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experience of a substantial company which maintains sales offices in all parts of the country.

In 10 vears, from 1940 to 1950, its rent increased 86 percent (not necessarily for the same facilities); salaries and wages increased 176 percent; and gross expenses, 157 percent.

In 1940 its rent payments represented 8 percent of business cost, By 1945 this had dropped to 7 percent. By 1950 it had come down to 6 percent. I cite this example because it is specific and because I believe it is typical. And we get comparable information from other tenant sources, equally reliable. It confirms my original statement that rent is a small and decreasing factor in the cost of doing business and that other costs are rising more rapidly than rents.

Our experience exchange facts gave you the office building picture in very considerable detail. I would gladly supply similar detail regarding loft building operations if it were available. It is not. Loft buildings are characteristic of certain larger cities. In many parts of the country they are little known or nonexistent. There is greater diversity in types of loft property and there are fewer comparable factors. Besides, it takes time to establish such a factual interchange as our office building report represents; and the loft building group is a fairly young branch of our association.

It can be said, however, that loft building experience, in general, follows the office building pattern, which it parallels in many respects. Vacancy is higher, approximately 4 percent; rental rates are much lower, in line with services rendered, but percentage increase higher over a 10-year period, having started from a lower base.

Operating costs have increased somewhat faster, possibly influenced to some extent by the Wage-Hour law which was held applicable to loft building operations. Decentralization has provided a special form of competition due to removal of many industrial concerns to new buildings of their own in outlying locations. There is consequently no shortage, present or prospective, to suggest the need of artificial controls.

There is one other item that needs to be recorded, and that is the nature of commercial leases. Commercial rents are not established, they are negotiated, like any business contract. The rent provided depends upon many economic factors other than intrinsic value of the space. The term, the conditions, the mutual obligations are all subject to individual agreement. They frequently involve expenditures by one party or the other for substantial alterations. Expiring leases, coming up for renewal, may have been drawn at a time when economic conditions were entirely different. All kinds of special provisions, percentage-wise and otherwise, may be involved.

There are such matters as condemnation clauses, options of many kinds, cancellation or recapture clauses, amortization provisions, tax participation and escalator clauses, graduated rentals, and not infrequently conditions involving a partnership arrangement, where percentage is a factor, in the tenant's business operations. The complexity of commercial leasing procedures needs to be clearly understood for its bearing on administrative proposals.

Well, these are the facts we have brought together for your consideration. Now, what do they add up to?

I believe it has been clearly shown:

(1) That commercial rent is not a major element in the current inflationary trend;

(2) That any influence on the cost of living is indirect and remote;

(3) That it is a minor and decreasing element in the cost of doing business;

(4) That the record of rent advances has no more than kept pace with rising costs of operation;

(5) That office building occupancy has in fact been declining-a trend which post-Korean impacts have only slightly interrupted;

(6) That store rents, still lower than they were 25 years ago, present no prospect of getting out of hand;

(7) That commercial properties have shared to a limited extent, at most, in the prosperity that other business has recently enjoyed, and still lag behind, economically.

(8) In short, there is nothing in the present situation that presents any tangible or predictable inflationary threat, or any hurdle in the stabilization program.

All this adds up to no occasion for Federal controls.

The question has been propounded, inferentially at least, if al other segments of the economy are controlled, why not commercial rent? Putting it that way would place the burden of proof on those who oppose pending legislative proposals, which we do-with conviction.

In view of the fact that commercial rents have never been controlled on a Federal basis, and that similar proposals were rejected by the Congress on more than one occasion in the course of World War II to which we might add that comparable lgeislation has been rejected by the legislatures of several States within the past few weeks-it would seem to us that the burden of proof lies the other way--with the proponents.

Such proof as has been offered has been neither specific nor factually competent. For our part, we have attempted, and I believe we have succeeded, in providing your committee with substantial facts.

It is misleading to infer that all segments of the economy have been, or are proposed to be controlled. That would be an administrative impossibility. Several phases not now covered were listed in the fine presentation of the Economic Stabilizer to your committee. Yet for certain of them, no control powers are sought. The reason, presumably, is that they are not administratively feasible, and that applies to commercial rent control.

Even if occasion had been shown-which we submit the facts do not support—there would still be a serious question of advisability of attempting to control commercial rents.

We have pointed out the complexities that commercial leasing procedures necessarily contemplate; they are inseparable in the very nature of our business. Because of these complexities, it would be altogether impossible to administer such controls with any degree of intelligence or equity. To attempt it would involve the establishment of administrative facilities of such size and extent as to require an annual appropriation running into many millions of dollars-all to accomplish no good purpose.

It is far from the fact that "everything” is either controlled, or proposed to be controlled. Contractual agreements for services to be

performed are not controlled; by the same token, lease negotiations involving considerations too complicated to be reduced to any administrative formula, should not be.

Let's now apply the tests suggested early in this presentation. Are you fully satisfied: (1) That the occasion for commercial rent control has been clearly established? (2) That conditions to be corrected warrant the disruptions that may ensue? (3) That it is workable and administratively feasible, the benefit, if any, outweighing the cost in money, manpower, and inevitable mistakes?

