C
ro
s
s
in
g
(
L
e
a
s

e
)
1
1
0
,0
0
0
$
3
.4
5
N
/A
$
3
7
9
,5
0
0
N

/A
$
3
7
9
,5
0
0
$
3
.4
5
B
u
il
d
-t
o
-S
u
it

—
C
o
lo
n
y
C
ro
s
s
in
g
(
B
u
y
)
1
1
0
,0
0
0
N
/A

$
1
,1
1
6
,2
0
0
$
1
5
0
,6
8
7
$
2
2
3
,2
4
0
$

3
7
3
,9
2
7
$
3
.4
0
S
o
u
rc
e
:
C
o
m
p

a
n
y
d
o
cu
m
e
n
t.
N
o
te
:
A
ss
u
m
e
o
p
e
ra
ti

n
g
c
o
st
s
a
re
t
h
e
s
a
m
e
f
o
r
e
a
ch
o
p
ti

o
n
.
a
S
ta
to
n
’s
o
p
p
o
rt
u
n
it
y
c
o
st
o
f
ca

p
it
a
l.
22
Appendix
Trends in the Commercial Real Estate Service Industry (2012)
Institutionalization In 2012 there was continued pressure from
large institutions such as
pension funds, banks, insurance companies, private equity, and
real estate investment trusts (REITs)
to seek modest returns from real estate amidst a still recovering
U.S. economy.20 Particularly, turmoil
in the global economy is increasing the flow of investments to
U.S. Dollars among larger investment
institutions. Likewise, some firms are investing at sub-5 % cap
rates with the intent to get the

properties under stellar management to throw off a high net
operating income (NOI). 21
Consolidation A wave of mergers and acquisitions occurred
among commercial real estate
service firms during the 1990s and into the twenty-first century.
In many instances, large national or
global firms snapped up small local players to penetrate new
markets and attempted to keep the
original owners invested in the ongoing business. In 2012, such
acquisitions typically occurred at 4–6
times trailing 12-month EBITDA and were accretive to
earnings.
Mergers between large firms were also common. In November
2006 CB Richard Ellis (CBRE)
announced it was acquiring Trammell Crow Company (TCC) to
create the largest global real estate
service firm. The $2.2 billion purchase increased the firms’
combined market share to 10.5%,
compared to the next closest competitor at 3.4%. The combined
company comprised over 21,000
employees with expected revenue of $4.4 Billion.22
Service expansion Full-service firms were better able to quickly
seize a diverse range of
opportunities, as they occurred. In addition, cross selling was
vital to the success of many real estate
service firms. For example, CBRE offers the full range of real
estate services and often times, brokers a
deal, develops a property, manages the lease, and services the
facilities.23 It was also common for
firms to take advantage of property management business to
acquire the more lucrative leasing
account of a property. A total of nine firms ranked among both
the top 25 brokerages and top 25

property managers, nationally, in 2012. (See Exhibit A-1 for
rankings.)
External competition Commercial real estate service firms faced
heavy competition from one
another and from external threats. Many advisory firms, like
San Francisco-based RREEF, had
pursued a vertical integration strategy, taking leasing and
property management services in-house
and threatening existing third-party service providers. Advisory
firms typically earned 0.75%–1.50%
of assets annually in management and performance fees, and
vertical integration represented a way
to capture additional value.
In addition, regional owners of office and industrial properties
with geographical critical mass
were leasing and conducting property management services to
control quality and generate a new
source of revenue.
20 “Emerging Trends in Real Estate 2013,”
PricewaterhouseCoopers and Urban Land Institute, October
2012, p. 1-4.
21 Ibid, p. 5.
22 CB Richard Ellis Worldwide Web site,
http://www.cbre.com/AssetLibrary/ClosingPressRelease.pdf,
accessed January 10,
2013.
23 CB Richard Ellis Worldwide Web Site,
http://www.cbre.com/EN/services/Pages/Overview.aspx,
accessed January 10,

2013.
23
Exhibit A-1 Top Commercial Real Estate Service Providers
Top 25 Brokerages
(2012 performance)
Investment Sales and
Leasing Transactionsa
Top 25 Property Managers
(as of December 31, 2012)
Square Feet Under
Management
CB Richard Ellis $159,000,000,000 CB Richard Ellis
3,200,000,000
Jones Lang LaSalle 98,630,000,000 UGL Services / DTZ
3,180,000,000
Cushman & Wakefield 88,600,000,000 Jones Lang LaSalle

