In the last Blog post, I addressed the subject of process management in the context of CRE management. Process management is directly tied to organizational structures. In fact, the structure and staffing of the CRE organization should directly correspond to key processes such as leasing, construction, design, facilities management, etc. Organizational structure varies by the size of the real estate portfolio, the type of industry (retail, financial services, manufacturing, etc.) the level of outsourcing, and the geographic dispersion of the real estate portfolio.

The latest trends in CRE organizational structures provide insights to the topic.  In a report by the research firm CEB (now part of Gartner), five key trends in CRE organizational structure were identified:

1.    Most Corporate Real Estate (CRE) functions with a portfolio size greater than 10 million square feet are centralized. CRE functions with portfolios less than 10 million square feet are split between centralized and hybrid (i.e., managed centrally and executed locally). Very few CRE functions are primarily decentralized.

2.    Few organizations manage activities wholistically at the local level; the most common locally managed activities are facilities and office services.

3.    Most CRE functions have a threshold project size, above which projects must be managed centrally. For portfolios greater than 10 million square feet, the median threshold is $50,000–$60,000. For portfolios less than 10 million square feet, the median threshold is $100,000.

4.    CRE functions with portfolios greater than 10 million square feet have had more structural changes in the past five years, with over 90% having at least two changes. CRE functions with portfolios less than 10 million square feet have had fewer changes, with 63% having two or less changes in the past five years.

5.    Leaders of CRE frequently change organizations. Median tenures for portfolios greater than 10 million square feet is three years, while for portfolios less than 10 million square feet, the median is 1.5 years.

Most CRE organizations maintain the following organizational disciplines:

• Real estate negotiation
• Construction management
• Design management
• Facilities management
• Lease administration
• Strategic planning
• Financial analysis

In many cases, the functional managers oversee and supervise the work of outsourced contractors such as tenant representatives, interior design consultants, construction contractors, etc. And, as mentioned earlier, most of these activities are either insourced or outsourced (or both) and are governed by explicit processes and supported by software.

Some CRE organizations also have responsibilities for environmental management and physical security. Others have the added responsibility for employee wellness, since most corporate wellness programs focus on health clubs or internal physical fitness facilities. Both of these areas closely align with CRE’s contracting or facilities management responsibilities.

Professional development and training are key functions that are essential to organizational performance. I would recommend ensuring that staff members include professional development goals in their annual objectives, with a balance between technical and management skills. I would stress communication skills while striving to give staff members opportunities to prepare and deliver presentations. In this regard, I would encourage staff members to present at professional forums such as CoreNet and IFMA. I would also encourage staff members to enroll in professional development courses at these forums.

Organizational structure and development are key responsibilities of the CRE manager. CRE executives must review their organizational structure periodically and ensure that the organization continues to align with business strategy and customer requirements. Questions to ask include: Do I have the right skill mix? Do we have the necessary reporting relationships and span of control? Have we built good team behaviors? Is there a high level of trust in the organization?  Are the staff members adequately provisioned and supported? These are some of the main questions that the CRE managers need to ask periodically to ensure a high performing organization.

Perhaps one of the most critical aspects of corporate real estate management is the subject of process management and the software that supports it. Process management is a major subject in the topic of quality management. It has been a topic that has dominated management subjects for decades. Most software applications have specific functionality that addresses process management; particularly around work flow.

There are many definitions of process management. Wikipedia’s is fairly representative of most definitions:

“Process management is the application of knowledge, skills, tools, techniques and systems to define, visualize, measure, control, report and improve processes with the goal to meet customer requirements profitably.”

In the field of corporate real estate, process management is central to the efficiency and effectiveness of the organization. Real estate management involves a multitude of processes and disciplines that are inter-related, inter-dependent, and in many cases time sensitive. Just the process of creating a lease involves a number of steps, a number of approvals, and finally a number of data points. Here’s a simplified process flow for the creation of a lease which is typically a subset of the broader set of processes in completing a new office project

·      Create a statement of requirements (square footage, headcount, target area,. etc)

·      Seek sign-off on requirements definition from tenant organization

·      Scan lease data base to determine if there is available capacity to meet requirements in the targeted market area

·      If nothing available in inventory, launch site search with broker/tenant rep

·      Narrow prospective locations to three possibilities

·      Complete test layouts of three candidate locations

·      Complete market analysis of targeted market (typically completed by broker/tenant rep)

·      Initiate lease negotiations with prospective landlords, owner reps.

·      Complete financial analysis of three prospective lease deals

·      In parallel complete lease authorization (financial approval) of three deals. I prefer seeking a generic approval that gives the CRE team some latitude in negotiations.

·      Finalize lease negotiations and complete lease documentation

·      Conduct legal review of lease. (adjust as necessary)

·      Once lease is finalized, complete interior designs, and order furniture and equipment.

·      Initiate and complete leasehold improvements (LHI)

·      Abstract lease and enter lease data base.

·      If a relocation, complete move plans with tenant organization

·      Complete the move

·      Conduct post project review, finalize “punch list.”

This is a simplified list of the key steps in a leasing project and each step involves different players, different responsibilities, and various dependencies. Also, the process is sequential, each step must be completed before moving to the next step. Another key element of the process flow is the exchange of data. Leasing projects create significant data that typically must be shared across the CRE organization, with other departments, external service providers and various management representatives.

Process management impacts organizational design. Ideally the organizational responsibilities and structure should align with key processes to ensure efficiencies. In the next blog post, I’ll focus on the organizational topic and explore how work flows (process) influences organizational structure

In the latest issue of the LEADER, the official publication of CoreNet, two of my former colleagues, Mike Joroff and Frank Becker, co-authored an article entitled, “Exploit Change and Uncertainty to Drive Corporate Value.” Becker and Joroff collaborated with me on several projects, including Office 88 (Becker-1983) and the Agile Workplace (Joroff- 2003) The authors make the case that many of the assumptions about the office, technology, and work need to be updated and revised to reflect the new trends visible in the global workplace.

One of the most interesting concepts in the article is the notion of “vireos.” Joroff and Becker define vireos as the opposite of “black swans” which are metaphors that describe hard-to-predict events that come as jarring surprises and have a major impact on the course of the economy or social events (think 9-11). Vireos are objects, actions, and ideas in our current environment that we do not see, but if we did see them they might give us a much better grasp of a possible future. A vireo gets its inspiration from the North American white-eyed vireo, a bird with a melodic song that is very hard to find, unless one actively looks for it hidden in its surroundings. One example of a vireo is the concept of “anytime, anywhere” work style. This was evident at least 25 years ago, if observers noticed how college students used the internet to work virtually anywhere.

