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s if their plates weren’t full enough already, economic conditions are mandating that corporate real estate managers figure out how to do more with less. More what? They must now demonstrate more of an ability to contain, if not reduce, costs where property assets are concerned, because shareholders and real estate investors are less forgiving than usual in a business recession.
Corporate real estate managers gathered once again in June at a Jones Lang LaSalle (JLL) Real Estate Leadership Roundtable to gain some insights into how to do just that. The New York event covered by Site Selection was the third in a series of such meetings; the previous two were held earlier in June in San Francisco and Chicago.
Moderators of the day’s first discussion, “Current Economy: Demand for Cost Structure Reduction,” were Debra Moritz, JLL’s international director responsible for the firm’s consulting activities in the Americas, and Paul Uber, international director in the firm’s Corporate Property Services Group. It’s not hard to put cost-reduction initiatives on the back burner during times of economic growth, the speakers acknowledged. But markets are cyclical. “In the good times, we are focused on growing revenue, expansion of the infrastructure at appropriate escalations and expenses, and the cost reductions go by the wayside,” said Uber.
“Economic uncertainty, shareholder scrutiny and mergers-and-acquisition activity all have caused us to refocus on cost containment,” noted Moritz. “We believe that an effective cost-containment program should not come at a time of crisis, but should be something that is constantly worked on, massaged and improved.” Such programs should be strategic, or linked to the company’s mission, she stressed. They also should be proactive not reactive, sustainable and realistic, culturally acceptable, disciplined and thoughtful.
Where to Find Savings
Uber identified three tiers of cost savings. The first involves tactical initiatives that can generate quick savings. These include outsourcing functions, implementing energy audits and taking other steps to bring about “quick hit savings.” The second tier is about savings possible from process improvement, or re-engineering procedures and practices so that they can be accomplished more economically. Electronic procurement is an example of this. The third tier of savings comes from analyzing the portfolio to determine whether every facility in it is the right facility, given organizational goals. It also includes analysis of the internal and external/service provider teams to determine whether the investment in them is appropriate.
A corporate discussion participant related how his organization centralized the lease administration function and initiated “a very aggressive lease audit program,” which helped his organization identify nearly US$2 million in recoveries. “We have another $1 million at least this year identified as being recovered,” he noted. “But more importantly, we’re taking a look at the rent checks before they go out.”
Another participant says her organization, with a 75 million-sq.-ft. (7 million-sq.-m.) portfolio, recently reduced the number of service providers it uses from five to two. “We care a lot about fees,” she said, “but it’s more important to us to pay one company that can have a full look at our portfolio, because we believe that will get us our tier three savings.”
Making Mergers Work
Most participants in the roundtable’s second discussion, which dealt with mergers and acquisitions (M&A), agreed that insufficient — and/or inconsistent — portfolio data is behind most barriers to successful transitions. The discussion was moderated by JLL’s Tom Bomba, senior director of global consulting, and an expert in portfolio management, and Michael Miller, also a senior director, global consulting.
Particularly in the case of mergers (most of which are actually acquisitions, the group concurred), strong portfolio data can influence which portfolio — and even which real estate department — survives. “When you put the acquired company’s data up against the acquiring company’s data, you can see right away which is the better real estate,” asserted one corporate real estate manager.
moderate a session on containing and reducing costs in the context of an economic downturn.
The broader challenge addressed in the discussion was how corporate real estate fits into the M&A planning, execution and outcome. “Corporate real estate will not have a significant impact on the vision [behind the merger],” noted JLL’s Miller. Nevertheless, he added, “Corporations realize more and more often that corporate real estate is an important part of their platform to make a difference, both with cutting costs and in creating synergies between divisions, and through that process grow revenues.” Merger rationales usually involve huge cost savings, but they also include the potential for earning significantly higher revenues. “This is an area in which real estate can add significant value,” stressed Miller.
Most discussion participants were as or more involved in downsizing, or disposing of property, than they were in blending portfolios with a merger partner. Depending on the industry and region, this is more of an issue than it might be elsewhere. Investment and commercial banks in New York and other major cities have spent the past several years merging with each other, combining front- and back-office operations. Silicon Valley is experiencing a huge surplus of space as high-tech companies retrench and search for ways out of long-term lease obligations and new construction starts initiated in an era of 30 percent growth in the high-tech sector.
Jones Lang LaSalle’s Bomba urged participants to take a macro view when considering how to manage a portfolio, no matter which industry is involved. “It’s the overall portfolio structure of your leases,” he explained. “You don’t look at your individual properties necessarily, but at the overall impact on the corporation. You can structure short-term leases for part of your portfolio with options and so forth to build in the flexibility that you need, and longer-term leases, ownership or the equivalent, such as synthetic leases, if you don’t want the assets on your balance sheet. You structure the portfolio and the overall impact on your corporation in this way.” At the end of the day, Bomba intimated, portfolio management is as much art as science.
