In 2000, Peruvian economist Hernando de Soto described the defining elements of strong capitalist economies. Mechanisms here are not built to protect property, but to protect transactions. Where a South American country might require multiple certifications of ownership and eligibility before a transaction can occur, American protections focus on the exchange of title and compensation.
This affects the environment for commerce, and the timeline. Transactions follow detailed protocols for serving notice, involving paid bailiffs, detailed calendars, and zero tolerance for failure. Acknowledgement of an e-mail saying, "We won't be renewing," may well be followed by, "You didn't serve notice - so your lease is extended." The number of steps and parties involved in executing a plan can be far higher than expected.
For this article, we convened four people and four perspectives. From the United States, Noah Shlaes and Bob Hess provided insight into the experience of American corporations as they look beyond their borders. Dan Robinson and Duncan Hamilton, our "embedded agents" in London, offer a view from the other end of the transaction. From these perspectives, we've assembled an interesting catalog of what can go wrong and right.
Labor, Labor, Labor
Many elements drive the evaluation of a location: commute patterns, building amenities, space configuration, availability and level of change in a labor pool, etc. In a U.S.-based selection, all are components of a sound choice. But overseas, and especially in Europe, they leave the realm of choice, and can take on the force of law, or something like it. Specifically, such business changes as displacements, expansions, and shifts in local labor markets are negotiated with "workers councils" - quasi-governmental bodies that are part planning board and part labor union. These councils concern themselves with what the experience will mean for employees in place. They emphasize existing jobs and existing employees, and the changes facing them.
So "moving a dot on a map" from a fixed workplace (like an established office or factory) to a work-from-home situation can have significant implications. For example, moving a job from the central business district to outside of an arbitrarily defined line can change several aspects that all affect the evaluation of the choice.
- Recognition of revenue - In Munich, for example, moving outside city lines can reduce tax impact, as a result of moving economic activity outside the bounds of the taxing body.
- Commute time - If you move too far, labor councils will not approve the commute time change occasioned by the strategy. In the UK, for instance, moves of more than 19 miles may trigger requirements for redundant positions and individual consultation.
- Lead time - In the Netherlands, certain defined periods must elapse between notification of a move.
At the heart of this is a focus on workers' rights and preservation of existing employment. Thus, timelines, incentives, and change management techniques are quite different when working overseas.
In emerging markets, the pace of change can bring its own challenges. Rapidly rising wage rates in Asia can create high turnover in middle management, as strong leaders move to new opportunities. Rising quality of life also changes the reason companies move overseas; though drawn by low-cost labor, they stay because of new, expanding markets.
Getting Control of the Site
Accepted mechanisms such as leases may be less flexible and more standardized than U.S. companies expect.
- Lease term - In France, for example, nine-year lease terms are defined by statute, with exit points at years three and six, and renewal at year nine, favoring the tenant.
- Payment period - In many places, rent is paid quarterly, instead of monthly.
- Termination rights - In the UK, the Landlord and Tenant Act preserves tenant rights to remain in space, and requires landlords to justify non-renewal. Mere lease expiration does not permit a landlord to replace a tenant.
- Physical condition - In Europe, office space is typically delivered raw, without finishes. The phrase "tenant improvements" comes closer to being accurate in Europe than in the United States, because the cost of these physical changes is borne by the tenant. Rent is seldom if ever used to offset this cost, and the tenant is obligated in most cases to return the space to the lessor in the physical condition in which it was provided.
The upshot of all of this is that space is less liquid, and retention tends to be longer than is expected by most American companies.
It's easy to forget just how much land is available here at home. In Bulgaria, the phrase "developable land" had no particular meaning, because "land" referred exclusively to farms. When "land" was zoned to build anything more complex than a barn, government agencies became involved in the construction of those improvements. One could not buy land for development, speculative or otherwise.
Zoning and permitting can be excruciatingly specific. One cannot assume homogeneity of permitted uses, even within a single structure. One corporate client, which had operated an open plan "business center" on a floor of a modern building, intended to expand on an adjacent floor and signed a lease. When ready to begin construction, the company learned that this floor had permits only for private offices, and was not eligible for open plan construction. Obtaining appropriate permissions and certificates of occupancy added 90-120 days to the timeline.
This pattern exists elsewhere and creates a near-absence of speculative development, at least on the part of developers. Speculation can take the form of central planning, especially in China and India. These constraints mean several things:
- 1. Supply is limited, with almost no speculative component;
- 2. Rents are much higher than they are stateside, and;
- 3. Utilization is also far higher, and is more closely managed.