2,100,000,000
Colliers 68,210,000,000 Colliers 2,000,000,000
NGKF 64,350,000,000 Cushman & Wakefield 806,000,000
NAI Global 55,000,000,000 NGKF 624,800,000
Studley 48,910,000,000 ProLogis 572,000,000
Eastdil Secured 46,100,000,000 Cassidy Turley 455,000,000
TCN Worldwide 27,060,000,000 NAI Global 315,000,000
Cassidy Turley 26,600,000,000 Lincoln Property 297,170,000
CORE Network 20,360,000,000 Simon Property Group
251,140,000
Marcus & Millichap 17,000,000,000 Transwestern 193,000,000
HFF 12,890,000,000 PM Realty Group 185,000,000
Transwestern 6,500,000,000 Duke Realty 143,100,000
ARA 6,030,000,000 General Growth Properties 136,000,000
RE/MAX Commercial 6,000,000,000 Hines 135,280,000
CORFAC International 5,700,000,000 The Inland Real Estate
Group 130,000,000
Sperry Van Ness Intl. 5,340,000,000 DDR Corp. 122,000,000
Lee & Associates 4,920,000,000 Westfield LLC 114,980,000

Coldwell Banker Comm. 4,860,000,000 Kimco Realty
114,010,000
Hodges Ward Elliott 3,400,000,000 USAA Real Estate
97,000,000
Avison Young 2,800,000,000 Brixmor 95,800,000
The Carlton Group 2,490,000,000 Brookfield Office Properties
82,000,000
PM Realty Group 2,100,000,000 CBL & Associates Properties
80,190,000
Kidder Mathews 1,870,000,000 Liberty Property Trust
79,370,000
Source: National Real Estate Investor, 2013.
aRepresents total value of transactions. Actual firm revenues
volume.
pg 62-65.pdf

Module #5 Industrial real estate.pdf
279
The Environment and Performance of
Industrial Real Estate
John D. Benjamin,* Emily N. Zietz** and G. Stacy Sirmans***
Abstract
This study examined over seventy industrial real estate research
papers and
categorized them according to: 1) property characteristics, 2)
demand determinants,
3) rent and income determinants, 4) return and valuation issues,
5) environmental
concerns, 6) international issues, and 7) management and
financing concerns. The
findings indicate that industrial properties tend to be segmented
and clustered by use
with greater demand for flexibility and smaller size, yet with
reduced demand for
warehouse space. Employment, age, and percentage of office
space affect industrial
rents while industrial land values indicate future rental rates. In
addition, local market
factors, physical characteristics and location affect industrial
property values, but
environmental contamination has an adverse effect.
Introduction
Interest in industrial real estate is increasing because it is a key

sector of the real
estate market in the United States. In 2001, for example,
industrial properties
accounted for almost 20% of the NCREIF Property Index with a
market value of
almost $21 billion dollars. Over the past twenty years,
industrial properties have been
a relatively stable investment for many investors, providing
solid returns and attracting
high demand, but the industrial real estate sector continues to
be an evolving and
dynamic market.
In this review of the empirical, theoretical and descriptive
literature concerning
industrial real estate, over sixty recent studies are examined by
addressing seven
questions: (1) What are the characteristics of the industrial real
estate market? (2)
What are the determinants of demand for industrial real estate?
(3) What are the
determinants of rent and income for industrial real estate? (4)
What are the return and
valuation issues in industrial real estate? (5) What are the
environmental concerns in
industrial real estate? (6) What is the international perspective
of industrial real estate?
and (7) What are the management and financing concerns in
industrial real estate?
The article is organized as follows. The next section defines
industrial real estate and
identifies the environment for industrial properties. Succeeding
sections survey the
literature by addressing the above seven questions. The
examination of categorical

topics is presented both in a discussion and tabular format. The
last section provides
a summary and conclusions.
*American University, Washington, DC 20016 or
[email protected]
**Middle Tennessee State University, Murfreesboro, TN 37132
or [email protected]
***Florida State University, Tallahassee, FL 32306-1110 or
[email protected]
280 JOURNAL OF REAL ESTATE LITERATURE
VOLUME 11, NUMBER 3, 2003
What is Industrial Property?
Expanding technology use in many industries is causing changes
in the makeup of
industrial real estate. Many industrial properties such as those
used for research
and development, for example, have benefited from improved
technology. The
performance of warehouse properties serving as large-scale
distribution centers is
similarly attracting attention.
In his seminal hedonic study of industrial real estate pricing,
Ambrose (1990) defines
industrial property as the land, structural improvements and
equipment connected with
a particular property that is being used for the conversion of
materials into finished
manufactured products. In general, warehouse property and

minor processing plants
of all kinds are included in the category of industrial property.
What specific types of properties are considered industrial real
estate? According to
the 1998 Real Estate Information Standards disclosed on
NCREIF.org, there are five
types of industrial properties.
1. Warehouse properties with at least 50,000 square feet with up
to 15%
office space, and the balance of the structure having 18- to 30-
foot ceiling
height; all loading must be dock-height.
2. Manufacturing buildings with 10- to 16-foot ceilings or
sufficient height
to accommodate overhead cranes must provide floor-height and
dock-
height loading.
3. Office showrooms that are single story (or mezzanine) with
10- to 16-
foot ceilings with frontage treatment on one side and dock-
height loading
or grade level roll-up doors on the other. Less than 15% of these
structures may be used as office space.
4. Flex space structures are single-story buildings with 10- to
18-foot
ceilings with both floor-height and dock-height loading,
including wide
variation in office space utilization, ranging from retail and
personal
service to distribution, light industrial and occasional heavy
industrial