Our answer, and we trust your answer, is ‘No."

For the reasons we have submitted, and the evidence offered in support of them, we recommend and strongly urge that those sections of title IV-A of H. R. 3871, which deal with control of commercial rents, be not enacted into law.

The National Association of Building Owners and Managers has appreciated this opportunity to present its case in opposition to these legislative proposals. We have endeavored to give you all the facts as they apply to this problem, and I believe they point to one conclusion, that imposition of commercial rent controls is unnecessary, unwarranted, and would be impractical of administration.

We ask that you also consider the local evidence submitted by a number of our member associations, which has been offered in the form of supplemental statements, filed with you for the record. There are in attendance in this room the personal representatives of associations of building owners and managers in Akron, Atlanta, Buffalo, Baltimore, Chicago, Cincinnati, Cleveland, Columbus, Denver, Detroit, Indianapolis, Kansas City, New Orleans, New York, Oklahoma City, Philadelphia, Pittsburgh, and St. Louis. If any member of your committee has a question applicable to any of these cities, I am sure the representative of the appropriate association will be happy to respond.

And if we can be of any further assistance, now or later, your request will be our pleasure.

(The following statements were submitted for the record, by Mr. Cook:)

SUPPLEMENTAL STATEMENT ON BEHALF OF THE CLEVELAND AssociaTION OF

BUILDING OWNERS AND MANAGERS, CLEVELAND, OH10 We wish to respectfully submit to your committee the case of the office building industry of Cleveland.

The Cleveland situation is in no way an exceptional case. Quite the reverse is true. Cleveland is a representative city. Populationwise it ranks midway in the large cities of the country. Historically, it is younger than the eastern cities and older than most of those of the Midwest, Southwest, and the Pacific coast. It is not a boom town but enjoys a steady development. It is not dependent upon one dominant type of industry, but has a widely varied nonseasonal industrial activity. In its immediate vicinity are many typical residential suburbs, small towns and cities, surrounded by farming areas, with an economy well balanced between industry and agriculture, with business properties located in neighborhood shopping centers or along the traditional American Main Street. Cleveland is a center for transportation by air, rail, and water; for a wide variety of industries contributing to the Nation's economy in both wartime and in peace. It is a center of finance, commerce, and wholesale and retail trade. To all of these the office building industry of Cleveland offers its facilities and services. Cleveland is a representative city and its buildings and building management are representative of the industry.

Like all American villages, towns, and cities the business community is largely concentrated in a central area and, like all American communities, there is present the problem of congestion from lack of adequate traffic facilities, public transportation, and parking. In downtown Cleveland there are 78 competitive office

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buildings, not including institutional, Government-occupied, or single purpose properties. These properties range from small buildings with only a few thousand square feet up to some of the largest in the country with over a million square feet. They have a total competitive rental area of about 9 million square feet, of which approximately three-fourths is office space and one-fourth mercantile.

The office building industry is highly competitive. Cities compete with other cities for the location of industrial plants and businesses which will bring more tenants into their own local properties. There is competition between the varios rival communities within the city itself. Every office building is in competition with every other office building in the sale of its office space and services. It is also in competition on its mercantile space with other retail business, restaurants, banks, and service industries. No one, who has not gone through the overbuilding of the twenties, the ruinous depression of the thirties, and the inflation of the forties, as I have, can fully appreciate just how highly competitive this business is.

Rental rates, in the last analysis, are influenced by the amount of vacant competitive space in the immediate area in which an office building is located. The economic laws of supply and demand are in full effect. Cleveland has had no new office building construction in the past 20 years. This also is typical of most of the other American cities, with the notable exceptions of New York and Houston and at the present time of Pittsburgh. The natural assumption might follow that the supply of space has not kept pace with the demand. The reverse is true. In Cleveland there has never been a time when adequate space was not available. The reason is simple. As demand increased there came into the market, not net office buildings, but the conversion to office space of properties formerly used for other purposes, storage garages, department stores, loft buildings, all favorably located in the downtown central area. In the past 10 years over a million square feet of office space has been added, without the construction of a single new office building. (In exhibit A attached you will find listed the names, addresses, and areas of these properties.)

Structurally sound buildings have bren converted into excellent office space at a cost far below that of present day new construction. Modern lighting and decoration, acoustical treatment and remodeling of lobbies and elevator ausiems have produced beautiful competitive space. •And, it is competitive. I know, I manage some properties that have always been office buildings. We have had to modernize to stay in the competitive picture.

There is no immediate prospect that Cleveland will not continue to have a supply of good office space adequate to meet any increasing demand. Conversion of properties from other uses is still going on. We have recently been asked by our local oífice of the Federal Public Building Service to assist in locaiing some 200,000 feet of space as needed for expansion of present Federal agencies and for the new defense agencies, These are large areas, ranging from 10,000 to 63,000

We have filed with PBS a list of available properties in excess of a half million square feet, some of which are now in process of conversion. (In exhibit B attached is a list of these properties, their addresses and areas.)

