USI is not alone. Grubb and Ellis recently initiated a five-year plan to cut “hundreds of millions of dollars” in real estate costs for a national service company with more than 1,500 U.S. locations. The effort will trim those locations by up to 25 percent.
Over the past two years, corporate America has set about trimming, cutting, and slashing its real estate costs in response to the flagging economy. To date, the easiest of this work has been done, according to Craig Morris, president of the Grubb & Ellis Corporate Services Group.
“It’s easy to pick the low-hanging fruit,” Morris says. “Most companies have sold off or sub-leased some surplus space. But the work we’re doing now involves strategic planning related to business processes.”
Sensing new business prospects in the higher-hanging fruit, real estate service providers at all levels – from professional service firms, through brokers to developers – have broadened their search for real estate efficiencies to include techniques that go beyond finding the best deals, and can better match real estate portfolios to larger corporate financial and operational strategies.
Opportunities abound. “Real estate is an enormous repository of costs,” says Mark Costello, a partner with Ernst & Young’s real estate advisory services. “Our clients want us to help rationalize their portfolios by locating people in cheaper markets, monetizing assets, recommending outsourcing and out-tasking alternatives, and finding ways to reduce occupancy costs ranging from janitorial services to security.”
According to George Bouris, a practice leader with the Deloitte & Touche corporate real estate operations and systems consulting group, real estate accounts for 18 percent to 67 percent – and averages 35 percent – of assets on corporate balance sheets. “After human resources, real estate is the second-largest operating cost for most companies,” Bouris says, adding that comprehensive portfolio management can cut real estate occupancy costs by 15 percent to 20 percent annually.
United Creativity
In 1999, United Technologies pulled responsibilities for real estate away from its six business units and centralized portfolio management in a group called UT Realty. Three real estate professionals moved from the company’s business units to UT Realty. A year later, United Technologies formed an alliance with USI, which brought a staff of 17 people into the UT Realty offices.
Dan Leonardi, USI account manager at UT Realty, says the group’s cost-reduction tactics include eliminating short-term leases by terminating them, turning them into long-term leases, or perhaps purchasing the property. “We’re also looking for value in owned properties,” Leonardi says. “Can we extract value through a sale-leaseback or an outright sale? Can we add two floors to an owned building and eliminate another 10 leases? We’re doing this at the micro-level within each of United Technologies’ business units and at the macro-level across the company’s business units.”
So far, this meticulous and creative work has cut approximately $40 million from United Technologies’ real estate costs. But the goal for 2003 – reaching $50 million in savings – will require new tools. Recently, United Technologies bought a new technology called Sequentra in order to move the portfolio management effort to the next level. Developed by Sequentra Solutions LLC, a wholly owned subsidiary of USI, the Web-based Sequentra can manage location information, transactions, and other real estate projects.
The system can also track real estate savings unique to individual companies, divisions, peer groups, and types of space, while measuring financial performance, occupancy cost savings, and customer satisfaction.
Opportunities On The Ground
Early this year, CB Richard Ellis announced that it would acquire Insignia Financial Group for approximately $415 million. With more than $1.8 billion in revenues, 250 offices and 16,000 people, the combined companies will rank as the largest real estate brokerage in the world. “It is a powerful combination,” says Steven Swerdlow, director of global corporate services for CB Richard Ellis. He believes the new global behemoth will offer corporations a suite of benefits. The most immediate, given the current economic environment, may involve services to corporations seeking to dispose of surplus property.
At the other end of the service spectrum, developers are seeking to snare any expansive corporate business opportunities that may be available in today’s tight construction markets.
Formed in 1997, the Citadel Group is an alliance of five regional construction companies: Diffenbaugh Construction of Riverside, Calif., Choate in Atlanta, Rogers O’Brien in Dallas, Krusinski Construction in Chicago, and IMC in Philadelphia.
According to the Group’s president and founder, Terry Lowe, executive vice president of Diffenbaugh, the goal of the alliance is to offer design-build services to national corporations in need of local expertise. “Individually, our companies have worked for almost all the Fortune 500 companies across the country,” says Lowe. “We hope those companies will use Citadel as they move around the country looking for contractors that understand local subcontracting markets and local market conditions.”
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For example, Diffenbaugh works in the California market and deals regularly with seismic issues. National builders with a handful of California projects cannot match Diffenbaugh’s local experience in that regard, Lowe says.
Since 2000, the Citadel Group has sold its concept of local expertise to eight corporations who have put up 12 projects, ranging in value from $1 million to $10 million. The work includes offices, warehouse and distribution centers, and retail centers.
Recently, Philadelphia-based Comcast Corporation, an IMC customer, awarded several office projects to the Citadel Group. Individual members of the Group will handle projects that fall within their regions. Citadel’s members will tap IMC’s knowledge of Comcast’s priorities to handle the individual projects.
“We think the idea works because corporations don’t have the time or the expertise to find reputable builders around the country,” Lowe says. “We can provide service from region to region, reduce risks, and enhance quality. That’s what companies want from a developer.”
Drilling Deeper Into Deals
Developers are also bringing more sophisticated financial and operational analyses to real estate executives in search of sites. For example, a national retailer recently opted to pay $1.6 million for a distribution site, foregoing a second choice just 40 miles away that would have cost only $653,000. The reason? The company’s advisor on the transaction, St. Louis-based Claycorp, Inc., found $1.5 million in additional costs related to the development and construction of the lower-priced site.
The Claycorp analysis showed that the cheaper site would have required more extensive excavation work, adding time to the construction schedule and about $1 million to its cost, says Tom M. Schroyer, president of Claycorp, a subsidiary of the Clayco Construction Company. Soil conditions at the cheaper site would have added about $275,000 to the foundation costs for a structure.
The analysis of operational costs for the proposed facility also argued for the more expensive site. Over a period of seven to 10 years, the cheaper site would have cost $350,000 for utilities and $1.1 million for transportation.
“The site that looked to cost $1 million more actually cost $1.5 million less,” Schroyer says. “This kind of analysis produces surprising results maybe half the time.”
When the economy finally begins to grow again, these real estate service providers will have assembled a new arsenal of cost management weapons. Even in good times, a $1-million dollar cut here and a $50-million cut there can add up to real money.