use.
5. Research and development industrial properties are one- and
two-story,
10- to 15-foot ceiling heights with up to 50% office / dry lab
space (with
the remainder in wet lab, workshop, storage and other support),
and with
specific dock-height and floor-height loading.
Commercial properties used for other purposes including
agricultural, offices (not
mentioned in type 3 above), apartments and retail endeavors are
not considered
industrial properties.
Characteristics of the Industrial Real Estate Market
This section provides an overview of the literature discussing
the nature and
characteristics of industrial real estate relative to other types of
properties while
Exhibit 1 presents summaries of studies that focus on the
characteristics of the
industrial real estate market. Some of the earlier research on
industrial properties
T
H
E
E
N

V
IR
O
N
M
E
N
T
A
N
D
P
E
R
F
O
R
M
A
N
C
E
O
F

IN
D
U
S
T
R
IA
L
R
E
A
L
E
S
T
A
T
E
281
Exhibit 1
Author(s) Title Source Date, Location, Time Summary of
Article

Mitchell and
Jucius (1933)
Industrial Districts of the
Chicago Region and
Their Influence of Plant
Location
The Journal of Business
of the University of
Chicago, 6:2, 139–56
Three manufacturing
districts in Chicago,
early 1900s
Evaluates the services rendered by three
Chicago manufacturing districts: the Central
Manufacturing District, Clearing Industrial
District and the Kenwood Manufacturing
District. Finds that the impact of manufacturing
districts includes valuable transportation
connections, financial advantages and
cosmetic benefits to both neighboring
property owners and to businesses and
consumers nationwide who gain by having
efficient and economical transportation
resources.
Mayer (1942) Patterns and Recent
Trends of Chicago’s
Outlying Business
Centers
The Journal of Land and
Public Utility Economics,

18, 4–16
Location of business
subcenters within the
city of Chicago; changes
in land values 1931–1941
Highlights the impact of business subcenters
on economic activity and land values. Finds
that land values may be used as an index of
the importance of business subcenters. The
median decline of land values of business
corners in outlying business intersections
(blighted areas) was between 20% and 29.9%
during the period examined.
Shenfield and
Florence (1944–
1945)
The Economies and
Diseconomies of
Industrial Concentration:
The Wartime Experience
of Coventry
The Review of Economic
Studies 12:2, 79–99
Industrial growth inside
Coventry and
Birmingham, early 1900s
to 1940
Examines industrial growth inside Coventry,
England, specifically the automobile

manufacturing, artificial silk yarn and electrical
equipment industries. Finds that the effect of
the war altered and unbalanced the industrial
structure of the city, expanded the motor, and
aircraft and associated engineering industries,
and lead to difficulties but ultimately
additional contracts for textile and service
industries.
282
JO
U
R
N
A
L
O
F
R
E
A
L
E
S
T
A

T
E
L
IT
E
R
A
T
U
R
E
V
O
L
U
M
E
11,
N
U
M
B
E
R

3,
2003
Exhibit 1 (continued)
Article
Grissom,
Hartzell and Liu
(1987)
An Approach to
Industrial Real Estate
Market Segmentation
and Valuation Using the
Arbitrage Pricing
Paradigm
Journal of the American
Real Estate and Urban
Economics Association,
15:3, 199–219
Quarterly return data
from a large
commingled real estate
fund consisting of 382
properties of various
types and locations with
a market value of $2.6
billion

Evaluates the segmented market within
industrial real estate in relation to risk versus
return factors, and considers whether a
submarket analysis or an integrated market
analysis provides more accurate and useful
results regarding rate of return and the
Arbitrage Pricing Theory. Using the Chen
methodology, concludes that the industrial real
estate market is indeed segmented between
various regions and a submarket analysis is
better for predicting returns, but does not
establish a link between general economic
factors and industrial real estate returns.
Moriarty (1991) Urban Systems,
Industrial Restructuring
and the Spatial-Temporal
Diffusion of
Manufacturing
Employment
Environment and
Planning, 23:11, 1571–88
Manufacturing
employment density
distribution patterns in
the U.S. from 1947–1982
Finds that geographic sorting of
manufacturing operations based on marginal
returns has led non-production workers to
become more concentrated in large urban
centers such as in the Northeast and Eastern
North–Central U.S. This sorting process has
helped influence geographic expansion of

development but the influence is beginning to
weaken.
Graham and
Bible (1992)
Classifications for
Commercial Real Estate
The Appraisal Journal,
60:2, 237–46
No empirical data Develops a systematic approach for
classifying
apartments, office buildings, retail centers and
warehouse buildings.
T
H
E
E
N
V
IR
O
N
M
E
N

