Commentary: It’s time to embrace new real estate philosophy

Twenty years of real estate investing has reinforced an old adage: Buy low. After acquiring over 150 buildings and working with over 1,200 tenants over the past 20 years, I no longer believe one has to ?lease high? to realize profit. As an example of my philosophy, our company, Colorado & Santa Fe Real Estate, recently acquired a building in Greeley, Colorado that has sat empty for the past year. The 238,000-square-foot office building, one of the largest in Greeley, will ultimately accommodate office users of as little as 300 square feet.
Despite being able to purchase the building very cheaply, many investors considered our investment in the former State Farm Regional Claims Center to be a dangerous ?money trap.? In fact, because we are offering lease rates at nearly half the going rate, no single property purchase in my company?s history has generated the level of media attention we have experienced in recent months. My response to every amazed inquiry into our Greeley purchase has been this: This type of property is exactly what we were buying in the 1990s and this type of property is exactly what we hope to be buying for the next decade.
Why buy low?
So we can lease low. The recent downturn in our economy has hit business owners and employees hard. Many Coloradans are looking for jobs and those fortunate enough to have jobs are fighting to keep them. Competition from overseas is fierce. In 1999, China graduated 200,000 engineers while the U.S. graduated 60,000. According to Don Stevens, managing director of the Institute for International Business at the University of Colorado, Denver, China will graduate many times that number in 2004 (while the number of U.S. engineering graduates will remain constant). These bright, new graduates will earn $7,000 per year and they will want to replace U.S. engineers. When I make a troubleshooting call to Dell Computers my call is routed to a call center in India for a fraction of the overhead. Today, even legal research pertaining to Colorado law can be done in India for around $20/hr. My company owns two buildings in Colorado where my tenants shut down operations, sending over 1,000 jobs to China in the last two years. Those jobs are not coming back. I have been to China and I know that labor, taxes and overhead are cheaper there.
The good news ? and there is good news ? is that the lease rates we offer are low and they allow companies to save on at least one part of their expenses. For example, our rents start at $2.95 a square foot for large tenants in our new Greeley building. If a Colorado company is to compete in this global market it will need to get lean and mean. Competition is no longer a gentlemen?s game between five key players who are all paying high overhead. Today, it?s ruthless and to win you need to play smart on all fronts. And let?s face it: Paying rent is an overhead expense that most companies have an interest in minimizing. Real estate investors, on the other hand, have an interest in maximizing rents. That is where my company differs. Our strategy of buying low and leasing low has worked so well because it all but guarantees we will keep our properties full of cost-conscious, globally competitive tenants.
Why buy real estate now?
Our recent purchase of the building in Greeley marked the beginning of a $200 million office and real estate acquisition effort by our company. We have been patiently saving our money for five years in anticipation of a time when we could purchase ?distressed? buildings (buildings that are empty or nearly empty of tenants). Most of the real estate industry is in denial; they don?t believe the era of high rents and booming job growth is coming to an end. Landlords will have to lower their prices much like the airlines and telecom companies are doing. Colorado & Santa Fe will lead the way in getting ?lean and mean.? Over the next few years we will be taking advantage of a distressed real estate market and will purchase over 1.5 million square feet of office alone. And once again, we will do what we do best: buy empty buildings and rent them out inexpensively so that our tenants can live and work on the Front Range all the while becoming competitive in a global economy.

Marcel Arsenault is chairman and CEO of Broomfield-based Colorado and Santa Fe Real Estate Company. He can be reached at (303) 466-2500.

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