Site Selection: HQ’s real estate holdings are growing by leaps and bounds, thanks to the merger of Frontline Capital’s serviced office unit, VANTAS, with HQ’s properties. What is your role in managing this growth? SS: Because you are in constant contact with corporate real estate managers, you probably hear about a variety of issues important to them. What would you say is their most vexing issue? SS:Generally speaking, are corporate real estate decisions being made centrally, or hierarchically, or on the business unit level? SS:Which is why the serviced office model is more appealing? SS: Are corporate real estate managers viewing property assets as strategic assets in the UK, as many of their counterparts in the US and in other markets now view it? SS: How is technology designed for corporate real estate managers helping you and your peers be more productive? SS: Besides adding efficiency to the profession, is there a strategic, value-added benefit associated with technology? SS: Are you working much with your clients in the area of space demand forecasting? How are they handling that important task? SS: How do you meet the needs of the start-up community in this increasingly dot-com-based economy? SS: How is the issue of own vs. lease unfolding in the United Kingdom?
Ron Adam (right): Completion of the deal is a little ways off, but we’re now in an interim period, which is making life interesting. In terms of the network [of serviced offices], this agreement is very positive. It takes the number of owned centers to nearly 380. Combine those with the centers under development, and we’re looking at about 500 centers, making it by far the largest network internationally. One of our challenges is to make sure we have uniform coverage on the ground and an appropriate density of ground coverage, or number of centers. For the past two years we have been very focused on the Continent in addition to expanding in the UK, which we’ve done well. We still need to increase our penetration on the Continent. The resources with which to do that and the ambition to do that is reinforced by this merger.
My role is director of operations and projects; I support the acquisition of new centers and oversee project teams that handle project center delivery. And I oversee the day-to-day delivery of our service and the ongoing portfolio management. When I worked at IBM and at Prudential Assurance, we talked about our users as being our customers. When you have real customers, it really opens your eyes to a higher level of understanding of what the customer is trying to achieve. That adds a very demanding dimension to the job — you have to think a bit harder about solutions. The customer really is king.
RA: Well, it actually has to do with why I wanted to join HQ. It’s the need for increased flexibility in the context of where the economy is going. Most of the economic and business processes are being, if not rewritten, certainly re-evaluated. In the UK, though, this is probably a more difficult issue than it is in other countries. We have the background here of the long-term lease driven by institutional funding. Continental investors are coming into the UK and investing in our property, yet in their home countries they would have nothing like the length of lease commitment and the security of income. The flip side is they make very good returns on their properties on the Continent. Institutional investors in the UK still have the view that unless you can sign up someone for [an extended period of time], then life is too uncertain. A lot of work is being done on that supply-demand imbalance. This is a major topic for us in IDRC in the UK and for the industry at large.
It’s not that we’re trying to change things just to take advantage of markets, it’s business driven. Competition, the breaking down of national barriers and heightened cross-border merger and acquisition activity and other factors require businesses to move more quickly, which requires greater flexibility.
RA: I see more of the latter. The move toward business units is not new, but it’s an issue that’s still very topical. The business units are used as a means of providing greater flexibility and responsiveness within organizations and generally are given increased autonomy. That puts enormous pressure on real estate managers, who now must deal with many different policies on how to approach real estate decisions and what value is. But the real issue is the flexibility [in lease terms] requirement resulting from shortened planning horizons. Companies can’t make significant, long-term commitments like they used to.
RA: One of the byproducts of that is more outsourcing of real estate as the market responds to that need for flexibility. I’m not saying corporations will outsource absolutely everything having to do with real estate. But much like the UK’s Public Finance Initiative [where the government outsourced real estate and other functions associated with certain state-run agencies], some companies will outsource it all, which gives the purchaser and less so the service provider a lot more flexibility, meaning he can be more competitive in his pricing. Serviced offices is a form of outsourcing of real estate, because you’re buying as much service as you are a roof over your head.