I can think of a number of “vireos” that may impact the workplace of the near future. For example, with the advent of sophisticated robotics, we may see many job functions in corporate real estate be supplanted by robots. I read about the possibility of robo-bosses, robots that oversee and supervise a group of employees like call center administrators. Just as we have autonomous cars, we may witness autonomous buildings, which conduct self-maintenance and repair using sophisticated software and robotic maintenance crews. Robots may replace janitorial staff and other low level worker activities in building operations.

Another vireo is the use of 3-D video in the marketing of commercial property. Virtual tours of available office space is becoming a standard brokerage marketing tool. 3-D video tours will evolve as a continuation of this phenomenon. Adapting gaming technology in lease negotiations is another vireo. A CRE leasing manager could develop a lease in real time with a broker and a landlord using such applications. Such an innovation could reduce the leasing process by 80%-90%.

What about facility management? The vireos here are the latent possibilities of the Internet of Things (IoT). With every system and subsystem of the building’s infrastructure having an Internet connection, building management can play a monitoring role only, as the building self-regulates and adjusts within prescribed parameters. And owners will be able to manage and monitor portfolios remotely across vast geographies.

So what are the vireos in your market and environment? Being alert to emerging trends is a critical skill for the CRE manager, who must constantly “look around the corner” to see what’s coming before it arrives and it’s too late to react.

In February, IBM announced that it is reversing its 10 year old policy that allowed telecommuting. All marketing employees must now report to six IBM offices or be terminated. The offices include New York, San Francisco, Austin, Cambridge, Atlanta, and Raleigh. Other employee groups will be affected over the next six months. Employees have 30 days to make their decision. The policy will also be implemented throughout Europe.

According to a recent news article, “IBM has pitched all this change to employees as a way to improve the working environment and office culture. In a video message to her troops, chief marketing officer Michelle Peluso said “there is something about a team being more powerful, more impactful, more creative, and frankly hopefully having more fun, when they are shoulder to shoulder.” (The Register, February 9)

The IBM decision is reminiscent of policy reversals on telecommuting at HP and Yahoo with reportedly negative results. Word has it that this policy decision is not popular with IBM employees. It is estimated that 40% of IBM employees have adopted flexible work styles. IBM has not advised how these six locations will absorb the thousands of employees that will require office space. Many observers suspect that IBM’s real intent is to reduce headcount, particularly older and higher paid employees who have settled into locations that will be highly disruptive to families with school age children, not to mention expensive relocation and resettlement costs. Many of the cities listed above have very high home prices, particularly New York, San Francisco and Cambridge. So the financial impact to employees will be substantial.

IBM’s key competitors, like Apple and Google have a strict policy against telecommuting. Apple’s new flying saucer headquarters in Cupertino is a huge investment in collocation. So it’s not surprising that IBM has decided to bring everyone back to the office despite its huge cost and impact on employee morale.

Frankly, I’m mystified by IBM’s decision. It seems so counter to modern workplace culture that emphasizes agility, empowerment and choice. Recent surveys of Millennials reflect the need for workplace flexibility and with the explosion in mobile technology, people now can communicate from anywhere/anytime including video conferencing.

I recall IBM’s leadership in flexible work styles some 20 years ago and was struck by the huge savings in office costs and reported improvements in productivity. When we studied the flexible workplace at Gartner back in the early 2000s and reported our findings in the Agile Workplace Report, we received significant positive feedback from the project sponsors as well as the broader workplace constituents. It seems that flexible working was a growing trend. But now it seems that for high tech companies like IBM and Apple, it’s believed that collocation of employees is a prerequisite to innovation.

Permit me to doubt! Time will tell.

In 1972, when I first took on a real estate management job at Xerox in Chicago, one of my most important tools was my Rolodex. For the younger reader of this blog, I should explain that the Rolodex was a simple filing of business cards or small index cards, arranged in alphabetical order, and containing names, phone numbers, and mailing addresses of service firms, colleagues, and other contacts. I would use the Rolodex at least 2-3 times a day to look up service people who I might need in an assignment or project, or check in with contacts who might help as a reference.

Today we have several automated tools that replace the old Rolodex. Beyond your contact list, you have a myriad of contact resources on the Internet. Networks of contacts provide an invaluable resource for information and support. A well-developed personal business network can provide fast input on various aspects of your responsibilities. For example, you may need a trustworthy opinion on a broker you’re considering to hire for a leasing project. You may need a second opinion on a software application. You may need a local insight on a distant market that is the target of a new leasing project. All these issues and needs can be readily accessed through your personal network.

So what are the key elements of the CRE business network? My suggestion is to organize your network into categories. I suggest these five categories: 1.) Your organization network. This would include key members in your department and company. 2.) Professional network. This would include associations like Corenet, IFMA, and individuals in the CRE profession. 3.) Industry network. This would include brokers, architects, engineers, in various aspects of the real estate, construction, and building industry. 4.) Social network. This includes friends, family members, school mates and associates that you have a social versus professional relationship with. 5.) Avocation network. This includes friends or contacts in those activities that are a part of your informal life such as health clubs, hobby groups, sports teams, etc.

There are guiding principles that underscore effective networking. The first principle is one of trust. It’s paramount that you maintain a high level of integrity in your behavior within the various networks in which you’re active. Along with trust and integrity is the issue of reliability and consistency. To prosper in your networks, it’s wise to maintain occasional contact and to “touch base” on a regular basis. For some contacts an annual call is sufficient. For others, a monthly call may be necessary. Networking is a form of marketing, and like marketing, a good networker is a good communicator.

I strongly urge aspiring CRE professionals to maintain active membership in one of the leading CRE associations like Corenet Global. These entities provide outstanding opportunities for networking and attendance at regional or global meetings is a great place to make contacts and to learn. I made a point of giving presentations on occasion at Corenet meetings. And by doing so you engage the attendees and enhance your personal brand.

Professional networking is a critical skill and practice for the CRE professional. A good network of various components described above will serve you well as both a professional and a manager. Developing good networking skills and nurturing your various networks over the span of your career will certainly enhance your success and enrich your career with long standing contacts and friendships.

In an earlier blog post I addressed the subject of outsourcing corporate real estate services. One of the key services that is central to the real estate process is the need for design services, typically interior design services. Maintaining a design team internally is expensive and unnecessary. For some organizations having a design professional as a member of the CRE staff is advisable for the purposes of supervising the  design contract firm and evaluating designs in various stages of development.

