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Three Key Questions About Commercial Real Estate

Mike Porterfield joins us to answer three key questions about the current market for commercial real estate: 1. How has the pandemic affected the commercial market? 2. What does the commercial market look like now? 3. What does the future of office space look like? Mike has more than twenty years of experience in the industry, and provides a wealth of knowledge and insight. He is Principal Broker with Tartan Properties Commercial in Old Town Alexandria, VA.

 

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Adam (00:08):

Welcome to Episode Four of Keeping It Real. I'm your host, Adam Tabaka. Today, we're asking three key questions about commercial real estate with Mike Porterfield. Mike is Principle Broker at Tartan Properties Commercial in Old Town Alexandria. A native of the city, mike graduated with a degree in broadcast journalism from Northeastern University. Mike has 20 years of experience in the industry serving the greater Northern Virginia area. He specializes in tenant representation for small and medium sized businesses and landlord representation or the lease or sale of commercial property. In 2019, Tartan Properties received the Small Business of the Year award from the Alexandria Chamber of Commerce. He's a husband, a father of three, a fitness enthusiast who enjoys musical theater. And if you didn't know, he coached the women's pair team in rowing to the bronze medal in the 2000 in Sydney Olympics. It's my honor to be joined by the one, the only Mike Porterfield. Mike, thanks for taking time out to be with us today.

Mike (01:10):

Thanks Adam. I appreciate the invitation. It's great to be here.

Adam (01:13):

Awesome. Well, now, before we dive into our three key questions, tell us real briefly, how did you end up in your current line of work?

Mike (01:23):

That's a good question. So when I left my first and only previous career as a coach with the US Olympic Team, I was transitioning back to the area and made the decision to get out of coaching at least from a full-time basis. And I looked around as a early thirties father of two and realized I wasn't qualified to do too much else. And having grown up in the industry, my father had been a solo practitioner in commercial real estate, and he in fact was Tartan Properties for many, many years and just did it on his own. I realized that I had an interest and a hunger for entrepreneurism and so I went looking for some other jobs, thought I would parlay my Olympic experience and do something interesting in marketing or branding. And then when I got offered a job for $27,500 a year, I'd have to wear a suit and go downtown every single day to do somebody else's bidding. I realized that that was my call to make some business cards and are knocking on doors. And so that's how I got into Tartan Properties.

Adam (02:28):

Awesome.

Mike (02:29):

Yeah.

Adam (02:30):

Now what are some of the biggest misconceptions, or at least the biggest misconception among the general public about your profession, your industry in commercial real estate?

Mike (02:42):

I mean, I would say that kind of superficially, people, and maybe not dissimilar to your industry, people think of us as space finders. They just go, "Hey, show me some space," and they want to just kind of jump right to it. But don't realize that there's can be much more to it than just finding a space. Because we're looking at... More holistically, we want to look at your long-term strategy for growth. We want to look at what the true occupancy cost for that space is and where that fits into your budget because after personnel costs, employees and salaries, your occupancy costs, your rent or your mortgage, that's going to be your second biggest expense for your business. So if you don't have a handle on what that is and what that's going to be 2, 3, 5 years down the road, you can put your business in a very tenuous position at times. So I think people look at it very simplistically, but we try to approach it in a more holistic frame of reference, or frame of mind.

Adam (03:38):

Now, do you find that a lot of kind of first time startup business owners don't have kind of the long-term plan in mind, or is it common among all business owners, or kind of what's your experience?

Mike (03:55):

Yeah. You know, we see a whole range of different kind of business operators. We see a lot of... Because we have a lot of signs up around the region, somebody who has an idea, the first thing they're going to do is either jump in their car and drive around an industrial park, or they're going to jump online and start searching on LoopNet or just do a Google search for office space. So we take phone calls from people in early stage, early, early stage, maybe too early stage. So in those instances we're doing a lot of educating and handholding, which was what my father used to call it. And that's fun most of the time, kind of teaching somebody the process and we talk about kind of the, there's a leasing process and the Tartan way. And so it can be somewhat formulaic, like let's start with your business plan. Let's start with a competitive analysis and all of those sorts of things to kind of help you through the kind of the launch and the finding of space and securing of space.

