Blue Cross Blue Shield May Reduce Real Estate to Save Costs

As reported in News Observer
By David Bracken

Blue Cross and Blue Shield of North Carolina's decision to review its real estate portfolio as it looks to slash expenses is part of a worrisome trend for the local real estate market. Like GlaxoSmithKline, Blue Cross is one of the larger and more stable employers in the Triangle, and one that wasn't expected to be a major contributor to the region's rising vacancy rate.

Blue Cross owns roughly 825,000 square feet of office space in Durham and Chapel Hill. The majority of that space is at the company's 40-acre campus along U.S. 15-501 in Chapel Hill and its customer service center and campus buildings on University Drive.The company also leases about 70,000 square feet in Durham's University Tower.

Although it's too early to tell how much of that space might become expendable, the results of a similar exercise undertaken by GSK are not reassuring.GSK is vacating six Triangle buildings it owns and also leaving nearly 90,000 square feet of leased office space in downtown Durham's American Tobacco complex.

The moves by GSK and Blue Cross are reminders of how the fragility of an economic recovery based largely on corporate cost-cutting is delaying improvement in the real estate market.

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Still in Survival Mode

"Every good business person knows that you can't save your way to prosperity," Highwoods Properties CEO Ed Fritsch said. "These are hopefully temporary measures until the economy gets back on its feet ... ."

The Triangle office vacancy rate was 18.3 percent in the first quarter, according to Karnes Research, a Raleigh firm that tracks commercial real estate trends. That's the highest it's been in more than a decade and nearly three percentage points higher than it was in the first quarter of 2009.

While there are local companies that are expanding to meet their own increased demand, iContact and Cree to name two, the majority of businesses continue to be in survival mode.Much of the activity in the market during the first half of the year involved companies searching for ways to reduce real estate expenses, said Rich Harris, managing director at Synergy Commercial Advisors in Durham.

"That's what a lot of brokers have been doing, sitting in meetings where the likelihood that you're going to achieve anything is pretty low but everybody needs to go through the process to see whether there's something that can be done," he said.

As large companies that own and lease space, Blue Cross and GSK are among those able to do something about their real estate costs.

Even the bigwigs haggle

Many large companies also negotiate termination clauses into their lease agreements that allow them to exit early for a fee. GSK, for example, took advantage of such a clause to leave its space in American Tobacco in May.

For others it's a matter of seeking relief from their landlord. One option is to try and reduce the rent by agreeing to a lease extension.When Highwoods considers such a request, it looks at the company's long-term prospects."We don't want to necessarily give relief now only for them not to be around to honor the lengthened commitment," Fritsch said. "You expect that most are and you do your homework."

Highwoods is also in a position to offer cash-strapped tenants other concessions, such as making improvements to a space in exchange for a longer commitment.The companies in the toughest position now are those that signed leases shortly before the economic downturn took hold and rents started falling. With too many years left on their leases, they aren't in a position to renegotiate. and can't take advantage of concessions being offered by landlords.

Harris said he sees signs there will be more serious tenants looking for space in the second half of the year. Venture capital is starting to flow again, and many companies looking have a year or less remaining on existing leases.

"The groups that we're seeing out there right now are more real," Harris said. "The probability that they're going to do a deal is higher."
david.bracken@newsobserver.com or 919-829-4548

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