Market analysis
Corporate Shifts
The changing market creates new challenges for corporate real estate advisers.
By Jennifer Norbut |
As the global marketplace
evolves faster than ever before, corporations are viewing their real estate
holdings as an increasingly important factor in their profitability and
strategic growth. Many directors and managers who advise corporations on their
real estate decisions are experiencing this shift firsthand: 68 percent of
professionals who participated in a 2013 Jones Lang LaSalle Global Corporate
Real Estate study said demand from the C-suite is central to improving the
productivity of the company’s real estate portfolio, and 58 percent of
respondents said they now report directly to their corporation’s top
executives. These figures point to the increasingly important role
corporations’ real property portfolios — and the professionals who advise
corporate decision makers — play in companies’ long-term objectives.
As economic conditions
continue to improve and corporations strive for greater efficiency, real estate
advisers will continue to be tasked with providing more than just lease
analyses and site-selection insights.
“The real estate
director’s role has evolved from that of a transaction manager who simply
conveys the best available space options to a relationship manager who must
bridge the gap between the dollars and cents of a lease and how the company
will function better in a new space,” says Peter Barnett, CCIM, senior real
estate manger with PwC’s National Real Estate Group in Tampa, Fla. As the
factors that impact corporate real estate decisions continue to shift, industry
professionals must change their game to make a stronger connection between an
organization’s property and its future growth.
Emerging Trends
Some industries, such as
financial services and manufacturing, are struggling to maintain historical
profit margins and view their real estate as a lever to reduce operating costs
and improve overall financial performance.
At the same time, others
are using their property to attract and retain stellar employees, says Bryan
Jacobs, international director of real estate and facility management
outsourcing for Jones Lang LaSalle in Los Angeles. “Certain industries, such as
technology, energy, and consulting, are in a constant war for talent. Many
companies are using the workplace as one tool to attract and retain top
talent.”
The desire for talent has
created a shift in C-suite mentality in many industries, says Simons R.
Johnson, CCIM, SIOR, a principal with Colliers International in Charleston,
S.C., who represents and advises a range of regional industrial corporations.
While top executives’ preferences may
have determined location decisions in the past, “some executives are now willing
to drive farther to retain employees because the cost to acquire and retrain
talent is so high, especially in first- and second-tier markets with a
competitive labor force,” Johnson says. “Retaining employees is critical
because it has such a huge impact on profit and loss statements. It’s really
starting to affect how corporations consider real estate — what space they get
and where they locate.”
The desire for
collaborative and flexible space is another driver of corporate space decisions
in today’s market. “Flexibility is the top demand from C-level executives when
it comes to a real estate portfolio,” Jacobs says. “The pace of major business
decisions such as mergers, dispositions, and new products is much faster than
the duration of standard commercial leases or construction projects.Corporate
real estate execs must build flexibility into their plans more than ever
before, which takes careful planning and a forward-looking view that can adapt
to changes from many stakeholders.”
Space flexibility will
remain an important requirement for all corporations throughout the remainder
of the decade as mobility support quickly becomes a “table stakes condition”
for knowledge workers, according to CoreNet Global’s Corporate Real Estate 2020
report. An estimated 40 percent of employees will work away from the office by
2017, underscoring the importance of virtual office concepts such as
telecommuting and hoteling in corporations’ future space-use plans, according
to the report.
Despite the desire for
mobility, industry experts say adaptable and flexible brick-and-mortar
facilities will continue to be essential for the evolving workforce. Providing
collaborative spaces for employees to interact and achieve face time is an
important aspect of attracting top talent, particularly among the millennial generation,
says Andrew Cheney, CCIM, SIOR, principal of Lee & Associates in Phoenix,
who specializes in corporate office leasing and brokerage. “It’s not just about
mobility that allows working remotely. It’s also mobility within the overall
office,” Cheney says. “Employees may spend one day with a collaborative team
and the next at a hoteling station in the office and then work from home a few
days that week. Corporate real estate managers must anticipate these changing
needs while keeping the culture and community intact,” he says.
