|Corporate Real Estate Adapts to Global Challenges
|Global market complexities are making strategic real estate planning more critical to business health - and more challenging - than ever.
Stuart Hicks, President, Strategic Clients and Chairman of Jones Lang LaSalle’s Global Corporate Solutions Board, Jones Lang LaSalle (March 2011)
Over the past three years, the global financial crisis created a corporate operating environment riddled with ambiguity, complexity, and volatility. As a result, executive leadership charged corporate real estate (CRE) teams to respond with greater agility, expediency, and productivity to develop short- and long-term strategic real estate programs to address an increasingly complex set of challenges. This need, coupled with a focus on cost improvement, presented an unparalleled opportunity to elevate CRE within the organization.
Global Trend #1: Higher Productivity Demands (1/5)
During the recession, CRE focused on short-term strategies to realize quick cost savings - essentially survival tactics. The experience made corporate executives more conscientious of their real estate portfolios. They continue to put pressure on CRE teams. These groups must strategize by bettering workplace efficiency, mobility, and productivity.
Next: Global Trend #2
Global Trend #2: Balancing Growth and Right-Sizing (2/5)
Growth pressures are returning in select geographies, typically in opaque real estate markets. Asia-Pacific growth is expected to be strongest, with China leading expansion. North America and Western Europe will experience flat or negative growth.
Next: Global Trend #3
Global Trend #3: Partnerships (3/5)
Partnerships will proliferate in the next three years with in-house teams working with outsourced real estate providers. Those already outsourcing all real estate functions will develop fewer - but stronger - relations with service providers.
Next: Global Trend #4
Global Trend #4: Reshaping CRE Structures (4/5)
CRE team restructuring is growing more urgent. Organizations expect to move towards centralization and establishment of core CRE teams. Businesses are locating CRE teams within greater support or shared service functions, led by professionals outside the real estate sector.
To search for insight about CRE's challenges and opportunities, Jones Lang LaSalle launched its inaugural Global Corporate Real Estate survey. The survey, with responses from more than 500 CRE executives across industries and locations, yielded insights into key trends and issues.
Two themes - growing wisely and increasing productivity - emerged as the biggest challenges for CRE professionals developing long-range strategic programs.
Balancing Growth and Productivity
The financial crisis challenged CRE teams to resolve the competing pressures of growth and improvement with asset productivity. With cost savings in mind, CRE teams initiated short-term, tactical real estate plays to cull direct cost savings from real estate portfolios. This changed the form, function, and value-add of CRE's relationship with company leadership. CRE teams must now deliver a platform that allows for business growth opportunities in markets that lack transparency, and parallel with portfolio right-sizing initiatives in mature markets.
Most companies anticipate the return of growth, but in select global locales. They will aggressively pursue growth in emerging markets, concentrated in arenas that frequently lack operational maturity and transparency. The emerging market dynamic is reflected in The pursuit of new revenue opportunities in the BRIC nations (Brazil, Russia, India, and China) reveals this emerging market dynamic, which is important considering the absence of strong economic growth forecasts within mature global sub-regions.
The survey shows the most significant growth in the Asia-Pacific region, particularly the North Asian countries of China, Japan, and Korea. Each country will see a more than 50 percent increase in net portfolio size over the next three years. Emerging markets in Central and Eastern Europe and the Middle East should also experience strong portfolio growth. In the Americas, Latin and South American growth reflects the emerging market dynamic.
The relative immaturity of these markets and lesser transparency will challenge corporate occupiers. Compare Figures 2 and 3 of Jones Lang LaSalle's Real Estate Transparency Survey, which illustrates global market transparency. Markets in which respondents are pursuing growth are also markets with low transparency. Speed to market is predictably slower in opaque markets, barriers to entry are higher, and routes to market exit are complex and costly.
The need to deliver a platform for growth in idiosyncratic real estate markets will pressure CRE teams in the medium-term. The pursuit of growth in these markets will expose the organization to opaque real estate markets. The CRE team will be required to inform the business of the practicalities of expanding in an emerging market and how to mitigate risk.
In stark contrast to the emerging markets, survey respondents indicate that the United States and Western Europe will experience a net reduction in overall portfolio size over the next three years. This downsizing is already under way in mature Western markets, where corporate occupiers have sought portfolio consolidation over the last 18-24 months and released surplus space back into the market, driving European and U. S vacancy rates to record highs. Further rationalization and consolidation will characterize portfolio initiatives in these locations for many years.
Improving productivity by implementing strategic real estate initiatives is defining best-in-class organizations. These organizations are also shifting from short-term survival tactics to medium-term, strategic initiatives drive enhanced portfolio productivity.
As global corporations responded to tightening financial conditions and shrinking revenues, corporate leaders sought to downsize real estate, primarily due to its roughly 10 percent contribution to total operating costs. With leaders focused on portfolio costs, CRE teams must meet aggressive performance targets and mandates that emphasize strategic action to improve business productivity. But many organizations did not anticipate the speed and intensity by which leadership attacked real estate costs. CRE teams around the world felt this pressure, as illustrated in the survey response of many CRE executives supporting their businesses with more than one tactical real estate cost-reducing activity.
Adding even more complexity, the event horizon during the financial crisis clashed with the planning horizon of most CRE strategies, which typically spans at least three years. Now, a change in strategic focus is necessary to deliver value and guidance that businesses require as companies recover.
Going forward, companies will seek better utilization rates in consolidated portfolios, which will dampen further demand for office space in mature markets. Utilization rates, currently about 40 percent, present a huge productivity improvement opportunity to corporate occupiers. Leadership in mature markets will increasingly challenge space utilization, triggering CRE teams to develop real estate initiatives that achieve a more efficient and productive workplace.
Creating an efficient workspace that accommodates modern work styles (i.e., makes the workplace more productive) will help CRE leaders build added business value. Additionally, expanding the scope of programs to incorporate a comprehensive set of initiatives will help organizations meet goals. CRE and business leaders must partner to address barriers to implementation to realize improved productivity. They must conquer fear of change, technological deficiencies, and lack of executive buy-in to realize the maximum potential of workplace programs.
The financial crisis brought attention to the structure, role, and future direction of CRE within an organization. Many survey respondents struggled to articulate how the organization would be designed to support the business in the future, presenting an opportunity for CRE leaders to start thinking differently about the role and focus of CRE, and also a likely shift from the tactical to the strategical. The data suggest CRE organizations make a more valuable, distinguished, and strategic contribution to the overall business and its growth. Greater visibility and engagement with the business allow the CRE community to make more contributions to the company's future.
Seventy-seven percent of survey respondents called the quest for enhanced productivity, right-sizing the portfolio, or a desire to change the work culture and nature top influences of future real estate strategies.
CRE teams must change to stay relevant and responsive to business needs. Based on the themes of smart growth and productivity, five fundamental strategies can drive CRE change and adaptation:
• Generate a long-term plan for CRE team evolution that supports and facilitates the wider business growth plan.
• Emphasize real estate portfolios to drive enhanced productivity and effectiveness.
• Fully leverage the service provider market to increase capacity and capability to balance right-sizing pressures with the pursuit of selective growth opportunities.
• Re-focus and restructure the CRE team in response to growing scrutiny from senior business leaders and to drive a strategic agenda.
• Access fresh talent from outside the industry that will engage and manage the greater expectations of an informed C-suite.
The global financial storm changed the corporate operating and economic environment forever. CRE teams will continue to be instrumental in responding to the damage. They will be equally central in re-setting agendas for new economic and operational realities, and in leveraging the unparalleled opportunities for growth, profit, and innovation that the future holds.