So what are the key steps in selecting a design firm? The first priority is to review current office design standards to insure adequacy relative to space efficiency, corporate culture, technology support, and cost. Are the standards supportive of office flexibility and work agility? Are the standards consistent with HR policies? Do the standards support safety and security concerns? Are they reasonably flexible to be applied in different markets and locales? Many CRE managers will engage a design firm to manage the standard update as a preliminary step in selecting a design services firm.

The scope of the design firm contract will vary by organization, but typically will include the following deliverables:

·      Test layouts in support of lease negotiations: Most commercial lease negotiations will require test layouts to insure that various space requirements will fit the floor plan of the subject leasehold.

·      Once the site is selected, the design firm will complete preliminary layouts including workstations, conference and training rooms, and specialty areas (such as mail rooms, server rooms, reception areas, and perhaps space for physical fitness, lunch rooms, etc.)

·      In many cases the design consultant will work closely with the broker or tenant rep during lease negotiations to insure adequacy relative to work letter, tenant improvement allowances, or other landlord offerings.

·      After preliminary designs are approved, the design consultant will complete final designs including color schemes, furniture layout, acoustical designs, lighting schemes, and communication cabling schematics. A key element in the design deliverable will be security provisions such as card key access, closed circuit TV monitoring, fire and perimeter protection, etc.

·      For many companies, the CRE team will require input from the design consultant on alternative workplace features such as drop-in offices, collaborative spaces, and other features in support of a mobile workforce.

·      For national companies, it will be important to select a design organization with sufficient capacity to support geographically distributed projects to minimize long distance travel. Most of the larger design organizations have geographically distributed offices in the major capital cities. For international firms it’s advisable to contract with design firms that are local to the designated project city. This will insure that the project design will conform with local codes, standards, and covenants. Many European countries have strict environmental and human resource laws that must be addressed in office designs. The local design consultant should address these factors as part of the design service.

·      One final consideration: The design firm should insure that final designs are delivered to the client in digital format so that layouts can be imported to the lease database. This will facilitate future planning and link design renderings with lease data.

Conclusion: Selecting a design firm is a key step in the facility management and leasing process. The CRE manager should invariably follow best practices in the sourcing process to include the development and issuance of an RFP (request for proposal), consulting with other CRE managers and real estate advisors on candidate firms, and then finally applying a disciplined interview and selection process. Over time the selected design firm will learn the priorities and culture of the client CRE organization and apply this knowledge to make the design process more efficient and collaborative.

In several of my blog postings over the last two years I made reference to the subject of outsourcing CRE functions. But my references were brief. So over the next several blog entries, I plan to delve deeply into the subject. My plan is to first discuss the general pros and cons of outsourcing while providing the rationale for outsourcing various CRE functions. I will then focus on three service areas: lease transaction services, design services, and property management services. I’ll also touch on other activities such as facility management and physical security.

Outsourcing has grown in popularity over the years to reduce costs, provide flexibility in meeting variable demand, and provide critical expertise in leasing, market analysis, and various technical knowledge and skill (such as design and engineering disciplines). Outsourcing CRE services is now a major industry on a global scale. Large companies such as Jones Lang LaSalle (JLL), Cushman and Wakefield, and CBRE are equipped with all the necessary disciplines to execute the entire CRE lifecycle from site search, lease negotiation, tenant fit out, and on-going property management. Global in scale, these firms operate worldwide and can bring local knowledge and expertise to bear in most major global markets.

CRE outsourcing is popular with both large multi-divisional corporations as well as smaller start-up enterprises. Perhaps the greatest reason for outsourcing transaction services is to have detailed market knowledge in the designated target area for the leasing project. The outsourcing firms work daily in the markets and maintain a detailed data base of recent transactions.

A key issue that the CRE manager needs to address is the scope of the outsourcing services (i.e. limit the scope to market analysis and site selection only, or provide a full service including lease negotiation and contract finalization). One of the concerns with outsourcing is the perceived loss of control. CRE managers worry about whether the outsourcer can be trusted to execute the project in a completely objective and professional manner. And there’s always a concern about fees and whether the real estate broker, who is typically commissioned by the landlord based on the ultimate transaction value, is truly operating in the CRE manager’s interest.

The key to a successful outsourcing relationship is the question of trust. Trust can be achieved by insuring that the entire transaction process is totally transparent. This would include such things as detailed trip reports, market surveys, meeting minutes, and an audit trail of how the lease negotiation transpired, and how the transaction unfolded, including competitive bids.

A successful outsourcing relationship requires time. It will take multiple transactions for the outsourcing firm to learn the client culture and processes. Similarly, it will take time for the CRE manager and staff to gain confidence in the outsourcing firm. From my experience, an important tool to build trust is to establish a detailed set of performance criteria to use in measuring the performance of the outsourcing contractor. These criteria would include at a minimum, adherence to schedule, adherence to agreed budget, and efficiency and quality metrics. The CRE team should solicit feedback from end users on such questions as communications, service quality, and meeting expectations.

Senior management strives to maintain core functions in the enterprise and to focus human resources on customer and profit objectives. CRE for most companies is a non-core function and thus is a likely target for outsourcing. But outsourcing CRE services requires deft management and attention. In the next several blog entries I will explore CRE outsourcing in greater detail and focus on the role of information technology in the outsourcing process.

Realcomm, the technology focused real estate web site, recently published an article entitled “The Data is Coming In: Corporate America is Using Less Than 50% of Its Real Estate.” This is no surprise; I remember from my own experience that our offices were nearly 30%-50% vacant at any one time. This was over 15 years ago. With today’s technology, the need for dedicated, assigned office spaces, on a one office to employee ratio is simply unnecessary and wasteful. With the advent of mobile technology, enabling anywhere, anytime work activities, much of the rationale for dedicated work stations or worse, private offices, quickly disappears.

Another impact of technology is the elimination of space for file storage. With the advent of cloud computing and enormous electronic file storage capacity, at least 20%-30% of traditional office space for file storage is eliminated.

Finally, the private office is becoming obsolete; except for work that requires strict confidentiality such as human resource activities, or legal activities, a need for privacy is reduced. Current management practices also prefer to avoid the private office as a symbol of power and authority. There are many examples where company CEOs utilize a cubicle instead of a large private office. John Chambers, CEO of Cisco, has used a cubicle office for years. This practice communicates teamwork, collaboration, and a non-hierarchical culture.

Offices require enormous cost: space rental, utilities, maintenance, tenant improvement amortization, security, depreciation, taxes, insurance all add up whether the space is occupied or not. When we did the Agile Workplace project at Gartner over twelve years ago, we calculated that half the occupancy costof the corporate campus was essentially a dead weight loss, since a high percentage of employees were working remotely. We made a strong case for shared office strategies including office hoteling, and desk sharing. These techniques are becoming mainstream in most US enterprises, along with such techniques as co-working and teleworking.