Who's Your Agent?
Not all countries share the American concern for identifying and declaring brokerage relationships. In the United States, strict rules require declaration of whose interest landlords, tenants, and brokers serve. One cannot safely take this for granted overseas. Depending on the market, a tenant representation advisor may also turn out to be the leasing agent for the building, and possibly its owner. An American realtor would refer to this as "triple agency."
Overseas, disclosure of this conflict of interest may not be required by law. Also, it is possible to create an agency relationship inadvertently. Carelessly involving multiple parties in a space search can lead to payment of multiple leasing commissions.
Conversely, in some parts of the world one can spend time and resources negotiating with the wrong party. Particularly in China, business processes are not well documented and are in constant flux. Securing the support of local officials, up to and including the mayor, may result in a project that is afoul of national goals, and which may be shut down after a few years to make room for a master plan from another part of the government.
The Built Environment
As discussed earlier, constraints on supply result in higher costs, and more efficient use of space. But this also means that smaller blocks of space are expected. Brokers active in the market identify the following concerns:
- Building quality - A much larger disparity in quality exists between classes A, B, and C space. Rather than the difference between granite and wood, expect the difference between granite and linoleum.
- Green features - There's greater incorporation of green and quality-of-life features in facilities. This can include open work plans, incorporation of low VOC materials, and the extension of available light into the workspace all the way to the core. (Again, this is driven by workers councils.)
- Measurement standards - More than ever, you'll need to conduct analysis to figure out just how much space you're getting, and how you will fit. "Gross internal area," measured from the interior wall of the physical envelope, doesn't give you much of an indication of potential utilization.
The American Influence on Vocabulary
Since the adoption of facsimile machines, American English has invaded the vocabulary of real estate and location selection decisions. Where Bulgarians use a single word to signify amortization, depreciation, interest, and mortgages, American English is filled with multiple, precise terms. Like the Eskimo vocabulary for snow, American English contains multiple, precise words for real estate, facilities, and expansions. But outside of America, a few keywords are worth knowing, mostly having to do with time:
- Mahlzeit - Roughly translates to "Enjoy your lunch." A few years ago, DaimlerChrysler telephone customers calling at lunchtime were stunned to hear endless ringing at the other end of the line. No voicemail, and no menu choices. Complete shutdown at lunchtime remains common among German companies.
- August - Especially south of the UK, August is a nonproductive period. American project plans calling for decision and action during this month often fail.
- Easter - This is a four-day weekend, at least in the UK.
- Midsummer's Eve - This is a Scandinavian period of rest running roughly from June 22 to August 1.
- Bailiff - This is the person paid to deliver notice of such actions as early lease termination or execution of an option.
Combine these with complex notice requirements, and the risk of unintentionally extending or failing to terminate a lease is increased.
Addressing the Challenge
Nevertheless, many companies succeed in operating across borders without apparent difficulty. The challenges described herein are more than offset by access to labor, skills, and markets. By understanding the assumptions we make, and the consistency that does not exist across borders, we can set realistic expectations based on local conventions and local markets.
This cannot be accomplished by remote control. Obtaining and analyzing the necessary data requires a mix of local knowledge and understanding of international corporate needs. Companies with an American base and scattered international operations often work through consultants to provide this capability. Those with larger or more repetitive international needs will either hire in-country or cross-train personnel from other countries. In either case, significant investment in communication is the key.
Over time, international facilities decisions will become easier. The aggregation of market data and business practice documentation continues to accelerate. International economic development organizations increasingly make this information available without requiring a trip overseas (at least in the early evaluation stage) and stay with projects to clear up communications issues and expedite processes. Though borders remain, barriers are fading.
About the Authors
All four contributors to this article are with the newly combined firm of Newmark Grubb Knight Frank. Two are based in Chicago: Noah Shlaes, CRE, FRICS is Senior Managing Director, focusing on portfolio strategy and data integration. Bob Hess, Executive Managing Director, helps clients with location selection, supply chain planning, and their implications for the ability to compete.
Two are based in London: Duncan Hamilton is Senior Director and leads efforts for American companies with facilities requirements in Europe. Dan Robinson is Managing Partner, Joint Head of Europe, Middle East & Africa, and focuses especially on clients in turnaround and restructuring situations.