ones Lang LaSalle's (JLL) Global Consulting division recently gave clients and prospects another opportunity to step out of the corporate real estate management fray and put the rapid change they are enduring in context. Dozens of real estate managers joined a team of JLL executives at the firm's latest Real Estate Leadership Roundtable, in Washington, D.C., last October to hear from experts on such topics as the electronic marketplace, portfolio financial structuring and how to create a strategic approach to corporate real estate. The firm organizes several such gatherings each year in the world's major business centers to create an environment in which participants can gain new insights and relate their experiences in the field.
        The forums also serve as a venue in which to showcase Jones Lang LaSalle's work in key areas of the corporate real estate industry. A case in point is the firm's recent focus on high-growth technology companies linked to the explosive growth in e-business applications. The consulting division has established a unit to address such companies' complex real estate portfolio requirements. But all organizations stand to benefit from automating business processes, particularly transaction processes in the case of real estate applications.
        "The promise of the Internet is premised on instant sharing of information and instant communication, which is why broadband [connectivity] is so important," noted Thomas C. Kirschbraun, senior director at JLL and an expert on e-commerce in the real estate industry. He and Don Polishuk, managing director and head of the firm's new high-growth company practice, led a discussion on speed and bandwidth as new drivers of the "E-conomy". Software that manipulates the flow of broadband data is the other key technological force needed to execute successful business models in the so-called New Economy.
        The firm's high-growth company, or gazelle, practice helps dot-com, telecom and other high-tech clients meet their priority objective, which is speed-to-market. "I would assume that the requirement placed on you as corporate real estate directors to provide space from the time someone says they need it has shortened significantly over the last two years," noted Polishuk. In that sense, all corporate real estate managers are in high-growth mode.

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Where Fiber Is -- And Isn't

Efforts are under way on many fronts to wire the business world. About 23 million miles (37 million km.) of high-speed bandwidth already are in place, Kirschbraun estimated, "but there is a difficult and interesting problem that has to be solved for true ubiquity of bandwidth," he related. "That is [getting it] from the curb up to your operation on the 12th floor of a building." Tenants face complex technical and lease negotiation hurdles just to get fiber bandwidth into their workspace. "We've seen situations where a client has a trading floor and has signed a deal for a new lease, and they find out later that they can't get fiber up to their space. You can't do a lot of trading when you're screen is blank."
        Added Jack Pressman, CEO of Chicago's Optimal Path/Telecom Development Group, "This is a major issue across the country for property owners and managers whose building network operations were built when there was really just one carrier in the business -- the AT&T spin-off to Bell. Now, buildings in major metro areas have many carriers coming in, and major tenants may want to bring in their carrier, and the physical infrastructure cannot support 20 or 30 different carriers." The result, he noted, is "a very significant management challenge," and the need to resolve open access issues --such as who should bear the cost of installing fiber optic capabilities in buildings -- that have been before the Federal Communications Commission for some time. "Our belief is that open access in a competitive environment is going to make a happier tenant and more valuable real estate," says Pressman. "The management of this infrastructure now is as critical or more so as operating the elevators, the power and the lights. Telecom has become the fourth utility."
        Kirschbraun concurred. "We are now seeing parties who cannot consider a building that they would have two years ago, because the bandwidth issue has not been resolved satisfactorily," he reported. "The telecom component of your operating costs are increasing rapidly, in some cases from 30 percent of real estate costs to 70 percent. The numbers aren't important, but the trend is. The telecom piece will be driving a lot of your location decisions going forward."
        It will likely be driving some other decisions as well, including investment decisions. "In a tight real estate market, with this dichotomy of buildings that have and those that have not, is there not an immediate attractiveness impact in terms of how tenants look at a building and a capital markets impact on the value of those buildings as they change hands?" posed Stuart Hicks, a JLL managing director. "That impact must be enormous and immediate."

New Property Valuation Criteria

In fact, valuing property assets is an increasingly moving target, as new uses for old properties emerge and demand for space suitable for supporting electronic commerce enterprises escalates. Former printing facilities, for instance, have huge potential as Web server farms or telecom hotels, given the open, easy-to-wire, fortified space built in.
        "The easy part of broadband delivery is the inter-city piece," explained Kirschbraun. "It's getting it to locations where the data gets distributed, where power will never fail, and that's an entirely new product type from a real estate investment standpoint." The question is how to finance these assets, he added. Investors are wondering about such properties' residual value in the event technology changes and a service housed in the building becomes obsolete. Can the building be used for another purpose?
        "I would argue that will not happen," Kirschbraun related. "New tenants in these buildings are signing at least 15-year leases, and the rents [the owners] are getting on some of the telecom hotels exceed Class A office rent on a net basis. If I were an investor, I'd be all over these assets. It's a new property type, and people are struggling to get comfortable with it." Further complicating the property valuation process is the importance of powering the technical systems so central to tenants' use of the space.
        "Institutional investors are really struggling with how to finance these deals," offered a roundtable attendee. "You can invest in a co-location facility, and then there may not be the necessary power available to support it. The Chicago grid is close to being maxed out." And energy-supply problems in California, which spiraled out of control in early 2001, have been festering since the state began its deregulation process. Additional strain on the energy grids should be factored into locating -- or investing in -- these assets.

Sites Outside the Box

Kirschbraun's discussion of the importance of bandwidth to corporate real estate managers related to one of their core functions -- site selection. Instantaneous sharing of information on a global basis, made possible with high-capacity bandwidth, changes the focus of the labor availability issue from finding qualified labor to finding less costly labor. "You can now source business in any country, and English-speaking countries are benefiting from the exporting of functions that we cannot staff up in the U.S.," he noted. "You can look outside the usual box in your site selection process."
        This is a particularly useful piece of advice as businesses organize themselves globally, pointed out Richard McBlaine, CEO of JLL's Global Consulting division. "Where in the world do we produce a particular product or do certain research and development work?" he illustrated. "That is driving real estate organizations to change their model."
        In the case of U.S. multinationals, corporate real estate managers have to rethink how their operations are structured, because they may no longer be meeting the needs of their constituents -- the increasingly geographically dispersed business units. "[Corporate real estate] organizational models don't support the business as well as they otherwise could, because they have a fair amount of geographic rigidity in them," McBlaine elaborated. "When a relationship manager in America has a discussion with a business line executive figuring out where to locate a call center, that manager has to call around and amalgamate some kind of a response. I feel organizational change will come out of the need to do that."

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Part 2 of this report will appear in the May issue of Site Selection.