We have said that Cleveland is a representative city. The same things that are happening here will be found in every other city in the country. The supply of space is increasing faster than the demand. This is shown by the occupancyvacancy survey's conducted by the local associations of our industry. In Cloveland we have made occupancy surveys quarterly for the past 30 years. The high point was an office occupancy of 99.16 percent in the last quarter of 1946. of January 1 this year it was 95.81 percent as against a vacancy of 53,000 square feet at the beginning of 1947, we now have a backlog of over 300,000 square fett of vacant space; in scattered units. This is the equivalent of three arerade 10-story buildings. The decline from 1946 has been gradual and constant, and there is every reason to believe it will be continuous as additional converted space will most certainly be brought into the market. It is highly significant that the increase in vacant space has arisen, not from excessive rental rates, but from this increment of converted space which the market has not absorbed as fast as it has been produced. (See exhibit C, January 1, 1951, office building occupancy report of the Cleveland Association of Building Owners and Managers.)

Let's take a look at what has happened to rental rates. Ownership and management of office buildings have for the most part inclined to a conservative long-range view of this matter. An office building is no fly-by-night business. It must prosper or become obsolete in its original location. It is dependent upon the general business barometer for its varying success or decline over a period of the lifetime of two generations of its tenants. Its most valuable asset is the measure of its ability by fair treatment and acceptable service to hold its tenants through goods years and bad. Management cannot take advantage of a temporary

square feet.

shortage of space to charge excessive rental rates. Competitors have vacant space. They will take care of that situation, and any misguided owner or manager who thinks that he can do a little gouging and get away with it will soon find that he is the one who has both vacant space and disgruntled tenants on his hands. We have seen a few, and fortunately a very few, instances of this kind in recent years, where new owners have acquired smaller Cleveland properties as a speculative venture. Rents were increased above the competitive level warranted for this type of building. The result, a great deal of vacant space, a high degree of tenant turn-over, daily advertisements in the newspapers, and gradual reduction of rental rates to the original competitive level.

The cost of present-day construction of new office buildings in Cleveland would require an average rental rate of $5 or more a square foot. We base this estimate on our local construction costs and on the experience of those cities where new buildings have actually been constructed. Locally rental rates in existing buildings and converted buildings average 30 to 40 percent less than the average rate required in such newly constructed office buildings. This is direct evidence of the fact that office building owners in Cleveland have not taken advantage of the tenants and have not set their rental rates on existing buildings at rental prices equivalent to those required in newly constructed office buildings in other cities. Moreover, office building owners in Cleveland, during the last five or more years, have been spending large sums of money in modernization of their buildings, including such work as new elevator installations, conversion from direct to alternating current, etc., all of which arrest the obsolescence of existing buildings and bring their physical attractiveness close to that of a newly constructed building. These improvements, it also might be noted, have been received with enthusiastic approval and appreciation by the tenants.

We have asked a number of our representative Cleveland office buildings, large and small, to prepare graphs, charting, on the basis of 1928 experience, their average rental rates in 1.128, in 1940 and as of today, together with operating costs for those dates. A typical graph shows that rental rates today are 12 percent higher than in 1928, operating costs up 46 percent, and the purchasing power of the dollar down to 72 percent of the 1928 dollar. Occupancy is siightly higher than in 1928. Do these figures show any evidence of excessive rental rates? We have established that:

1. Cleveland is representative of all American cities. 2. The oflice building industry is highly competitive. 3. Rental rates are governed by the supply of vacant space. 4. An adequate supply of vacant space has at all times been available in Cleveland and vacancy currently is on the increase.

5. Conversion of buildings from other uses to office space has produced over a million square feet in the past 10-year period.

6. Over a half million additional feet is now in process of or available for conversion.

7. Rental rates average 30 to 40 percent below equivalent rates required by new office building construction.

8. Rental rates increases have lagged far behind increases in operating costs:

9. There has been no rent gouging. These foregoing facts are the basis for our strong conviction that there is no proven need in Cleveland, or elsewhere, for control of business or commercial rental in office buildings.

There is one other viewpoint which we would like to touch upon briefly. That is the contention sometimes advanced that business and commercial rentals represent a substantial part of the cost of doing business, that they add to the cost of living, and are therefore inflationary. Nothing could be further from the truth.

Tenants in mercantile space in office buildings most commonly operate under a percentage lease, with a moderate fixed minimum rent and a maximum rent produced by a fixed percentage of gross sales, graduated by volume. In effect, landlord and tenant share in the profits of the business, with the landlord's average percentage ranging from 5 to 8 percent of gross sales.

Mercantile rents go up or down with the volume of business. But the percentage remains fixed. And, the selling price of those commodities sold under such percentage leases is now under price control.

Office space rentals vary widely in different buildings. As a result the tenant, whether a professional man, a large corporation, or a small business, can readily find space at a rent which is best suited to his needs and his pocketbook. Professional men, lawyers, doctors, dentists, consultants, etc., tell us voluntarily and freely that office rent amounts to something less than 10 percent of their income,

83473—51-pt. 3—33

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