            But then we're also dealing with working with existing businesses at different stages. I mean, one story I tell all the time is a lot of people here in Northern Virginia know Port City Brewing. So Bill Butcher came to us, it's been now... He just had his 10th anniversary. And I learned a lot from working with Bill because he had already been working on his business plan for years and it was very methodical. We sat in this very room and interviewed contractors, interviewed engineers, we interviewed architects and we put the team together before we ever even went out and started looking at space. And so it can be a little loosey goosey, just kind of depends on where in the process you are. But with people like Bill who are very, very dialed into methodical, with a real plan on how to approach it, those clients are obviously fun and inspiring to work with as well as the startup folks.

Adam (05:52):

Very cool. Now, is there any one thing in particular that you would say is the most underappreciated aspect of what you do in commercial real estate?

Mike (06:04):

Yeah, so I think some of the soft skills that are required... Not required, but are helpful to have, is patience. So not only is patience important from just the brokerage standpoint of running this business, because we can't make people go out and buy and lease and sell buildings. So we have to be patient to work around whatever the market conditions are, see pandemic. But then also when you get into a deal, know that every one of your, all of your gestures and all of your questions and how you move around a deal, if you're a tenant working with a landlord or a landlord broker, all of those human touches are being kind of perceived by the landlord or the other side that you're negotiating with of how eager you are to get that space leased or purchased or sold.

            So people don't understand that you can run out and find something, but if you want a good deal at the best price and you want it quick, you just can't have it all, right? You got to give on one of those things. So if you want the best deal, you got to be super patient. And sometimes that's pushing back, that's pausing, that's moving slowly, and so people don't understand the subtleties of that. And around here, I always refer to it as like, you have to think a little bit like dating, you'll want to make them like you, but not too much in the beginning.

Adam (07:32):

Sure. Sure. Great analogy. Love that.

Mike (07:34):

Yeah.

Adam (07:36):

All right. So let's delve into the three questions that we're here to kind of take a look at today. You know, the pandemic had caused a lot of disruption in a lot of industries across the economy. What were some of the effects on your business in particular and on the commercial real estate market as a whole?

Mike (07:56):

Right. So I think in the most simplest terms, whether it's brokerage firms like ourselves or landlords, I mean, it was wildly disruptive, right? So in our industry, everything in the first quarter of 2020 just came to a screeching halt. So nobody was leasing space. Nobody was looking at space. Everybody stayed home. People weren't going into their offices. I mean, the deal flow just came to a screech. Now, obviously in your industry, things paused. But then the machine in Northern Virginia for selling homes kind of kept rolling. But for us, it just came to an absolute screeching halt.

            So very slowly, people have started to kind come back to work, but that took months and months and months. And even now we're at a stage now where people are still kind of tentative and reticent to make big bets on real estate, especially leasing office space, because we don't know still who wants to come back? Who's going to come back? What's that space going to look like? Do people want to be in closed offices? Do people want to go back into wide open spaces? Probably not in the near term.

            So, we basically have been two strategies, stay alive and then be in business, still be here when the music comes back on. And so I think we've achieved both of those. And you know, in the early part of the pandemic, when nothing was happening, a lot of our time, what we were focused on was our customers and clients, trying to figure out what they needed. So business operators, we were calling them constantly. Hey, do you need help with PPP? Do you have a bank? Do you have a lender?

            One of those things that I was really... I learned a lot and I was eyes wide open, was how many small business owners actually don't have a true relationship with their banker, don't have a bank that they know the person by name and nobody at the knows them by name. So when you hear people talk about access to capital for small businesses, it's real. And I didn't fully embrace that until this happened. And I was able to, and I feel really good about it, that we were able to help several of our clients and friends find new banking relationships, to get PPP loans.

