Globalizing:
Real Estate Payoffs and Perils
by Jack Lyne
Globalization: Clearly, it’s transformed 20th century business life.
Far less clear, though, is how to optimally globalize business operations, particularly when it comes to real estate.
“Globalization has been a long evolutionary process,” says Marvin Manheim of Northwestern University’s graduate school of management. “Only a few senior managers have understood what it meant, what needed to be done.”
Most globalization plans are typified by a missing link between overall strategy and real estate, indicates research from the International Development Research Council (IDRC), the world’s leading association of corporate real estate professionals.
“Most businesses proceed implicitly concerning their real estate.
| inevitably miscalculate, failing to consider transactions’ appropriateness in the context of real estate strategy,” says Equitable Real Estate Investment’s J. Timothy Lake, who extensively researched globalization’s effect on real estate decision-making as an IDRC doctoral intern.
‘Missing the Point’ in Global Real Estate
Richard Watton, Chase Manhattan Asia-Pacific vice president and portfolio manager, has often seen the disconnect between globalization and real estate.
“I’ve seen a number of American firms come to this region with project managers who are more on the investment side, not the real estate side,” says Watton, who’s spent a decade working in the Asia-Pacific real estate industry. “They drive really hard at one thing, to tell their boss they got the lowest rental, without thinking about other important things like flexibility, connectivity, productivity, and recruiting and retaining human capital.
“They miss the point, really, of what corporate real estate is all about. Your lease commitment is lots of things, with the dollar of rent paid only one portion, and not necessarily the most important. In the end, you do pay making decisions that way in their negative impact on operations.”
Even well-thought-out globalization plans can go awry, especially if extensive capital expenditures are involved; ultimately, they create intense financial pressures.
Stockholder restiveness, for example, is now dogging Southern Co.’s multibillion-dollar globalization. Stockholder howls over falling Wall Street prices and mounting losses in the mid-1990s ultimately forced Federal Express to dramatically scale back its European expansion.
‘Two-Track’ Global Strategies
IDRC research shows that most firms have responded to that quicksilver environment with what Lake calls a “two-track system” for internationalization.
Expanding markets rule most globalization strategies. “Market access” was overwhelmingly cited by transnational managers as the primary rationale for globalizing production in a 1997 study spearheaded by the United Nations Conference on Trade and Development. That’s a very fast real estate track.
Domestically, though, most strategies now emphasize defending against global competition. That’s a much slower real estate track, typified by tactics like production rationalization.
Most two-track global strategies break down, though, at the real estate level, Lake says. “International operational decisions are made independently from decisions made for domestic sites,” he says. “[But] most firms do not use separate international real estate strategies.”
Part of that breakdown lies in what some analysts call “corporate disaggregation.” Globalizing firms have empowered business units to respond more quickly to fast-changing business realities.
That has significant real estate implications. Many real estate executives ruefully cite examples of separate business units independently looking for space in the same city, sometimes even unknowingly bidding against each another.
The Shared Service Model
Such inefficiencies are spurring the development of new global business models. For example, firms like Bank of America, CitiBank, Hitachi, Eastman Kodak and Mobil are integrating non-core functions like real estate, IT and human resources under shared-service models (a.k.a. “corporate infrastructure integration”).
Mobil, for example, consolidated 12 shared services under Fairfax, Va.-based Mobil Business Resources Corp. (MBRC).
“[Mobile CEO] Lou Noto’s goal is to make Mobil a great global company,” says Reed Grimes, MBRC global real estate executive vice president.
“We’ve bought oil and gas exploration companies and invested in Qatar. We’re also going into China in a major way, and into a lot of South Asia, including Pakistan, Bangladesh, Nepal and India. Four out of five of my new projects are overseas. Market pressures and international penetrations are just phenomenal for us.”
New Financial Concepts
That common focus in Mobil’s globalization has been facilitated by the company’s use of return on capital employed (ROCE) as a guiding financial concept. “The shared-service concept has focused us more on the bottom line [and] understanding and striving for the same goals,” Grimes says.
Many globalizing firms have adopted similar financial concepts to increase coordination and accountability. The new concepts share an emphasis on liquidity-fueled flexibility. That means that real estate “must focus on return and productivity in an environment where cash is king,” says Deborah Kops, Price Waterhouse national managing director of corporate real estate consulting.
At Mobil, ROCE means that business units now pay for real estate services. “But they don’t have to use us,” Grimes explains. “That makes us think about value added.
Mobil’s ROCE-charged globalization emphasizes minimizing real estate costs, focusing major capital expenditures on oil exploration and production, which offer a far higher rate of return. The results have been impressive. Grimes’ unit has taken US$100 million out of real estate operating cost in two years, a big chunk of its five-year $166 million goal.
“Everybody understands ROCE, because if they don’t hit some hurdle rates, they’re not going to be around,” Grimes says. “So the focus is on partnering, helping strengthen their bottom lines and return rates, so they get more money for future investment. Linking real estate decisions to business strategies results in the lowest bottom-line business cost.”
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