T
A
N
D
P
E
R
F
O
R
M
A
N
C
E
O
F
IN
D
U
S
T
R
IA

L
R
E
A
L
E
S
T
A
T
E
283
Article
Harrison (1992) Industrial Districts: Old
Wine in New Bottles?
Regional Studies, 26:5,
469–83
No empirical data Analyzes a recent trend of economic growth
where similar types of companies are locating
in close proximity to one another and
contrasts this pattern with other trends that

have led to geographic dispersal of some
production facilities. Suggests that
governmental incentives may encourage
similar businesses to form ‘industrial districts’
by providing infrastructure and other services.
Notes that the interaction of independent firms
located closer together may be able to lower
overall costs and that trust can be built more
easily in face-to-face meetings. Concludes
industrial district prototypes involve more than
simply agglomeration economies.
Bruce (1994) Industrial Goes Upscale Journal of Property
Management, 59:2, 14–7
Industrial property near
the U.S. –Mexico border,
May / June 1994
Evaluates the changing and higher technology
standards that industrial property tenants
demand as they consolidate operations into a
few major locations. Finds that the elimination
by NAFTA of duties and tariffs on goods being
sent between the U.S., Canada and Mexico
has influenced the demand for industrial
property. Documents a shift from industrial to
office / industrial spaces demand as tenants
who previously sought cheaper office
buildings move to save money and to reduce
rents and commute times for employees.
284
JO

U
R
N
A
L
O
F
R
E
A
L
E
S
T
A
T
E
L
IT
E
R
A
T
U

R
E
V
O
L
U
M
E
11,
N
U
M
B
E
R
3,
2003
Article
Franklin (1994) Industrial Inspirations Journal of Property
Management, 59:3, 18–

20
No empirical data Asserts that industrial properties are strong
performers in the real estate industry and that
with innovative management, even older
industrial properties may be excellent
investments. Provides three case studies on
how to make older industrial properties better
investments.
Myers (1994) Fundamentals of
Production That
Influence Facility
Designs
62:2, 296–302
Utilizes information
dated back to 1985
Suggests that valuing a production facility
presupposes evaluation of industrial
production methods. States that it is essential
to understand the productive capacity of a
facility and the history of the property before
trying to assign a value to a property.
Evaluates various advantages and
disadvantages in facility design: capacity of a
property allows evaluation of sales of similar
buildings based on design capacity, potentially
the most important unit of industrial
engineering measurement. Evaluates the
factors the companies should consider when
searching for an industrial property including
property flexibility and the capability of the

site to handle future technology, capacity and
plant design.
T
H
E
E
N
V
IR
O
N
M
E
N
T
A
N
D
P
E
R
F
O

R
M
A
N
C
E
O
F
IN
D
U
S
T
R
IA
L
R
E
A
L
E
S
T
A

T
E
285
Article
Bruce (1995) Recycling Your
Industrial Properties
Journal of Property
Management, 60:4, 44–7
No empirical data Discusses obsolescence strategic planning
and
environmental concerns as the commercial
and industrial real estate markets suffer,
suggesting that alternative uses must be
found or property may be abandoned.
Categorizes three types of properties: those
affected by central business district (CBD)
expansion due to their downtown location,
CBD-related or waterfront-related residential
projects and properties further from desirable
CBD or waterfront. Discusses managing
approaches for handling vacant properties.
Evaluates the decisions involved in a potential
recycling project, such as one that is
converted from commercial to residential.
Venables (1996) Localization of

Industry and Trade
Performance
Oxford Review of
Economic Policy, 1996,
12:3, 52–60
No empirical data Examines the determinants of a country’s
industrial structure and trade patterns. Finds
that ceteris paribus, firms are more profitable
and are able to pay higher wages in locations
that have the benefit of an agglomeration of
complementary activities. Finds that
comparative costs of different sectors
determine the pattern of trade and that
agglomeration forces are only one factor
determining trade patterns.
286
JO
U
R
N
A
L
O
F
R
E

A
L
E
S
T
A
T
E
L
IT
E
R
A
T
U
R
E
V
O
L
U
M
E
11,

N
U
M
B
E
R
3,
2003
Article
Black,
Wolverton,
Warden and
Pittman (1997)
Manufacturing versus
Distribution: Implicit
Pricing of Real
Property
Characteristics by
Submarket
Journal of Real Estate
Finance and Economics,
15:3, 271–85

331 industrial property
sales in southeastern US
from 1987–1995
Evaluates differences in distribution activity
and manufacturing activity, and proposes that
these differences may lead to pricing
differences. Provides evidence that there are
indeed two submarkets in the industrial real
estate environment—manufacturing and
distribution. Enumerates significant variables
for manufacturing properties (age, year of
sale, MSA distance and lifting crane) and
significant variables for distribution properties
(air-conditioning, rail and excellent condition
rating). Concludes that industrial submarkets
should be considered when pricing a property
and finds that of these fourteen characteristics,
four proved to be different between the two
submarkets. Provides analysis showing that
the existence of these submarkets is a result
of production process differences.
Cleminshaw
(1997)
Measuring
Superadequacy in
Older Industrial
Plants: A Case Study
Assessment Journal, 4:1,
37–40
No empirical data;
Case Study