            And for landlords, we were talking to landlords about like, Hey, are, are your tenants paying rent? Have they closed up? You know, what do they need? Let's talk about rent forbearance. Let's talk about whatever it is that they need and adapting the lease, deferring rent to the back end. Because if you had a good tenant, the best landlords were the most flexible during the early part of this and figuring out a way to like, Hey, like I want these guys to be here when this is all over, what do I need to do? Obviously I need to pay my mortgage most likely. So let's try to figure something out. So we were spent a lot of time trying to assist people, clients on both sides of landlords and tenant relationships. And so, although that did not generate income necessarily for Tartan, it was fairly gratifying to be honest with you.

Adam (11:07):

That's a good business to take care of your people.

Mike (11:10):

Yeah. Right. And all good businesses is about who your customers and your clients are. And I know I have a list right here of who was calling me and saying, "Hey, Mike, how's Tartan doing? What can we do to help you?" And so you appreciate that stuff. You find out who your friends are when the shit hits the fan.

Adam (11:29):

Oh, always. Always. Well, so on that note, so what does the commercial real estate industry look like now that people are kind of starting to go back to office space again?

Mike (11:41):

Yep. So I think everybody had kind of pegged this fall as kind of like, all right, we're going to get back to it. We're getting vaccinated. Those who want vaccinations or getting that done. Originally I was thinking people would start kind of going back right away, but I think some of the larger companies had signaled let's let our workforce kind of gather their breath and their thoughts and have some vacation time, let things kind of de-stress and then we will come back at this in the fall.

            But as you know, unfortunately with the variant now starting to become more prevalent, there have been a number of organizations, large private sector firms that have deferred for another 30 days about going back and now until September. So I think Apple, Google and Facebook have all just in the past week announced that they're going to wait 30 more days to make a decision about return to work plan. So I think if we get to that, again, people are still trying to figure out, all right, are we going to platoon? Are we going to work from home? Come into the office occasionally, kind of deintensify the number of people in the office?

            But I think the next big critical juncture about going back to some kind of normal work environment is going to be centered around vaccine mandates. So, I mean, there's a lot of talk about that, but I think when some of those decisions or decisions are made, whether that's federal government, which now is just announced. I think when the government makes that decision or Facebook makes that decision, then I think a lot of smaller companies will step up and make those hard decisions whether they're going to do that or not. And I think that's going to have a lot to do with who comes back into the office.

            But ultimately my sense is that some portion, some percentage of office space that's out there, is never going to get occupied again. I know it's a little bit gloom and doom. I'm fairly optimistic person by nature, but I think this trend has been coming, right? So after '08 market crashes, everybody is right sizing their businesses, big law firms are taking less space for their partners, associations are moving associates from private offices into collaborative space, i.e. cubes, right? That made it taste a little bit better to call it collaborative space. So that's been the trend, right?

            So now we're hitting this another huge speed bump and I think people are going to do the same thing. They're going to figure out like, Hey, now I actually have confidence in technology. I have confidence in my work staff to work from home. So let's do that. Next time our lease comes up for renewal, let's give the landlord some space back or go lease a smaller suite and then we can save money in our operating costs and keep doing what we're doing. So then we have to figure out what are we going to do with all that extra office space? And I think it's going to come your way in the form of conversion around residential.

Adam (14:45):

Okay. Perfect. Well that just-

Mike (14:46):

That's what's going to happen.

Adam (14:48):

That segues into our third question, your predictions about the future of office space, you think it's going to slowly be converted over?