There are a myriad of applications which support office hoteling: that give the employee the capability of reserving a workstation, private office, or conference room. In some cases this functionality is available in the workplace management system.

These trends suggest that corporate real estate managers take a hard look at their current and projected office space utilization. Key questions to ask include:

·      Do our office standards reflect the reality of a highly mobile work force?

·      Have we piloted various alternative workplace strategies such as desk sharing, telecommuting, or co-working?

·      What is the actual utilization of our current office space? And if over supplied, what can we do to consolidate or reduce the office footprint?

·      What’s the financial impact of this over supply in office space?

Information technology is transforming every aspect of our society. Certainly retail has been transformed by the internet and mobile technology, not to mention entertainment, education, and medical services, and the vast changes brought about by social media. It’s not surprising that technology is fundamentally transforming commercial real estate in profound ways; and the most obvious example is how technology has reduced the demand for office space. This reality is yet another reason to insure you have a modern, up to date lease management systems to track and control your lease commitments.

One of my colleagues recently posed the question “Is there an example of a decision you made that you would do differently now based upon technologies available today?” I began my career in corporate real estate in 1971 with Xerox. I was the Regional real estate manager for the Midwest region and my job was to handle all real estate requirements for the Midwest Region- an area that encompassed most of the Midwest states.  Most of the projects involved the relocation or renewal of branch sales offices, which averaged about 25 K square feet. These projects required close coordination with branch management, regional staff, and corporate real estate and office of general counsel. In reflecting on the state of the art in information technology at the time, I recall how primitive were the available tools to get the job done. I recall having to cut and paste lease documents before faxing to Corporate. I didn’t have any spread sheet tools, so I had to do all the financial analysis on paper spread sheets. One lease deal would require hours of calculations that would be repeated every time a new deal scenario was produced. Needless to say the leasing process took weeks and I have to believe there were deals that could have been vastly improved if I had the kind of advanced network technology and spreadsheet tools available today. There was also the lag in communication. It would take more than a month to turn around a lease between branch management, the prospective landlord, general counsel, and another several months to secure management approval.

While I don’t recall a specific decision I would have done differently, I do recall one serious error in missing a critical lease option that would have cost the company plenty. If I had a software tool such as Visual Lease that flags and alerts leasing specialists of critical dates and options, I wouldn’t have missed the option. As it turned out, branch management didn’t want to renew so the error became mute.

Another key project I recall that would have greatly benefited from today’s’ lease management system, was a consolidation and relocation of D&B’s corporate headquarters from Manhattan to Connecticut. In essence, we had a number of leasing actions, terminations, and office consolidations that resulted in the move of several division offices into the Corporate HQ lease at 299 Park Avenue. But first we had to move the corporate staff from New York to a temporary leasehold in Westport, Connecticut, while we renovated an owned office building in Wilton, Connecticut for the ultimate move of the HQ. This project required detailed analysis of existing leases, and exhaustive financial analysis of various permutations of leasing alternatives. At the time we didn’t have the benefit of a lease database to evaluate which leases could be targeted for the consolidation. We got through the process successfully but not without tremendous effort.

Corporate real estate has evolved into a sophisticated managerial process. With the advent of network technology, advanced process management tools, and smart phone tools, along with powerful cloud based lease management systems, CRE can now deliver impressive financial results, coupled with premium workplace services. These benefits are only possible through the use of advanced information technologies.

From time to time clients raise the question of the difference between corporate real estate and facilities management. In essence, they’re asking why we have two different professional designations since they both seem to have the same responsibilities. But the two professions have distinct differences and responsibilities. Here we explore these differences and attempt to bring clarity to the issue.

Facilities management is primarily an operational role. Facilities managers have the responsibility of managing the day to day operations of enterprise facilities including maintenance, repairs, utilities, energy management,  landscaping, furniture acquisition, and in some cases physical security. Facilities managers are typically members of professional organizations such as IFMA (International Facilities Management Association), which offers training and certification associated with facilities management disciplines.

Corporate Real Estate (CRE) is distinct from FM in that it is primarily a transactional responsibility with focus on leasing of facilities for the enterprise including office, warehouse, data centers, manufacturing, and research facilities. CRE professionals manage the life cycle of property, beginning with site location, building design, acquisition, disposition, and in most cases leasing versus owning company properties. Over time, CRE has become more strategic in its role as steward of the enterprise portfolio; developing long range plans to insure efficiency and cost effectiveness in the portfolio. In the last decade CRE has assumed the role of workplace manager and developed workplace strategies such as desk sharing, office hoteling, and various mobility strategies such as co-working and telecommuting.

CRE professionals tend to join associations which focus on real estate management versus facilities management. The most prominent CRE association is Corenet, an international association with tens of thousands of members worldwide. Corenet was formed from the merger of the International Development Research Council (IDRC) and the National Association of Corporate Real Estate (NACORE). Similar to IFMA, Corenet offers professional training and certification in subjects unique to CRE management.

In many cases, the CRE executive has the responsibility for facilities management and will have a separate FM staff as part of the CRE organization. In addition to leasing the CRE organization will have office design capabilities, engineering, environmental expertise, and IT management capability usually staffed from the IT organization.

For both CRE and Facilities Management responsibilities, it’s crucial that all staff members have a good knowledge and understanding of the new FASB lease standards. While these standards will be more relevant to the CRE managers, who are directly involved in property leasing, it’s important to recognize that the standard applies to all leasing including equipment leasing. FM managers lease various equipment such as vehicles, maintenance equipment, landscape equipment, etc so FM must be cognizant of the FASB standard as well.

Corporate Real Estate and Facilities Management are distinct managerial disciplines, but closely aligned. It’s important that the two disciplines collaborate since     FM should be involved in the property leasing operation to provide input on maintenance and repair issues with prospective properties, input on the energy efficiency of the prospective properties, and other building operational factors. It’s wise to have some degree of cross training between CRE and FM; to enhance the level of collaboration based on common knowledge and understanding of the critical success factors for both disciplines.

There’s always a dispute within the organization aboutthe issue of chargebacks, particularly facility occupancy costs. Department heads typically question the need for charging back occupancy costs, since they don ‘t feel they have any direct control over these overhead costs. But occupancy costs are directly linked to staffing, so it’s logical to burden a department with its share of occupancy costs relative to staffing levels. The argument for chargebacks centers on the need for reinforcing cost containment, as well as maintaining a level of fairness in the organization.