Defines superadequacy as ‘‘an element within
a building’s design which creates an
undesirable excess’’ and provides procedures
and a case study of computing functional
obsolescence due to superadequacy.
Thompson
(1997)
Industrial
Employment
Densities
Journal of Real Estate
Research, 14:3, 309–19
510 U.K. industrial
properties
Evaluates long-term floor space-to-
employment ratios in the U.K. and seeks to
identify densities formed by specific industrial
building types and to explain these densities
and how they change over time. Attempts to
create a method for predicting demand for
various types of industrial property by linking
employment data with property data.
Concludes that there is no identifiable
relationship between macroeconomic trends
and employment densities.
T
H

E
E
N
V
IR
O
N
M
E
N
T
A
N
D
P
E
R
F
O
R
M
A
N
C

E
O
F
IN
D
U
S
T
R
IA
L
R
E
A
L
E
S
T
A
T
E
287

Article
Hanson (1998) North American
Economic Integration
and Industry Location
Oxford Review of
Economic Policy, 1998,
14:2, 30–44
Canadian, Mexican and
U.S. manufacturing
employment and wages,
1850–1997
Finds that in Mexico, closer economic ties with
the U.S. appear to have contributed to a
contraction of employment in the Mexico City
manufacturing belt, an expansion of
manufacturing employment elsewhere in the
country and an increase in wages of skilled
workers. Concludes that with the exception of
U.S. cities on the Mexican border (whose
employment growth is strongly related to
export production in neighboring Mexican
cities), the effects of economic integration on
industry location in Canada and the U.S.
appear to have been much weaker.
Ellison and
Glaeser (1999)
The Geographic

Concentration of
Industry: Does
Natural Advantage
Explain
Agglomeration?
American Economic
Review, 89:2, 311–16
Four-digit manufacturing
industries from 1987
Notes that agglomeration may be caused by
local industry spillovers or as a result of
natural cost advantages present in a specific
area. Evaluates the effects of natural
advantage location, suggesting that industrial
location is a product of resource availability
and labor-market advantages. Presents a
model that explains industry clusters in three
ways: observed cost advantages, unobserved
costs advantages, geographically localized
industry spillovers. Considers sixteen
interactions relevant to the advantages
provided from natural resources, labor and
transportation costs. Concludes that at least
50% of the industry concentration is a result of
natural advantages present in specific regions
of the country.
288
JO
U

R
N
A
L
O
F
R
E
A
L
E
S
T
A
T
E
L
IT
E
R
A
T
U
R

E
V
O
L
U
M
E
11,
N
U
M
B
E
R
3,
2003
Article
Hill and
Brennan (2000)
A Methodology for

Identifying the
Drivers of Industrial
Clusters: The
Foundation of
Regional Competitive
Advantage
Economic Development
Quarterly, 14:1, 65–96
194 industries in the
Cleveland-Akron, Ohio
Presents a methodology for determining
clusters of industries for which a region holds
a competitive advantage—the ‘‘driver
industries—because they have a significant
economic effect on the region. Identifies
‘Foundational clusters’ for areas such as
metalworking, chemicals and allied products,
as having important relationships with other
industries in the area. Concludes that there is a
strong competency in materials industry
especially metals and specialty chemicals,
suggesting that the region must be innovative.
Crawford and
Slade (2001)
Appraising Industrial
Special-Purpose
Properties
69:2, 161–73

Hypothetical asset value Illustrates a new, convenient method,
based
on utilization rates, for estimating economic
obsolescence in the appraisal of industrial
special-purpose properties. Stipulates that this
utilization-based method consider the
operating leverage of the property, allowing an
adjustment for obsolescence. Suggests that in
order to accurately estimate economic
obsolescence in industrial special purpose
properties, an industrial appraiser must have
access to information on underutilization,
operating leverage, replacement cost new,
current age and the total estimated economic
life of the property.
THE ENVIRONMENT AND PERFORMANCE OF
INDUSTRIAL REAL ESTATE 289
examined the economic and general impact of manufacturing
districts and industrial
parks. A study by Mitchell and Jucius (1933) evaluates the
service benefits of three
manufacturing districts in the Chicago Central Manufacturing
district. This study
highlights the unique services that industrial districts provide,
including transportation
and financial benefits to many businesses and consumers in
these areas, as well as
consumers across the country who receive shipments
conveniently and cost efficiently.
Mayer (1942) also examines major industrial centers in Chicago
and finds varying
rates of change in land values when specifically examining

