Is a Corporate Campus Right for Your Business?

The decision to plan and build a corporate campus consists of dozens of often conflicting considerations, both tangible and intangible. If the corporate real estate executive wears many hats, here’s where he wears them all at once.

TAs a way of solving long-term real estate challenges, business leaders frequently look to developing corporate campuses as a way to gain operational benefits, improve business performance, strengthen corporate culture — and control real estate costs.

But is a corporate campus the right solution for your organization? If your company occupies 250,000 square feet (23,225 sq. m.) or more, you’ve probably posed this question. America Online did, and decided the answer was yes (see Site Selection cover story, August/September 1998). SRA International, on the other hand, decided the answer was no. To find the right answer, it’s important to go through the right evaluation process, one which examines intangible issues as closely as the tangible ones.

But be forewarned: this evaluation process takes more time than most people think it will. In any corporation, a discussion about real estate becomes a catalyst for discussion about the entire business. It will trigger decisions not only about buildings and campuses, but also about growth and revenues and the strategic direction of a company. As a company begins the evaluation process, the drivers might want to consider complementing the internal team with outside experts in real estate consulting and strategic facilities planning.

What Is a Corporate Campus?

A corporate campus consists of buildings in close proximity to each other with centralized support, amenities and other internal functions. There are three primary types: urban, ex-urban, and suburban.

The buildings on an urban campus are adjacent but not necessarily connected. An ex-urban campus is located close to the urban core, where costs are high, so the buildings are proximate to each other and parking is usually under the buildings or in an adjacent garage. Since land costs are less, a suburban campus affords more opportunities for open space and more parking options; there is often freestanding structured parking or surface parking, or a combination of both.

Although there are opportunities for significant financial benefits, it is likely a company will make the decision whether or not to go the campus route based on more intangible issues: operational, business performance and cultural. Operational issues address how facilities support day-to-day functions and evolving space requirements. Business performance issues examine the effects of the different ways employees communicate, collaborate and share knowledge. Cultural issues delve into how connected the employees feel to the company and to each other. The tangible financial considerations come into play once a company decides a campus is worth considering.

Intangibles: Operations, Business
Performance and Culture

Operational benefits can clearly be gained by developing a corporate campus. Space is available when needed, facilities are custom designed to support the organization, and the location is easily accessible to the employee base. Facilities are equipped with an infrastructure that supports the corporate mission. Special-purpose areas (conferencing centers, data centers, fitness facilities and convenience stores, for instance) can be planned to meet the specific needs of the company’s employees. A secure campus environment can be created, and the company itself can control the project schedule.

Conversely, there are also drawbacks: most notably, if a company downsizes, it will be burdened with excess space. If the property goes on the market, other organizations might not find the custom-designed facilities easily adaptable to their needs. And — even if the organization never has to consider releasing any space — if the corporate mission changes, the custom-designed facilities might not support the new business. Finally, as the party in control of the project schedule, the company must ensure that it has the experience and resources to drive this process effectively.

In addition to evaluating operational factors, companies should consider the impact of a corporate campus on business performance. Locating people together bolsters communication and exchange of knowledge. Even with today’s technology and methods of instant communication, such as video conferencing and e-mail, it is a commonly accepted fact that bringing employees together fosters better collaboration and greater synergy. Also, bringing people together can result in less absenteeism and lower attrition rates — and better business performance.

Cultural factors also come into play in the evaluation process. Is it beneficial to your company to have a strong sense of corporate culture, and for employees to feel more tangibly connected to the company? If the answer is yes, locating employees together on a corporate campus can achieve these goals. Housed together, employees can develop a greater sense of loyalty and commitment to the company.

However, consolidation can also have some negative effects. Employees can develop “corporate headquarters syndrome”– they can become too isolated from the field and not have the sensitivity to what is happening on the front lines. They might feel as though they don’t have enough exposure to other situations. But this effect is noted most often for companies who have developed campuses remote from their customer base and target markets.
Once a company has examined the operational, business performance and cultural factors and has decided to move forward in the evaluation process, the next step is to look at the financial feasibility of developing a corporate campus.

The Tangible Issue: Finance

When it comes to analyzing the financial considerations, this is the most important piece of information to remember: Real estate is not a profit center; it is a cost center. Companies should evaluate these kinds of real estate decisions with the objective of maintaining the lowest possible cost burden on their business. Do not look for high returns on this investment.
But with a well planned and well executed strategy, a company will yield long-term financial benefits. It will maximize its return to the greatest extent by controlling the design, by living in facilities specifically planned to support the business, and by being able to respond quickly to changes within the organization.

