The Leader - May/June 2008 - (Page 51)

Wells F a r G o ’ s s a n Fr a n cisco spa ce str a teGY : Dav i D ne ls o n’ s cYcle -p ro o Fi nG Make s Fo r i Mp re s s i v e c BD p o rt F o l io p l aY ships with our customers in order to predict their future space needs? YES n Are we going to continue to expand our presence in San Francisco? YES An important outcome was that CRE expanded its space planning department by adding a strategic planning component tied to internal client needs. ‘our version oF tHe perFect storM’ The goal, as Nelson outlined it, “No surprises over space over time.” He then began an impressive initiative to create a flexible but balanced portfolio structure that accounts for both future space needs – which is hard to forecast – and recurring economic cycles – which are not always predictable. “Real estate is a cyclical business and we need to build a strategy that works in the good times and the bad times,” he said. So the CRE team broke down the strategy into three phases over a long period of time of 15 years, which Nelson described as “the basis of our strategy.” pHase 1: concentration alonG Market street corriDor in cBD to the early piece of the portfolio transformation. Key aspects of 2002 – 2003 deals: n 15 year leases with exits at 7 and 11 years floor by floor for higher flex levels n Right to expand, right to contract “Results are astounding!” n Getting the first deal was difficult, but the rest “fell like dominos.” n CRE fixed the cost of the CBD portfolio n It also accommodates “future expansion at known rates.” pHase 2: strike a Balance BetWeen oWninG anD leasinG n The confluence created the conditions for a substantial sale-leaseback opportunity for Wells Fargo. “We picked the rate and terms and went to market,” Nelson comments. “We said: ‘This building is for sale with this lease (the bank’s terms) attached to it.’ ” Then investors bid on it. There were over a dozen offers. “We adapted to a dynamic marketplace by doing a sale/leaseback,” Nelson explains. Highlights: Sale price: Purchase price: 1 ½ year profit: n n Purchase well-known downtown office buildings “A long-term strategy worth pursuing.” $370,000,000 $150,000,000 $220,000,000 2005 Wells Fargo Purchase Deals in CBD 632,000 sq. ft. (58,715 sq. m.), 261,000 sq. ft. (24,248 sq. m.), and 77,000 sq. ft. (7,154 sq. m.) “We talked to owners with a lot of vacancies and told them we could help them out by buying their buildings,” Nelson recounts. “Then, they wouldn’t have to worry about future cycle changes and expensive leasing and build-out costs,” thanks to the bank’s economy of scale, credit rating and cash holdings getting them off the hook in a down market. In 2006, a year later, rental rates skyrocketed again. It was the second upward market swing in 5 years, he says. n Cap rates compressed dramatically n 7-8 percent returns went down to six percent, then to 5.5 percent and even lower to five percent n “It was our version of the Perfect Storm,” he surmises. n 30 years of fixed costs Complete control over the building pHase 3: reDuce tHe nuMBer oF BuilDinGs occupieD in tHe cBD The objective was to enter long-term leases – cheaper space at long-term fixed rates. 2002 – 2003: Lease 525 Market Street, One Front Street and 600 California Street The market changed quickly and dramatically. “Instead of rising rents we had over 20 million square feet of empty space in San Francisco and 50 million in Silicon Valley,” Nelson remembers. Rents were in free fall. “We took a lot of space at the bottom of the market with 15-year terms,” Nelson explains of the timing relating “Our goal was to migrate to big buildings with big floor plates,” Nelson points out. Larger floor plates are more efficient and provide best economics on an employee/sq. ft. basis, he says. “We wanted to increase our property management efficiencies,” he explains. “We wanted to increase our ability to expand and contract.” When senior management asked how much of a premium it was costing to add this level of flexibility, he had to agree with Nelson’s response, as underscored in CoreNet Global’s 2007 study on Flexible Leasing, “Yes, flexibility costs some more but it’s worth it.” The example he offered was that the bank might pay $42 a foot instead of $40. “Senior management of the bank understood it,” he says. tH e le aDe r 51 MaY / j u n e 2008

Table of Contents Feed for the Digital Edition of The Leader - May/June 2008

The Leader - May/June 2008 Leadership Contents Message from the CEO Real Estate in the News Green Real Estate Work Without Boundries Building Flexibility Into the Business Strategy Multi-Generational Work-Force Design Work Force Longevity Analysis Wells Fargo's David Nelson Pennsylvania's Michael Rossman Globalization 2.0 Site Selection Consultant Directory The New York Report: A Core of Traditional and State-of-the-Art Opportunities Discovery Forum Findings Industry Tracker Young Leader Career Development Effective Leadership Economic Development in the News A Look Ahead In Our Next Issue Calendar of Seminars Index of Advertisers Executive Development Spotlight

The Leader - May/June 2008

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