important outlying
business corners. Industrial concentration in England was
examined by Shenfield and
Florence (1944–1945). This study highlights the effect that the
wars had on several
key industries, including altering the industrial structure of the
city, expanding the
motor and aircraft industry and associated engineering industry,
and causing
difficulties but ultimately facilitating additional contracts for
textile and service firms.
A systematic classification approach for defining various
commercial properties,
provided by Graham and Bible (1992), includes apartments,
industrial properties,
office buildings, retail centers and warehouses. Consolidation of
industrial real estate
into a few major locations owing to higher technology standards
is found by Bruce
(1994). Examining the issue of market segmentation within the
industrial real estate
market, Grissom, Hartzell and Liu (1987), for example, find
empirical evidence to
support a segmented market within the industrial real estate
environment, and
conclude that looking at regional submarkets allow better
predictions of returns. Black,
Wolverton, Warden and Pittman (1997) show that the industrial
real estate market can
be divided into at least two subcategories: manufacturing and
distribution. Their study
suggests that property pricing is still most feasible when
measured in aggregate, but
that adjustments should be made for variability between
subcategories.

Several studies examine the clustering effect of local industrial
property markets.
Moriarty (1991) attributes the concentration of nonproduction
workers in large urban
centers to the geographical sorting of manufacturing operations
based on marginal
returns. The advantages and disadvantages of companies
locating within close
proximity are discussed by Harrison (1992). He also examines
governmental
incentives and infrastructure that encourage businesses to form
‘‘industrial districts.’’
Firms are more profitable, according to the findings of Venables
(1996), in locations
that have an agglomeration of complementary activities.
Natural cost advantages are used as an explanation by Ellison
and Glaeser (1999) for
the geographic concentration of industrial properties. Their
study suggests that firms
can save on labor and other resource costs through industry
clustering and that
transportation and marketing costs can be reduced by locating
closer to target markets.
This concept is further developed by Hill and Brennan (2000)
who examine 194
industries in the Cleveland-Akron, Ohio area in an attempt to
determine clusters of
industries or ‘‘industry drivers’’ for which a region holds a
competitive advantage.
Their study concludes that there is a strong tendency in the
materials industry,
specifically metals and specialty chemicals, for driver industries
to add value to a
region. In Mexico, Hanson (1998) finds that closer economic

ties to the U.S. caused
reduced employment in the Mexico City manufacturing belt, but
that there were
advantages of economic integration for cities along the U.S.-
Mexico border.
Several studies have focused on the characteristics of industrial
properties that enhance
the utilization of property. One study examines obsolescence
and suggests ways to
recycle industrial properties to prevent them from becoming
abandoned (Bruce, 1995).
In examining changes in central business district (CBD)
properties, this study
elaborates on how to handle vacant industrial properties in ways
such as converting
them to residential. While providing case scenarios on how to
make older properties
good investments, Franklin (1994) notes that industrial
properties are one of the
stronger performers in the real estate industry. His study
suggests that innovative
management could facilitate older industrial properties
becoming outstanding
investments. Crawford and Slade (2001) illustrate a new
method, based on utilization
rates and operating leverage, for estimating economic
obsolescence in special-purpose
industrial properties.

Some studies have examined physical characteristics such as
capacity and design.
Myers (1994) discusses the importance of understanding the
productive capacity and
design of the facility, arguing that design capacity is the most
important measurement
for an industrial engineer. Other factors important in industrial
property design include
flexibility in technology and capacity expansion. Cleminshaw
(1997) argues that a
building’s design can create functional obsolescence by creating
undesirable excess.
To evaluate long-term floor space-to-employment ratios in
England, Thompson (1997)
uses employment densities. His study finds no significant
relationship between
macroeconomic trends and employment densities.
The major findings from this section are:
� Industrial markets are segmented (e.g., manufacturing and
distribution)
and investment returns are better predicted in sub-markets.
Studies have
provided a systematic approach to classify industrial property
types.
� Clustering is present in industrial properties due to
infrastructure,
government incentives and natural cost advantages (e.g., labor,
transportation, marketing costs).
� There is some advantage to economic integration.

� Recycling industrial properties to other uses is important
because
obsolescence can occur due to design and age. Studies have
suggested
ways to revitalize industrial properties in order to avoid
abandonment.
� Capacity and design are important. Properties must be
flexible for
technology and capacity expansion.
Determinants of Demand for Industrial Real Estate
Studies that examine the demand patterns and determinants and
the supply of
industrial properties are synthesized below and reviewed in
Exhibit 2. Using Detroit
T
H
E
E
N
V
IR
O
N
M
E
N

L
R
E
A
L
E
S
T
A
T
E
291
Exhibit 2
Author(s) Title Source
Data, Location, Time
Period Summary of Article
Wheaton and
Torto (1990)
An Investment Model of
the Demand and Supply
for Industrial Real Estate
American Real Estate
and Urban Economics

