30 Jul 2012
All businesses rely on some form of real estate to execute their business plans, whether it’s a boutique consultancy, a large manufacturer, or complex corporation like HSBC or Microsoft. However, companies today are facing an unpredictable future; the aftershocks of the economic crisis have made planning one of the most challenging aspects of the corporate environment. Current business and economic trends often dictate that real estate must consume less capital. However, merely acting to reduce costs can harm operational efficiency – the lack of a strategic real estate plan can limit a company’s ability to respond to future opportunities and challenges.
European CEO met with Andrew Hallissey, Executive Director of Global Corporate Services (GCS) at real estate advisory firm CBRE to discuss how the most successful corporates address this issue. Globally, CBRE has three billion square feet of property and corporate facilities under management for companies such as Bank of America Merrill Lynch, Nokia Siemens Networks, RBS, Oracle and Aon.
Unlocking latent value
Though it may represent a substantial part of the balance sheet depending on the industry sector – often approaching one quarter of assets – real estate planning receives a disproportionately lower amount of staffing, budget and other resources compared with other corporate functions.
CBRE’s GCS team assists clients in unlocking the value in complex property portfolios, building strategies that are closely aligned to the overarching business strategy. In the current environment, this frequently focuses on streamlining the costs associated with occupying and owning buildings as well as executing growth or restructuring plans.
CBRE considers real estate an important factor of production for big companies. Good or bad real estate choices invariably have an impact on employee or client relations, corporate image, workflow efficiency, the ability to deploy new technologies, and the return on equity investments in a company. “We think of it in the context of the factors of production – land, labour, capital and enterprise,” explains Hallissey. “We help clients provide the land component of the factors of production in the most efficient and cost-effective way.”
Most large corporations operate based on the delivery of services, or production of goods, that are not often related to the real estate they occupy as a business. With real estate strategy and execution often the responsibility of the COO or CFO, advisors such as CBRE are brought in for their specialist knowledge and global reach, allowing companies to concentrate their resources on their core businesses.
“What it really does is allow companies to focus on what they are best at, in the confidence that they have a trusted partner delivering the service with much greater resilience than they could provide themselves,” says Hallissey.
This type of outsourcing encompasses portfolio planning, transaction management, lease administration, facilities management and project management. “Worldwide, the market is most mature in North America, where large corporations use this as a standard model to manage their real estate portfolios,” explains Hallissey. “However, with the financial pressures we have seen in Europe over the past few years, companies here have taken a far more aggressive approach to assess their real estate costs and ensure a more efficient approach to achieve the full potential of their occupied real estate.”
Real estate outsourcing trends
The changing face of the global economy shapes the growth and development of the company. Hallissey suggests there is a strong correlation between global economic trends in different sectors and the demand for different types of real estate services. “As you can imagine, a lot of firms in the financial sector have been reducing their footprints and real estate portfolios because of the tough industry conditions they are facing.
“The most successful organisations at capitalising on these unique conditions have been the ones with robust data for their portfolio on a global scale and those that were able to access real-time market data to allow them to re-gear and restructure their portfolio in a systematic way,” says Hallissey. In his experience, these changes can often deliver double digit savings on total occupancy costs.
However, companies in the technology sector, which have performed particularly well over the past three years, have been consistently increasing their footprint globally. “These are the organisations that have continued with an expansionary strategy around the world as they have built operating infrastructure,” says Hallissey. Their real estate needs are quite different and include finding and securing locations, as well as expert management of the global portfolio to ensure it operates at maximum efficiency.
Many Asian companies are also starting to enter new markets. “Outsourcing of real estate expertise has traditionally been the preserve of large American or European corporates as they expand out of their home territory and it is interesting to now be advising domestic Asian corporations as they go through a similar process of internationalisation and globalisation”, says Hallissey. “I expect we will see a continuing demand for them to centralise and globalise their activities on a multi-country basis.”
Mitigating real estate risk
Over the past four years, some countries, particularly those hit hard by the downturn, have seen significant corrections in real estate values. Despite this, many industry observers believe now is the time to invest in real estate in these markets – whether entering a market for the first time or re-positioning an existing portfolio by capitalising on favourable terms. For example, conditions in the market have been particularly tenant friendly over the past three years. “Real estate values tend to be somewhat emotive and tend to overcorrect. In Ireland, for instance, there has been a correction of over 50 percent in values from peak to trough,” says Hallissey, “but it is a market which has strong underlying economic fundamentals, and you would expect to see the price recover along with, or ahead of, the domestic economy.”
Especially in times of economic uncertainty a major component of any successful real estate strategy is risk management. CBRE approaches this on two levels; investment risk and occupational risk.
In recent years, managing risk from an investment perspective has revolved around helping clients deleverage and consolidate investment portfolios into core markets. This type of risk is mitigated or reduced by diversifying real estate portfolios and ensuring properties are of high quality and efficient, and by securing longer-term tenants. According to Hallissey, “the key is trying to secure a more predictable stream of cash flow from tenants in addition to eliminating as much vacancy as possible to the portfolio.”
CBRE has also identified the four principal risks faced by corporate tenants:
– 0perational management of the portfolio and business community;
– financial risk;
– reputational risk; and
– external or geopolitical risk.
Hallissey notes that “large corporations have been particularly focused on ensuring critical facilities are being properly managed. The application of real estate managing systems and intelligent building management strategies are put in place to support the operational consistency of their real estate portfolios.”
In an environment where every divisions’ profitability is under the microscope, sound real estate management has taken on increasingly strategic importance. Rigorously and objectively evaluating how best to manage such a pivotal element of operations can yield huge dividends for an organisation.