Market analysis

Corporate Shifts

The changing market creates new challenges for corporate real estate advisers.

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.”

Jennifer Norbut

Listen to the “Commercial Real Estate Show” online anytime at www.CommercialRealEstateShow.com.

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