Association Journal, 18:
4, 530–47
Fifty-two major
metropolitan areas with
130,000 structures from
1972–1989
Develops a model that is useful in estimating
excess plant capacity in particular markets.
Suggests that many tenants actually use
industrial property for some mix of uses
including manufcturing, distribution storage
and research. Suggests that construction lag
time may cause a temporary inefficiency in the
supply and demand for industrial property.
Hartman (1991) Industrial Real Estate:
Go Figure
Real Estate Issues, 16:1,
23–7
Detroit Market Data from
Michigan Society of
Industrial and Office
Realtors (SIOR) from
1982–1989
Examines the growth in average sales prices
per square foot of industrial buildings and
land and compares city values to those of the
suburbs. Finds that the relationships between
the number of market transactions and the
sizes of industrial buildings did not change
over the time period examined: sales and

leases of buildings of 25,000 square feet or
less regardless of market conditions are
dominant. Shows that unit prices consistently
decrease as building size increase.
Rauch (1993) Does History Matter
Only When It Matters
Little? The Case of City-
Industry Location
The Quarterly Journal of
Economics, 108:3, 843–
67
Theoretical model Examines the historical role of city-industry
locations and the traditional incentive
businesses have to remain subject to
agglomeration economies. Finds that since
World War II, industries have had a tendency
to cluster together and are reluctant to move
from an old, high-cost site to a new, low-cost
site. Notes that industrial park property
developers may alleviate this inertia through
discriminatory pricing strategies.
292
JO
U
R
N
A

L
O
F
R
E
A
L
E
S
T
A
T
E
L
IT
E
R
A
T
U
R
E
V
O

L
U
M
E
11,
N
U
M
B
E
R
3,
2003
Hughes (1994) Determinants of Demand
of Industrial Property
62:2, 303–09
Data for industrial and
office properties in

Atlanta, Chicago,
Boston, New York, and
Washington, DC from
1984–1988
Examines the difference in demand
determinants for industrial properties versus
office properties, noting that simple population
changes may not be sufficient to determine
current and future demand for industrial
property. Finds that general population growth
is only one factor that determines demand,
while other factors include: technological
changes, natural resources, labor,
infrastructure and exchange capability.
Wheaton (1996) A Perspective on
Telecommunications
Technology and Real
Estate: Office, Industrial,
and Retail Markets
Real Estate Finance, 13:
2, 13–7
Data used are national Predicts enhanced technology will reduce
industrial space demand by improving
inventory management and thus reducing
warehousing needs, but the effects of
improved technology will not be too quick or
drastic. Evaluates the effects of corporate
downsizing, noting many companies use more
subcontracted services, thus shifting rather
than reducing real estate demand. Suggests
that ‘‘Hoteling’’ may not be a suitable strategy
to save on real estate costs unless the time

spent in the office is random and not
determined by cycles or seasons.
T
H
E
E
N
V
IR
O
N
M
E
N
T
A
N
D
P
E
R
F
O

T
E
293
Christensen,
Wisener and
Campos (1997)
Attributes of Tomorrow’s
Warehouse Structures
Real Estate Review, 27:3,
51–7
No empirical data Assesses the changing spacing needs of
warehouse tenants, but warns that these
needs do not validate the views of either
modernists or traditionalists. Consistent with
modernists, tenants perceive a need for
slightly more building square footage. Tenants’
expectations for change in dock doors vary
with building size of their warehouse spaces.
Users of properties with at least 50,000 square
feet expect to add doors more quickly than
users of smaller properties. Concludes that
landlords’ belief that tenants prefer buildings
with higher ceilings may be inaccurate.

Rabianski and
Black (1997)
Why Analysts Often
Make Wrong Estimates
About the Demand for
Industrial Space
Real Estate Review, 27:1,
68–72
No empirical data Offers three approaches to estimate industrial
space demand: forecast industrial space
relative to office space, estimate future
manufacturing space demand and forecast the
demand for business parks. Factors sometimes
overlooked include the performance of the
regional and national economy and overall
economic growth. Proposes that the single
most important problem is that analysts often
assume that analysis of the demand for
industrial space is synonymous to the analysis
of demand for office space.
market data from the state Society of Industrial and Office
Realtors (SIOR), Hartman
(1991) examines the growth in average sales prices per square
foot of industrial
buildings and land, comparing city to suburban values. This

study finds that prices
consistently decline as building size increases. Hartman also
finds that demand is
greatest for buildings of 25,000 square feet or less regardless of
market conditions.
Examining the tendency of various firms within an industry to
cluster together and
often form the nuclei of a city, Rauch (1993) examines the
historical role of city-
industry locations. This study notes the historical incentive
businesses have to remain
subject to agglomeration economies. Rauch finds that firms are
reluctant to move from
an old, high-cost site to a new, low-cost site, but that property
developers may alleviate
this inertia through pricing strategies over time.
Evaluating data relevant to plant completions, Wheaton and
Torto (1990) provide a
model that is useful in estimating excess plant capacity in a
particular market. They
also stress that many tenants use industrial properties for mixed
purposes such as
manufacturing, distribution, storage and research.
Two studies discuss the impact that changes in technology are
having on the demand
for industrial properties (see Hughes, 1994; and Wheaton,
1996). Both studies concur
that large companies are looking to consolidate operations into
a few key locations.
Hughes, in examining the determinates of industrial space
demand, reports that firms
are shifting from industrial to industrial / office properties,
often as a way to meet their

