Is Less More?

There was some buzz in the office last week about Dollar Shave Club and their introductory video which has gone viral.  They are offering razors delivered to your home each month at a discounted cost.  The video takes shots at Gillette and their use of Roger Federer as a spokesperson, hinting that it adds costs to the consumer.  Their simple value proposition is that they deliver a no frills product at a cheaper cost than the competition. Some of the most popular seats at Yankee Stadium are the bleachers.  In the old Stadium, the bleachers were a separate section with no access to the rest of the Stadium and in the last few years of its existence, they didn't serve beer.  However, the pricing was, and remains, the cheapest in the Stadium.  In the new Stadium, those in the bleachers are provided with the same experience as the other fans, except the seats have no backs.

In previous entries, I have discussed the trend of "flight to quality" and tenants flocking to buildings in better locations, with more amenities.  The statistics support that case with 72% of the deals in New Jersey in 2011 occuring in Class A buildings, while the Class A set comprises 52% of the market.

However, there's a flip side to the market and it resembles the no-frills, low cost approach mentioned above.  As buildings revert to lenders and values are reset, landlords will be in a position to provide aggressive leasing deals to tenants.  This will become more prevalent in the coming months as we see vacant buildings continue to trade at a significant discount.

In 2010, one of our clients purchased a building for just over $30/sf in Monmouth County.  We completed almost 100,000 sf of deals over an 18-month period on their behalf.  We did so by undercutting the market by approximately $3/sf and we captured almost every deal in the market. 

People will try The Dollar Shave Club, but if the razors aren't as good, they will unsubscribe quickly.  The bleachers, especially in the new Stadium, offer a great experience including beer, and a nice view of the game.  In our Monmouth County project, immediately upon buying the building, the landlord renovated the lobby, installed a new HVAC system and re-paved the parking lot. 

We've seen several tenants take advantage of this new pricing model and it's happening in quality buildings.  If these less expensive buildings didn't offer tenants what they needed to accommodate the needs of their employees, they would be eliminated from consideration immediately.

Very few tenants make what I call "spreadsheet decisions", meaning the only consideration is financial.  Real estate departments are under a higher level of scrutiny and business units, even profitable ones, aren't given the ultimate say in some corporations. Building quality, amenities, location, financial stability of the landlord, building maintenance, and efficiency of the space are just some of the considerations that go in to the overall decision.  But, if all of those things are equal, why wouldn't the less expensive alternative win the day?

So I have come to the following conclusion: less is more...as long as it's the same or better.

Do you agree?

JN