What are the typical costs included in the chargeback? Certainly rental is a primary cost along with utilities, maintenance, insurance, leasehold improvement amortization, and capital depreciation related to furniture and equipment. These costs should be accessible from the lease management system, and department P&L statement. Usually, staffing numbers are available from the department operating statement. In my experience, the finance department would develop a cost per person, and then charge a department P&L with the product of number of employees times the chargeback rate. In my opinion it’s unnecessary to differentiate space allocations based on different office sizes. A standard cost per person is sufficient for the purposes of chargebacks and avoids arguments over space per person differences.

Some years ago our group worked with the Institute of Management Accounting in an effort to develop a broader chargeback metric that was called “workpoint accounting.” This metric included both occupancy costs and fully loaded IT costs such as network costs, prorata share of equipment costs, etc. The idea behind this broader metric would be to account for cost per person regardless ofwhether employees were assigned a workstation or whether they worked on a mobile basis. The effects of this chargeback were quite compelling and made a strong financial case for telecommuting primarily as a result of reduced occupancy cost per person. At the time, the Agile Workplace project at Gartner did several case studies using the Workpoint accounting metric. I recall that in the case of Gartner’s headquarters in Stamford, several scenarios assuming different levels of desk sharing and telecommuting reduced the cost per person dramatically from $19 K per employee down to $15 K per employee. (Total occupancy plus IT costs)

Charging back occupancy costs has several benefits:

·      Provides incentives to conserve space.

·      Provides metrics to analyze desk sharing and telecommuting strategies

·      Provides benchmarks to analyze occupancy costs across the portfolio.

·      Provides a tool to plan new facilities based on headcount projections

·      Identifies disparities across different department occupancies; and exposes space inefficiencies.

Conclusion: Occupancy cost chargeback, is an effective tool for allocating overhead costs to different staff groups. Some organizations strive to develop a P&L statement by department, and having a cost component for occupancy insures a complete picture of profitability. But chargebacks assume that the organization has a robust lease management systemto identify space, and associated leasing costs. It also assumes the organization has an effective human resource system that tracks staffing levels by location.

In March of this year, Sodexo released a study of the corporate real estate profession, focusing on its image and value as a viable career path. Having practiced in the profession for over twenty-five  years, I experienced first  hand the challenges and rewards of corporate real estate as a junior manager, a senior executive and as a broker and consultant . For many years, corporate real estate didn’t enjoy the cache or prestige of other corporate functions such as marketing, finance, and even Information Technology. But this is changing with the advent of new leasing standards and workplace strategies.  So it was with this personal back ground I took a special interest in the Sodexo survey and report.

In a few words, the study did not reveal many surprises. Less than half of the respondents (43.8%) were end users, while the balance were service providers, brokers, and other players in the real estate industry. Nearly 70% of the respondents were male, and the vast majority were seniors (ages 50-59). One surprise was the response to the question: What are  the most important skills in a CRE career? The answer: not technical skills, but interpersonal skills (93%), leadership skills (75%), and analytical skills (74%).

In terms of compensation, the respondents were generally satisfied with their compensation (54%) while 22% reported initially low salary, but rapid growth. The respondents were generally satisfied with the fast pace of CRE as a career, as well as its flexibility, work hours, and work life balance.

In terms of leadership, the respondents were generally dissatisfied with leadership development with 45.2% agreeing that “the CRE profession is in need of strong leaders.” However the respondents agreed that “there is an opportunity within the CRE profession to become a leader,” (52.9%). The other interesting finding is that the respondents agreed that the profession offered long term tenure (57.3%) and was not considered to be a transitional or intermittent career move (60.3%)

In most cases the respondents felt generally satisfied with their image in their organization and the broader market place. They felt appreciated within the department, by external clients, and within the corporate organization.

In general the respondents were dissatisfied that their function had received any degree of promotion or publicity in company media, news releases, web pages, etc . In essence the CRE function was invisible, and kept low key. From my own experience, this lack of exposure in company media, was probably linked to a concern about negative press about real estate, its impact on the environment, its cost, etc. In summary the report put forward a series of recommendations to promote the CRE profession in the broader labor market including “better emphasis on accreditation and education,” better links to the community, ”focused media on what CRE means from a career standpoint.”

The report concluded with a series of insights and implications. The more interesting findings included:

·      Soft skills remain more important than technical skills

·      Work-life balance is excellent but offset by the industry’s fast pace.

·      CRE is in need of leaders but provides opportunities to grow and advance

·      There is a need for greater innovation

·      There is a high level of knowledge and appreciation of the CRE profession among clients and the corporate organization

·      The CRE profession offers many opportunities for personal growth

My bottom line on the report: no surprises but encouraging indicators that the CRE profession is maturing and becoming more self-aware as a long term career option.

Click here for a copy of the report. 

          In June of this year, Corenet Global published a report entitled, “The Future of Corporate Real Estate.” The report covered several major trends which would influence the corporate real estate function. Such trends as sustainability, advanced information technology, globalization, the “gig economy”, urban development, workplace changes, etc. would all have a major impact of the future of corporate real estate.

These trends will certainly have an impact, but I suspect there are unforeseen changes which may emerge that will affect the corporate real estate profession at its core. Here are five developments that may have an impact:

·      CRE becomes the over-all contract manager of the enterprise. CRE deals extensively today with contracts, particularly lease contracts, construction, architectural services, etc. As lease and contract management software evolves, it is quite likely that CRE could become the central manager of all contracts including IT contracts. This will be a sea change for the profession and will have profound implications for organizational structure and responsibilities. It’s possible that CRE and IT could merge into a single asset management entity. There has been some evidence already; particularly with firms that are IT intensive, and see efficiencies in having a single point of control for all contracts.

·      The entire CRE function becomes a candidate for wholesale outsourcing. Companies want to eliminate non-core functions wherever possible, and real estate and facility management have been the target for major outsourcing over the last two decades. Large global service firms like JonesLangLaSalle, and Cushman & Wakefield have the resources, coverage and technology to manage all aspects of the CRE function, and it’s perhaps only a matter of time when enterprise management adopts a total outsourcing model.

·      Many of the CRE tasks will be automated, through the use of sophisticated systems, natural language recognition software, and various uses of robotics. Any task that is repetitive will be eligible for automation solutions. It’s conceivable that 70-80% of the leasing process will be accomplished by an automated process, so that the time and effort to conclude a commercial lease contract will be hours rather than today’s days and weeks. Consider how the mortgage process has been automated like “Rocket Mortgage” which offers “push button” mortgage services.