more advanced warehousing and distribution needs. These needs
include more
automated inventory tracking and ordering systems such as JIT
inventory
management. Wheaton (1996) supports the popular view that
enhanced technology
will reduce the demand for industrial properties as inventory
management is improved,
and thus the demand for warehouse property is shrinking.
Another study addresses
the changing demand for certain physical attributes of industrial
space. Christensen,
Wisener and Campos (1997) discuss the changing space needs
for warehouse tenants
such as square footage, dock doors and higher ceilings.
Noting the difficulties in analyzing industrial space that arise
from the assumption
that demand for industrial space is synonymous to the demand
for office space,
Rabianski and Black (1997) suggest three approaches. First,
they estimate the demand
for industrial properties relative to office space; second, they
forecast manufacturing
space demand; and third, they forecast the demand for business
parks. It is important
to not overlook the performance of the regional and national
economies, overall
economic growth and overall population change as demand
drivers for industrial
space.
The major findings about the demand for industrial real estate
are:
� Price per square foot declines as building size increases, and

demand is
greatest for buildings of 25,000 square feet or less regardless of
market
conditions.
THE ENVIRONMENT AND PERFORMANCE OF
INDUSTRIAL REAL ESTATE 295
� Estimating the excess supply of industrial properties is
confounded by
their use for mixed purposes such as manufacturing, storage,
distribution
and research.
� Large companies generally seek to consolidate operations
into a few key
locations and are shifting from industrial to office / industrial
properties.
� The demand for warehouse property is decreasing due to the
improved
inventory management that results from enhanced technology.
� Demand for industrial space should be estimated relative to
demand for
office and manufacturing space, regional and nation economies,
overall
economic growth and population changes.
Determinants of Rent and Income for Industrial Real Estate
The determinants of rent and income for industrial real estate
are examined in the
articles grouped in Exhibit 3. Topics range from geographic

differences in rental rates
to the factors that best forecast rents and vacancy rates. Bible
and Hsieh (1996) argue
that Geographic Information System (GIS) technology may be
useful in industrial real
estate research. Where property characteristics in general are
not important in
determining warehouse occupancy rates, GIS technology may be
used to examine
warehouse occupancy rates by applying distance variables along
with conventional
property variables. Where location is important, Reenstierna
(1997) discusses the
advantages and disadvantages of using a ‘‘baseline’’ valuation
model in lieu of the
traditional sales comparison method. His study also uses a GIS
map, indicating the
change in value for a ‘‘baseline’’ property in different locations
throughout the area
examined.
Studies that seek to explain rental rate patterns and the
determinant factors of
industrial rent variations include those by Sivitanidou and
Sivitanides (1995),
Buttimer, Rutherford and Witten (1997), Jones and Orr (1999),
Thompson and
Tsolacos (1999) and Thompson and Tsolacos (2000).
Sivitanidou and Sivitanides use
alternative empirical models to examine the long-term rents of
similar properties
within competing industrial areas. Their study finds that several
property-specific
variables are relevant to the firm and other variables are
relevant to workers; moreover,
both have significant effects on the rental rates of industrial

properties. Firms value
access to raw materials and other markets, available services,
freeway, intersection
and major airport proximity as needed amenities whereas
workers value education,
low crime rates and proximity to shopping areas.
Presenting an empirical analysis of the determinants of pooled
industrial warehouse
rents, Buttimer, Rutherford and Witten (1997) note
characteristics that positively
influence rent per square foot as well as characteristics that are
negatively related to
rent per square foot. Using Dallas / Fort Worth data for 848
industrial properties from
1989:4 through 1992:4, they find positive and significant
variables for the number of
ground-level doors (a proxy for accessibility and building size)
and the annual change
in net employment. Ceiling height, percentage of office space,
building age and a
296
JO
U
R
N
A
L
O

F
R
E
A
L
E
S
T
A
T
E
L
IT
E
R
A
T
U
R
E
V
O
L
U

REE6932_Case Study 2 Outline.docxCase Study 2The Holt Lunsf.docx

REE6932_Case Study 2 Outline.docxCase Study 2The Holt Lunsf.docx

Recommended

Recommended

More Related Content

Similar to REE6932_Case Study 2 Outline.docxCase Study 2The Holt Lunsf.docx

Similar to REE6932_Case Study 2 Outline.docxCase Study 2The Holt Lunsf.docx (20)

More from catheryncouper

More from catheryncouper (20)

Recently uploaded

Recently uploaded (20)

REE6932_Case Study 2 Outline.docxCase Study 2The Holt Lunsf.docx