The Challenge of Long-Range Corporate Real Estate Planning
Martha A. O'Mara, PhD, CRE; Glenn L. Burdick, Managing Directors, Corporate Portfolio Analytics
Of all the difficult decisions facing senior executives as they try to identify and manage the critical resources their organizations require to compete effectively in today's demanding business environment, decisions about real estate commitments are probably the ones they hate the most.
Why is this so? Real estate decisions are highly visible in the organization, costly, and take a long time to implement. Once a commitment is made, it can take years to change: buildings last for decades and even leases often lock firms into long-term obligations. On the other hand, a company's competitive environment can quickly change, requiring different resources, perhaps in different locations.
Today, the planning and management of corporate real estate is further complicated by advances in information technology and telecommunications. People no longer have to go to a specific place to access the information required to do their job — it is available anywhere internet access or mobile telephony can reach, around the clock.
Changes in real estate supply have also made planning more difficult since most office space is purpose built for pre-committed tenants — there is little speculative space produced these days. Therefore a company which identifies the need for additional space must do so well in advance of actually occupying the space. However, at the present time many large of the large corporate users of space we work with are still burdened with significant internal vacancies — some as high as 25% — which they are gradually burning off through lease expirations and sale of owned assets.
What strategies are large companies such as financial institutions, telecommunication and technology companies and national professional service firms implementing to help better plan for future space needs? We see four major trends:
Consolidation to fewer cities: Mergers and acquisitions often result in a hodgepodge of business locations without a rationalized approach to labor markets, costs, and customer service. Concentrating employees in fewer cities helps firms to balance the internal supply and demand of space better, as well as enabling them to move loyal employees across lines of business as needs change. Corporations favor locations that offer both a quality workforce and relatively lower labor and operating costs.
Increased density through use of alternative office approaches: Studies of actual employee usage of office space shows that typical middle managers, even those who do not travel extensively for their jobs, still show up to work at their assigned workplace only about 60-70% of the time. By moving to flexible office assignments and encouraging telecommuting, companies can fit more employees into the same amount of space. Since many companies still have excess internal space, this trend has not shown up in overall occupancy statistics, but as these companies grow headcount or decrease their footprint, we will see more use of flexible office approaches to lower the average space per worker.
Shorter and more flexible lease terms: As one corporate real estate executive recently observed: “If I could rent office space like hotel rooms I would.” Relatively high commercial office vacancy rates have given corporations more room for negotiating early termination options, or shorter terms entirely. Anecdotal observations from the field indicate that lease lengths are shortening. Equity Office promotes tenant flexibility by allowing its largest tenants the option of switching space commitments across Equity properties in different cities. Companies are also more careful about putting too much fixed capital into office build-outs.
Portfolio-wide planning: Real estate is one of the few functions that can take a view across the entire corporate platform of individual lines of business. Lines of business tend to make narrowly focused real estate decisions because that business line's performance is the primary measure of their managers. Corporate real estate managers are now being more proactive in integrating real estate planning and decision making across boundaries, especially in the occupancy of like-type facilities such as call centers. Consolidation of facilities to fewer locations also encourages sharing and cooperation across business lines. The centralization of real estate planning and management, and the increasing use of outside service providers for transactions and asset management, are also encouraging a portfolio-wide view.
In response to increasing uncertainty about future real estate requirements, corporations are becoming more proactive in the long-range planning of their real estate occupancy. In future columns, we will examine some of the tools that enable better long-range corporate real estate planning.