·      The smartphone becomes the central tool for virtually all CRE activities and data management. The CRE executive will be able to retrieve data on virtually all aspects of the enterprise portfolio. And data input will a simple matter in most cases of scanning, or voice input.

·      Security and Safety will surpass sustainability as a CRE priority. With the possibility of a major terrorist attack like 9-11, senior management will double the resilience of the enterprise, and much of the security upgrades will be the responsibility of CRE. This will be particularly the case in global markets such as mainland Europe and Asia.

These developments are admittedly speculative, but possible. CRE represents a major cost center, asset class, and influence on workforce recruitment and productivity via workplace strategies. One thing’s for certain: change will happen in ways unimaginable today. Planning for the unexpected is becoming a core competence for the wise CRE executive.

         In a recent article in the New York Times, the report described how corporate America is moving from suburban campuses back to urban markets, despite the higher cost of central business district office space. These moves are driven primarily by the need to attract younger (Millennial) workers who prefer the excitement and buzz of urban settings as well as the proximity to public transportation. General Electric exemplifies this trend. On August 22, the company is moving its executive staff from its sprawling campus in Fairfield, Connecticut to a multi building complex in Boston’s Fort Point area. The headquarters will house 800 employees, while other corporate functions will operate from current locations in Cincinnati, Norwalk, Ct. and Schenectady, NY. This disaggregated model is made possible by modern network technology which allows organizations to work seamlessly across both time and space.

         Other companies adopting this strategy are McDonalds, moving from the suburbs to downtown, Chicago, Chemours (a spinoff from DuPont), who plans to remain in Wilmington’s urban core, andKraft Heinz which had 2,200 workers when housed in Northfield, IL, to 1,500 now after their move to downtown Chicago.

         The higher cost in rental rates are typically offset by the reduction in over-all space, financial incentives offered by the local jurisdiction attracting the new high profile tenancy, and the benefits of recruiting high quality talent. Motorola reports that since moving to downtown Chicago from the suburbs they get four to five times the response when they post jobs downtown.

         CRE executives are smart to consider a disaggregating strategy, not only for major headquarters offices but for other operations such as customer service centers, administrative operations, call centers, etc. I recall the move of a call center from a headquarters site in New Jersey to a standalone facility in Allentown, Pa. Not only did we save space, but we also tapped into a good labor market, and lower rental rates. All in all a much better financial result and recruitment effort.

         It’s essential to utilize a robust lease admin system when planning a disaggregating strategy. The system will identify lease termination dates that will need to be aligned with a possible relocation; it will provide rental rates as a comparison to market rates in the targeted relocation market; and it will give quick access to those locations that make sense for a disaggregation strategy. It’s wise to engage a design consultant with the necessary programming skills to undertake an analysis of functions that can be split from the primary location without interrupting work flow or operations. Invariably management will be surprised by how many functions can operate remotely using network technology and collaboration applications. Once you complete this analysis you can then decide where to relocate the primary location and where to house the disaggregated operations and staff. In many cases these operations can be collocated with existing staff to leverage existing support staff and technical infrastructure.

         I recall a few years ago, there were pundits who declared the death of the central business district, and the rise of “edge cities” and exurban campuses. Well, this prediction was clearly false. Companies have rediscovered the benefits of the urban core, and renewed a move back to down town. This trend will continue into the foreseeable future, and will bode well for urban redevelopment and renewal.

Security and safety is now high in the minds of CRE managers, because of the eruption of violent terrorist attacks worldwide. It seems a day doesn’t go by when some violent outbreak takes the lives of multiple victims. In many companies the CRE executive is responsible for physical security and thus, must develop a plan for insuring the safety of people and assets in the workplace. Typically the IT department has responsibility for information security, but it’s wise for the CRE executive to coordinate with the CIO on security. So what are the key priorities that need to be addressed in a workplace security plan?

·      Perimeter security- It’s helpful to think about physical security as a series of concentric circles. The outer most circle will define the outward most dimension of physical access. In most instances, this would be the front entrance to the office but some facilities are situated on a campus, and thus, access may extend to the parking lot or even a general front gate of the campus.  For most office locations the front entrance will be the primary point of access, and would require some measure of control, either a card reading device in combination with a receptionist during normal business hours. 

·      All employees are provided with an ID card that also serves as a key to enter via a card reading access point. Some companies require both a card reading and pass code to allow ingress.

·      The next layer of security is for controlled access to sensitive areas within the office area such as server rooms, records storage, mail rooms, or other areas that contain business confidential information. These areas will require card access, programmed for specific individuals.

·      The security system is usually both an access control and fire and smoke detection system.  The CRE executive will plan on periodic drills to test system integrity as well as prepare workplace staff for appropriate evacuation protocols.

·      Security standards and procedures. Most likely the human resources department will be responsible for developing and maintaining security standards, but the CRE executive will need to insure that physical security is addressed in the procedures. Such procedures will define levels of security, access provisions,  and disaster recoveryprotocols. In terms of disaster recovery, it’s wise to conduct periodic drills to prepare employees for “what if” scenarios. I recall the 9/11 attack in NYC and how one company evacuated its staff to a disaster recovery siteand was fully operational within hours after the attack.

·      Work-at-home security and safety. Many companies now provide for home working, and thus, must be mindful of security and safety provisions. Employees must be guidedto insure a safe and secure work area at home. This would include the ability to secure company confidential informationand company assets such as laptops, printers,etc. I recall that the HR department would require at leastone inspection of the employee’s home work area for both security and safety compliance. This was required by the company’s insurance provisions.

Summary: Workplace safety and security is a top priority for the CRE executive. In most cases the building owner will provide the necessary perimeter and fire detection technologies. But the CRE executive must insure that interior office security and safety is covered along the lines outlined above.  Having a security plan and conducting periodic drills will insure that most security and safety risks are adequately addressed. 

     A key process for the CRE executive is overseeing the site selection process, particularly for major office, data center, or manufacturing sites. I’m going to focus on office site selection since this typically represents the most frequent type of leasing actions. In general, the CRE team will depend on their real estate advisors to conduct the site search, and report back with eligible site alternatives. The goal is to winnow the candidates down to at least two, then enter into negotiations with both to create competition and thus, obtain the best terms and rates.

         So what are the key site selection criteria to be used by the real estate advisor?

·      Target market: The first step in the site selection process is to agree on the target market. Assuming a relocation of an existing office site, the preference will be to relocate within the same area to minimize disruption in staff commuting patterns and customer access. For strategic reasons, the site may represent a major change such as a move from the central business district to the suburbs. But this is the exception. The CRE executive will want to know the real estate market outlook, from the standpoint of trends, rental rates, availabilities, absorption, etc.