Keys to Successful Relationship Management
Relationship management is a vexing topic for corporate real estate managers, including those attending the leadership roundtable. Eugene Page, JLL’s senior director, global consulting, and an expert in organizational design, and Steve Scruggs, managing director in the global client services group, moderated a discussion on this topic. Page had recently completed a research project that involved in-depth interviews with 26 global corporations to determine how the real estate function is structured and how communication with senior management and business units occurs, among other issues.
Three basic types of relationships emerged, said Page. In some cases, real estate managers were mere order takers, filling needs for new space as the business units required it. The second is a consultative role, where the real estate managers have the opportunity to add some value to transactions and play a somewhat more strategic role. The third group consisted of cases where real estate managers were considered business partners with senior management, and their opinions were factored into the formation of strategic objectives for the organization.
One way to achieve the third, most desirable, situation is to appoint one or more relationship managers who would act as the business unit heads’ key point of contact with the corporate real estate function. “That means you’re going to need to understand the business of the business,” Scruggs pointed out, “and the corporate real estate executive will take on this role for certain units, depending on the size of the organization.”
This point is critical to making relationship management work, because everyone wins, Scruggs argued. “With advanced knowledge of what the business units are up to and what that might mean for real estate downstream, you can begin to think about the impact [of changes] on the portfolio and balance some of the vacancies in one area with [space] needs in another area.”
Relationship management is by no means a case where one size fits all. One participant, for example, naturally aspires to the business partner model, but his organizational structure prevents it. Real estate decisions are mostly tactical moves driven by relatively low-level members of the business units and where corporate strategy does not factor into the space needs. The amount of information flowing through the key liaison will vary as well, as will the nature of the information shared. The main point is to structure the interaction between the real estate department and the business units as a service provider would interact with his clients, recognizing that the way one business unit approaches real estate will differ from how another one does.
“Organizations that organize around their customers in many cases have a competitive advantage,” noted Page. One barrier to enjoying business partner status with the business units, he suggested, is getting started. A real estate manager may be new to the organization or to the assignment of working with a business unit to reduce space costs or plan for new space requirements. “A good way to start — and this has been done for thousands of years as a way to show respect — is to come bearing gifts,” said Page. “And one of the best things you can bring is active real estate data. It is amazing how many business units don’t know exactly how much space they have, and more importantly, what it’s costing them, what the utilization of the space is and what the constraints are with respect to exiting the space.”
Bringing this data into the dialogue and committing to working with the business unit heads with benchmark analysis and other tools goes a long way to establishing trust and mutual respect.
in many cases have a competitive advantage.”
–Gene Page, Jones Lang LaSalle
Megatrends to Watch
Richard McBlaine, JLL’s CEO, global consulting, and John Phillips, president of the tenant representation practice in the Americas, moderated the final discussion of the day, which shed light on how four megatrends will shape the corporate real estate profession by the year 2006. The trends discussed were technology, macro-economic trends, the pursuit of knowledge workers — labor — and transportation.
McBlaine’s discussion of technology centered on connectivity, technology infrastructure and business-process enabling technology. Among the many insights he offered on the topic (too many to chronicle here) was the imminent ubiquity of microprocessing chips in virtually everything we use. Huge jumps in processing power combined with ever-greater availability of bandwidth will have an enormous impact on business systems and processes as well as how workers perform their tasks.
“File storage is going to be a huge issue, and data processing and knowledge management is going to be a co-competency of corporations in a way that it isn’t today,” McBlaine predicted. “Buildings can be designed around work, which will enable you to provide the knowledge worker of the future with tools that we can’t even imagine today.”
Employee demographics will dramatically affect corporate real estate from the types of facilities in the portfolio to the length of lease terms and ownership structures, McBlaine proposed. And competition for knowledge workers — generally considered to be those with a college degree — is fierce. At 1.7 percent unemployment, there is virtually full employment of this group.
Where do they live? “Fifty-five percent of knowledge workers live in 10 states, which also happen to be 10 of the most populated states,” McBlaine illustrated. In terms of knowledge worker growth rates, Michigan and New Jersey fell off the top 10 list during the 1990s and were replaced by Colorado and North Carolina, enhancing the sunbelt flavor of the list. On a percentage basis, Nevada and Arizona joined the list. And domestic migration trends point to many of the same states as attractive locations for knowledge workers. “States that are losing population to other states are putting concerted efforts in place to attract more immigration into their states to fill the gaps,” he related.
Other material covered in the final discussion, including how global infrastructure investments will influence global capital flows and business expansion activity, will be the topic of a future article in Site Selection.