RA: We are seeing a lot more of that. Historically, real estate has been seen as a historic asset where it has been a fairly static scenario, such as the case of a major corporation rooted in a certain area with a core facility. That was the strategic view of property. Now, that is much changed. It’s more of a company issue than a country issue. It is the nature of the company and its management that determines whether real estate is viewed strategically.
Also, companies are recognizing that you can influence how you operate, organize and behave by reducing some of the inhibitors inherent in certain design solutions. British Airways’ new headquarters is a good example. The airline has just consolidated to a major campus site, which they call combined operations center rather than headquarters, near Heathrow Airport. They broke the mold when they moved there from multiple buildings that reflected the pre-privatized organization, when it was run like a civil service, very traditional, hierarchical and structured. Now it’s a very responsive, dynamic organization, and the new workspace reflects cultural change.
RA: Technology affects real estate managers in two ways. First, like any other manager, it allows you to be more efficient, and with wireless technology you have portability, which is better yet. Historically, [corporate real estate management system] offerings have been rather fragmented. Computerized facilities management systems are very resource intensive to adopt. It’s fine if you can start from scratch with a new facility. But to install such a system in an existing organization is complicated. Perhaps there will be a technology breakthrough that will make that migration easier. That would change quite significantly the way we manage our portfolios. Until that happens, we will continue to use databases for inventory management.
The Internet is and will be very significant as a communications medium, because you now have access to a lot of information. Thin-client technology is very important. Each site in the portfolio has its own collection of data, whereas with the thin-client approach, you have a single source of data with multiple access points. That will help enormously in corporate real estate, as it would in other applications. Video transmission, too, will make a vast difference, because real estate is a very visual industry. You should never talk about a building in any detail that you haven’t seen, which historically has meant traveling to go see it. Now, you can see as many buildings as you want to without leaving your desk.
RA: Absolutely. The focus now is not so much on delivery of the various components of corporate real estate, it’s about managing the process. You can get other people to deliver; it’s more important to manage the process. Technology creates the opportunity to do that more effectively. Yell out the window that you have a transaction coming up, and people will line up at the door who are better able to do it. How you bring the corporate requirements to bear so the industry [service providers, for example] understands those requirements and manage the process is what makes a difference in corporate real estate management. If the real estate manager can use technology, such as networked databases, to do that, then it is vitally important to do so.
RA: Yes. Making the connection between the future in which the company will operate and corporate real estate requirements is always a challenge. You can use some metrics that project business volumes and production and people, and you can relate that to square feet and facilities, but a lot of these rules are changing. We’re seeing this with start-ups a lot, especially the Internet start-ups. Their needs can change daily. They are so busy developing their systems and getting their tiger by the tail. The corporate real estate solution must be one that responds to their requirements.
Forward planning is very difficult. Companies are becoming better at planning, and they are doing more of it, which adds to the demands on the real estate manager. But the response of the real estate manager should not be to plead for more time, but to think about how to deliver a more responsive portfolio.
RA:We give them just what they need, which may be accommodation and services for two people this week and 22 people next week. We see them through the phase when they are in high-growth mode and where their only real estate concern is how to get from the car park into the office. They spend 99 percent of their time working on the system they plan to deliver. We do everything else. That’s the service dimension. As they develop, it becomes more important for them to have their own internal support in a limited way. They want real estate without any of the burdens associated with it.
RA: There is a trend against ownership here, and that will continue. At HQ, we have to acquire buildings rather than lease buildings sometimes, because there isn’t a lease opportunity available. We see that with companies in the UK who would not normally want to own space, but they realize that to achieve their objectives they have to take on that ownership role. The alternative is less attractive. Typically, they eventually convert to sale and leaseback. The real estate investment part of the industry is reluctant to take on a purchase on a fairly short lease term for the leaseback. So the building owner is left with wondering why he sold. Frankly, it’s not producing any flexibility, and you could argue it’s reducing flexibility, because now I have a lease to get out of which could be quite difficult. So, the background is a still longer-term lease, and the ability of the corporations to get what they want is still driving a lot of build-to-occupy activity.