Mike (14:58):

Yep. I think so. So like here in our hyper local neighborhood of Alexandria and even more specifically, Old Town Alexandria, there's over 300,000 square feet of office space right now that's either under construction to be converted to residential or under consideration, or has already been approved and waiting for conversion. So that's a lot of office space and that's all just come about in the last kind of 12 months. And some of that was already in kind of motion pre pandemic, but I think that local jurisdictions everywhere are going to be grappling with these decisions. And it's not as simple as saying," Hey, look, let's just let that office build and turn into a condo." But then the question is for the local municipalities is schools, do we have enough school space? Do we have enough park space? Can we afford to hire more police officers and first responders to serve those residential and is it truly adding to our tax base? So those are the bigger questions for people to answer.

Adam (15:59):

Yeah. One more bonus question for you here.

Mike (16:00):

Okay. Let's do it.

Adam (16:01):

So in the residential space, prices are... They'll move upward fairly quickly, very, fairly easily. When there's downward pressure, they're slow to adjust. And just curious, is that the same situation, same kind of that you see in the commercial space? Or do you see something different where owners of commercial property are a little bit more responsive to downward pressure on pricing?

Mike (16:33):

I see. Yeah, that's a really good question. I've never thought of those. I compare our industries all the time and in terms of how they behave, but I haven't really thought about that in terms of pricing per se. But what I can tell you is that coming out of this pandemic, there has been a shortage of, and there remains a shortage of, tenants in the market. So a landlord that has vacancy, they are, I think to answer your question, slow to cut their price, their kind of listed, asking price, rental rates or purchase price. But what they have done is they've increased their incentives to get tenants in the building. Like they will give you more free rent. They will offer you more money towards the build out to make it the space the way you want it, as opposed to just kind of wholesale cutting the price.

            Now a smaller owner can be more aggressive on rental rate if it's a lease space or an owner that has no debt on the building. But larger landlords that have debt, they have underwriting rules that they have to follow with their lender. Like they can't go out and lease the space for less than $40 a foot without permission from their lender, because theoretically they bought the building on the thesis that all of the space is going to lease for roughly $40 a square foot.

            So it has made it harder, but they do have a pot of money. So they've gotten more aggressive with tenants for free rent, kind of the standard now for leasing office space is for every year that you sign up for, you get at least a month of free rent. So five year lease would get five months of free rent, sometimes more. The bigger the deal, the more aggressive the landlord's going to be.

Adam (18:11):

Okay [inaudible 00:18:13].

Mike (18:13):

So it's probably not dissimilar to your industry in that regard, slow to make pricing adjustments.

Adam (18:18):

Very slow.

Mike (18:19):

Yeah.

Adam (18:20):

Especially on the heels of an upswing, so...

Mike (18:23):

Right.

Adam (18:25):

Yeah. And we're just starting to see that a little bit right now, as we get a little bit more inventory on the market and you know, it's it's [crosstalk 00:18:34]-

Mike (18:33):

Yeah. We have plenty of inventory. You've been suffering from a lack of inventory where we've been suffering from, or we are suffering from a glut of inventory.

Adam (18:41):

Sure.

Mike (18:41):

I mean, right now quarter after quarter, more space is coming on the market for lease than it's being absorbed. So it's a negative absorption that we're dealing with kind of region-wide.

Adam (18:52):

Awesome.

Mike (18:53):

Yeah.

Adam (18:54):

Mike, it's been awesome having you on today. Tell us real quickly before we head out, where can people get in touch with you if they're looking to find you and find some commercial space and work with you?

Mike (19:05):

Excellent. Well, you can obviously go to our website, Tartanproperties.com. We're on Instagram Tartan Properties, on Twitter we're Tartan Properties. And then my personal Twitter is The CRE Broker, Commercial Real Estate Broker.

Adam (19:22):

Awesome. Mike, thanks so much for joining us. It's been a pleasure and love to have you back again sometime.

Mike (19:28):

Let's do it. Thanks for the opportunity Adam. Have a right day.

Adam (19:31):

All right. You too now take care.

Mike (19:33):

Bye.

 

Adam Tabaka

Long & Foster Old Town Alexandria, VA - Realty
400 King Street
Alexandria, VA 22314
703-683-0400
703-589-6513
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703-589-6513