Additionally, an ownership position in a corporate campus affords a company a much greater opportunity to control its long-term real estate costs. For instance, if a company leases its facilities, landlords can dictate capital improvements schedules. Conversely, if a company owns its facilities, improvements can be sequenced to benefit its financial position. And other municipality expenses can be reduced.

Companies can look at it this way: if the company is going to need the space, why not pay for it now rather than later, presumably at a lower cost? Again, rather than viewing real estate as an investment vehicle, it should be viewed as cost avoidance. There were a number of professional facility managers who financed corporate real estate transactions in the 1980s with the objective of profiting in the market; they were obviously disappointed in the early ’90s.

If a company decides to implement a corporate campus, one of the keys is securing available capital. Many organizations cannot support the debt. If a company is not profitable, it is unlikely it will be able to finance internally. But if a corporate campus makes sense, there are alternative ways to structure a deal. If using a company’s own money is not an option, there are other financing vehicles such as equity partnerships, synthetic leases and other corporate or real estate debt.

And for those companies that are able to secure the necessary capital for a campus, there is an obvious drawback: It’s a lot money going into one place. This concern is what prompts many solvent corporations to team with developers. As a general rule, corporations should not try to play real estate developer. If a company decides to involve a developer, it should recognize that the developer’s interests will come into play as well. Corporate real estate consultant Don Young of PMC International, San Rafael, Calif., reminds clients: “Remember that a build-to-suit project is often built to suit the developer, not the user.” (See Management Strategies Site Selection, June/July 1998.)
Like anyone else, developers want to minimize their risk, and will have a clear say in what happens. Even though a remote location might hold appeal to a company, the developer will most likely prefer to build a facility in a growth area which already has a strong commercial market and corporate presence. If the company vacates the campus, reasons the developer, there will be other candidates for occupancy.

Financing over the full life of the project constitute the largest project cost, perhaps as much as 80 percent. Between construction financing and permanent financing, construction financing is a much higher cost; the risk is higher because there is no final product. (Once the project is completed and there is a usable product, the risk is lowered.) In general, the rule to remember is that whoever can borrow money at the lowest rate should be the primary owner and developer of the property. If a company is very profitable and has AAA credit, it can use corporate debt and borrow at a very low rate. Perhaps it can borrow at 8 percent while the real estate developer can only borrow at 9 percent. In this case, the company itself is in a good position to do it. While this approach is defended in many circles, it is important to keep in mind that this presumes predictability in the company’s need for the space.

Here is another consideration: If a company has a sustaining need for the facilities on a corporate campus, it is much better off investing in a campus than it is leasing, because it can control its long term costs. But if the company’s need changes, what is it going to do? The answer depends on the location and product. If it doesn’t have a generic or easily adaptable product in a demand market, a corporate campus can be a noose around the company’s neck.

Don’t Build a Submarine
Without an Escape Hatch

If your company is considering a corporate campus, it is important at every stage to identify ways to minimize your risk. You can presume a long-term need, but you must plan for contingencies. Smart companies, for example, formulate an exit strategy from the very beginning. Some CEOs resist planning exit strategies, viewing them as a sort of self-fulfilling prophecy. But effective planning isn’t about presuming failure. It’s about making sure your business survives by responding to unanticipated challenges. After all, would you build a submarine without an escape hatch, or a house with only one door?

Companies that have opted for corporate campuses cite the benefits, both tangible and intangible. Several years ago, after significant growth, the Federal Home Loan Mortgage Co. (Freddie Mac) decided to move employees from eight scattered facilities into a 900,000-sq.-ft. (83,600-sq.-m.) suburban campus in McLean, Va. Bill Menda, interim vice president of administration and corporate properties, points out that it was the right thing to do. “A corporate campus afforded the best opportunity to consolidate,” he explains. “It positioned us for planned expansion. Also, cultural considerations were important. We knew that one way to help our culture develop was to keep people together.”

Freddie Mac continues to be a successful company, says Menda. “We like to think that our environment and our workplace contribute to that.” Corporate leaders throughout America who have evaluated whether or not to develop a corporate campus have come to different conclusions, but agree on one major issue: If your decision-making process is sound, the solution will be the right answer for your business.
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David T. Haresign is a principal of Ai, a Washington, D.C.-based firm specializing in strategic planning, architecture, interior architecture and engineering services.

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