Evolving Roles
Although many factors,
including technology, the reemergence of on-shoring among U.S. manufacturing
corporations, and government inefficiencies, have had direct impacts on
corporate real estate decisions, advisers’ and directors’ roles are evolving
organically to adapt and anticipate future needs. “Over the past five years,
corporate real estate directors have had to shift their thinking from pure cost
reduction to enabling cautious growth and driving employee engagement,” Jacobs
says. “They have also had to transition from managing their teams somewhat in
isolation to working much more closely with business units such as human
resources teams and especially procurement teams.Due to compliance and
cost pressures, procurement organizations have significantly increased their
influence over real estate decisions and purchasing practices.”
In the Jones Lang LaSalle
study, 69 percent of corporations reported that procurement is actively
involved in real estate decisions. This shift is impacting the leasing and
management environment, Jacobs adds, and “has been a struggle for many
traditional corporate real estate executives.”
In his advisory and tenant
representation role, Johnson has also seen a growing trend toward collaboration
of in-house and external teams. “Real estate is now more of an effect of how
well you understand the corporation’s business,” says Johnson, who works with
primarily logistics and manufacturing clients. He’s seeing the emergence of
strategic partnerships among corporations’ real estate divisions and
departments ranging from finance to operations. “As corporations become more
sensitive to how much they spend and what they spend it on, they’ll need more
communication and collaboration as opposed to one team conquering every
assignment,” he says.
As the marketplace
continues to evolve, the trend toward outsourcing real estate services
continues to grow. In 2013, approximately 8 percent of global corporations
indicated they had not outsourced any commercial real estate functions — a
significant drop from the 24 percent that claimed no outsourcing in 2011,
according to the JLL study. “This indicates that corporate real estate
outsourcing is quickly catching up to other outsourced functions such as IT, HR,
and finance,” Jacobs says.
Barnett points out that
many corporations continue to retain in-house control of their assets, but rely
heavily on external consultants for other real estate functions. “Recent trends
suggest that most companies use in-house teams to handle overall management of
the portfolio, while transaction management, project management, and
architectural consulting are traditionally outsourced,” he says.
The evolution of corporate
real estate advisers’ roles will continue as corporations adapt to new
technologies that allow increased mobility and flexible spaces, the work
preferences of a new generation of employees, and the ever-growing need for
collaboration among the various stakeholders about the organization’s future
direction. “In general, corporations will continue to recognize that real
estate is an enabler of success for their organization, and that pure cost
reduction can hinder the larger goals of the company,” Jacobs concludes.
Jennifer Norbut is senior
editor of Commercial Investment Real Estate.
What’s Ahead?
With a prevailing desire
to increase density and efficiency, corporations are likely to be faced with an
abundance of excess space in the coming years. In several sectors Jones Lang
LaSalle tracks, including banking, legal services, and government, tenants are
reducing their overall leased-space footprint by an average of 15 percent when
negotiating renewals.
As a tenant representative
for some of the Phoenix market’s largest office-space users, including
Motorola, JDA Software, and HDR Engineering, Andrew Cheney, CCIM, SIOR,
principal of Lee & Associates, sees the “old standard of large offices
dwindling as these corporations become more cognizant of the next generation of
workers and more community minded.”
Anticipation of growth and
forecasting will be a major factor for corporate real estate decision makers in
the years ahead. Current conditions have created a bit of a paradox, says
Simons R. Johnson, CCIM, SIOR, of Colliers International in Charleston, S.C.
“Some corporations’ vision of growth includes looking at current opportunities
that they have for ownership because financing is so good right now,” he says.
On the leasing side, the
trend of avoid longer terms is becoming less prevalent. “Companies are
analyzing the benefits of acting now to reduce cost exposure and lock in rates
or suffering the potential consequences of higher interest rates and construction
costs if they wait too long make decisions,” he says.
Finally, as corporations
continue to expand their global footprints, they will be challenged with
providing consistent, high-quality platforms in every market, which can be
tricky to manage given the wide range of leasing practices, construction
standards, and employee expectations among different countries and cultures.
According to the JLL study, corporate real estate directors will be required to
“manage expectations and educate the business about the challenges of
delivering real estate solutions in less transparent markets.”