·      Proximity to transportation services: What transportation services are available to the site alternatives? What about parking?

·      Safety and security: What are the crime statistics in the targeted market? How do the alternative sites rate in terms of physical security? Are there any recent incidents to suggest a safety risk?

·      Space availability: What are the availabilities relative to usable and rentable space?  What are the loss factors, i.e. what is the ratio of usable to rentable space? How is the space configured?  And is the space contiguous or split between floors?

·      What is the energy efficiency of the alternative sites? Has the building structure been designed and constructed with the latest in energy standards such as the LEED standard? What is the current electrical cost per kilowatt hour? Is electrical a separate expense or included in the expense stop?

·      What are the key provisions in the standard building lease? Renewal options? Expansion options? Termination options? How does the asking rental rate compare to comparables in the local market? What are the terms relative to escalations? And how are escalations determined? Does the tenant have the right to audit annual expenses?

·      What does the building owner provide relative to leasehold improvement allowances? Is there any rent abatement? Are they any other tenant incentives? Is the tenant allowed to use its own capital for improvements?

·      Are there any restrictions or impediments that would reduce tenant flexibility or operation? For example limiting hours of operation? Using landlord contractors? Using landlord building services?

Conclusion: A major responsibility of the CRE executive is to oversee and direct the site selection process. The process will vary depending on the type of structure. For example, a major retail location will require extensive analysis of customer demographics, buying patterns, competitive outlets, zoning, etc. A data center requires yet another set of criteria particularly issues relating to electrical power availability, rates, and growth potential. The security issues such as fire, earthquake, and flooding represent priority considerations in a data center selection. Manufacturing sites take on another set of unique characteristics such as labor availability, logistics, proximity to suppliers, etc.

         Perhaps the single most critical element in the site selection process is competition. The CRE executive will want to insure that the final two site alternatives are put through a competitive process, both in terms of pricing and terms. And that all the key site selection criteria are addressed in the process.

        It’s been over a week since the British vote to exit the European Union, and the situation is worsening for property owners in the UK. The greatest impact is happening in the financial markets. Real estate Investment trusts (REITs) are experiencing increased redemption causing some of the biggest funds to halt outflows as a means to protect values for existing investors. The three funds- run by Standard Life, Aviva Investors and M&G Investmentseach “pointed to heightened levels of stress in the market prompting investors to sell,” as reported today in the New York Times. Here are a series of likely impacts for US firms with property holdings and operations in the UK:

·      The uncertainty of the Brexit impact will increase EU regulatory scrutiny which will impact earnings negatively

·      Financing will be increasingly difficult putting downward pressure on loan to value coverage.

·      The limitations on immigration will put stress on labor availability, and most likely cause labor rates to increase.

·      Tenants will reassess current leases and attempt to renegotiate lease term and rates.

·      There will be increased uncertainty relative to the regulatory environment.

·      Reassessment of legal and tax obligations will certainly be required. Contractual obligations with UK entities may require renegotiation.

·      CRE managers can expect continued low cap rates in the US as the Federal Reserve holds the line on interest rates. However the volatility and risk in the UK finance markets may result in higher rates that will offset lower Federal rates.

·      The British pound will continue to weaken, impacting earnings and capital values which may lead to significant “mark-to-marketlosses,” according to a recent report from Deloitte.

·      Perhaps one of the greatest areas of uncertainty relates to the possibility of other member countries exiting the EU. US CRE managers will most likely have to re-evaluate their entire European portfolio along with their UK portfolio.

·      Political upheaval in European countries may lead to further exits from the EU as a result of elections in France, Germany, and the Netherlands, compounding the market and financial risks.

Conclusion: The Brexit vote has created a firestorm of uncertainty with the greatest impact happening in the UK property markets. The ripple effect of distress in the banking industry, declining currency values, pressure on redemptions, downwardpressure on rental rates, all will wreak havoc on US CRE managers with leases and real estate investments in the UK. Amidst the chaos comes possible opportunity. CRE managers should be alert to opportunities to renegotiate lease terms and rates wherever possible and to consider strategic investments as the markets continue to deteriorate.

         Earlier this week, the world was stunned by the British vote to leave the European Union within 2 years.  The most likely impact on corporate real estate markets and operations will be immediate. While equity markets have recovered somewhat from the lows, it’s unlikely that the stock market will return to its historical highs of last week any time soon.

         The first and most immediate effect will be substantial downturn in the UK property markets. In a Wall Street Journal article on Tuesday, the article reported a job loss in the UK of nearly 100,000 workers. Publically traded real estate companies saw sharp drops in share price. UK real estate investment trusts also saw declines in values. There’s wide spread speculation that investment in UK property will stall, although the Chinese have indicated a desire to increase UK investment opportunistically.

         It’s likely that international property investment will increase in the US as an alternative to investment in the UK. This may result in increased demand and pricing in such US markets as New York, Chicago, San Francisco. Similarly analysts predict increased demand in other global markets such as Frankfurt, Paris, Dubai and Singapore.

         In the short term at least investors will take a “wait and see” approach before making any significant investments. However, CRE managers may want to accelerate leasing deals to take advantage of possible lower rental rates, and more generous tenant allowances in UK markets. Analysts predict a melt down for UK based banks. This will certainly affect banking stocks and may result in substantial declines in lending rates. This is good news for CRE managers who may want to take advantage of lower rates in UK property deals. It’s uncertain how Brexit will affect European property markets, although analysts predict a decline in values with UK properties leading the list.

         The Journal article saw major declines in several UK REITs. Shares of the two biggest U.K. real-estate investment trusts, Land Securities PLC and British Land PLC, tumbled 17% and 24%, respectively, since markets closed last Thursday, the day before referendum results were announced. 

Conclusion: The Brexit vote creates enormous uncertainty and thus, CRE managers will most likely revisit leasing and investment plans in light of this sudden change in both the UK and European markets. Uncertainty increases risk and risk is a bad thing in the real estate industry. 

In the last several Blog posts, I’ve explored the various steps in becoming a CRE executive.  Today I want to address the question of CRE organization. There is no one organizational model that is ideal. But there are various structures thatfit the needs of most business entities. Below I explore three popular models:

Functional: Here the organization is structured around the major disciplines needed to manage a CRE portfolio. These would include design, those actions needed to create the interior layouts for a particular office location. In many cases the design manager serves as a procurer of interior design and architectural services. Some companies maintain master agreements with design firms, while others recruit on an as needed basis. The next discipline would be leasing specialists. These individuals conduct site searches and then negotiate lease agreements with several building owners, and then finalizing a deal with the most competitive arrangement. The third discipline would be project management. This role oversees the build out of a project whether it’s an office, retail, or industrial site. The project manager also supervises the work of a contractor as well as orchestrates the move of the tenant organization.  The final discipline is facility management. These individuals take over from project managers, and manage all on -going tasks related to the occupancy of the leasehold including maintenance, security, safety, and overseeing the services of the building owner. Most CRE organizations also require a lease administration group who manages the lease portfolio, relating to lease and escalation payments, lease abstracting and the day to day administration of the lease management system.

Outsourced: Here most or all of the key CRE disciplines outlined above are outsourced to one or more contractors typically on a geographic basis. Many of the major real estate service firms such as Jones Lang LaSalle, Cushman and Wakefield, or other full service firms can provide not only the transactional services such as leasing, but can offer the other services as an integrated capability. Outsourcing has grown in popularity as companies attempt to limit the size of internal non-core staffing. The role of the CRE organization is to focus on planning, budgeting, strategy, and to supervise the work of the outsourced services. Some CRE organizations are decentralized to the business units, and the CRE executive interacts with the unit CRE groups as well as corporate staff on matters of policy, capital approvals, and functional oversite.

Hybrid CRE Organization:  This model combines the functional orientation with the outsourced model. The hybrid model is typically a small group of specialist managers who oversee the activities of the outsourced service firms. In some cases, the CRE group is aligned with the IT group, particular if there is an intense orientation toward IT infrastructure and services such as a “cloud computing” company that maintains a large portfolio of data centers. Another situation requiring specialized services is retail. Store location requires specialized capabilities that analyze market demographics and other variables important to a big box retailer.

Conclusion: There is no one organizational model that will suit every company. Organizational structure is as much about company culture, as functional needs. With advances in information technology, there is a clear trend to minimize staffing, and rely on service contractors in conjunction with powerful management systems to eliminate the need for multiple layers of CRE organization.  The astute CRE executive will be a skillful outsourcer of CRE services and user of information technology. Keeping the CRE organization lean and technology enhanced is clearly a winning strategy in today’s global and competitive environment.

In our continuing series about how to become a CRE executive, the conversation would be incomplete without a brief review of the IT basics relating to CRE management. The CRE executive will need to become a close collaborator with counterparts in the IT organization. Knowing the IT vocabulary is the first step in building this partnership. There are two major categories of CRE related IT

First, are the IT issues relating to buildings. This would include broad band cabling, WIFI capability, communications gear such as PBX and DSL services, and the array of servers, routers, file storage, and other IT equipment needed for modern office operations. In most cases the IT organization will have the primary responsibility for IT provisioning, however, the CRE organization must provide the appropriate physical infrastructure for the IT equipment and cabling.  Physical security is a priority, and in many cases the CRE organization is tasked with providing the necessary security infrastructure including sensors, card readers, and where necessary surveillance TV cameras. Many CRE organizations are responsible for guard services which are typically contract services.

The other major category of CRE related topics is the whole range of software applications designed to manage the various CRE processes. It is wise for the aspiring CRE executive to become familiar with the key applications and to gain an understanding of their functionality and cost. I wrote a blog post a year ago (IWMS Priority Applications: What’s Important? What Can Wait?-July 2015) about prioritizing these applications. To summarize, I suggested that I would begin with a robust lease management system since the foundation of CRE operations begins with the lease portfolio. The next priority is space management functionality. Here the application gives the user the ability to create blocking and stacking designs from the building layouts, and keyed to personnel data.

The third category of functionality is building maintenance management, which provides records of building maintenance tasks, both preventive and predictive. The final category of functionality is a robust project management module. Here the application arrays all the key tasks in various building and leasing projects, and ties project milestones to a preplanned schedule. These various modules can be procured separately and tied to a common data base via middleware. Or the CRE group may opt to acquire an integrated solution (IWMS) where the various modules are fully integrated into a single enterprise level software solution. Another major decision is whether to license the software and operate within your server environment or whether to “rent” the software via a cloud provider. Your IT organization can give you advice on the best approach, although cloud solutions are clearly becoming the preferred alternative.

The final category of IT related topics which need to be fully understood by the aspiring CRE executive is the whole subject of data center facilities. With the advent of cloud computing, and the growth of virtualization, data center growth has exploded over the last ten years. The modern data center is a highly complex and sophisticated structure, requiring significant investment in electrical power, HVAC, cable management, and redundant back- up generators and UPS systems. It’s not uncommon to see data center construction costs exceeding $1000 per square foot for a highly redundant, and fault tolerant center. From my experience the IT organization will take the lead on a data center project, but the CRE organization will play a key role in site selection, leasing, and building design so it’s important to gain a basic understanding of data center design, infrastructure, and the priorities for site selection.

As I mentioned in my last blog post on becoming a CRE executive, there are many roads to achieving a position as head of corporate real estate.  It’s critical that the subject of IT become a key knowledge base for the aspiring CRE executive.  IT is transforming the nature of work and the workplace. I don’t think it’s an exaggeration to assert that the successful CRE executive of today must be a reasonably knowledgeable information technologist to compete in the modern digital era.

Entering a career in Corporate Real Estate can take many paths. During my career I met countless CRE executives with myriad backgrounds. Some moved from real estate services such as brokerage or consulting. Others came into the profession as architects or engineers. A popular avenue is facility management, since the disciplines of property and maintenance management are a natural stepping stone to real estate management. I recall one executive who was a senior vice president responsible for corporate manufacturing. He was close to retirement and requested a role as the head of real estate services. He had no knowledge or experience in corporate real estate but as a seasoned senior executive he was imminently qualified to lead a major corporate function. What I recall is how much he enjoyed the specifics of corporate real estate, particularly the various deals that required his review and approval. I had written a thesis as part of my MBA which made a case for my company to enter the real estate development business. The senior executive read the thesis and invited me to corporate headquarters to launch a real estate development program. We formed a development subsidiary and subsequently entered into a number of joint venture developments, anchored by the company’s sales and marketing branches. Thus, the executive parlayed his senior management skills and experience into a major development strategy.

Perhaps the most important knowledge base required for a career in corporate real estate management is the subject of corporate finance. It’s imperative that the executive has a good working knowledge of discounted cash flow, accounting, and balance sheet structure. This is particularly true now with the advent of new lease accounting standards which require that all leases of one year or more in term be placed on the balance sheet as both assets (value in use) and corresponding liabilities. There are various professional development courses offered by universities and professional organizations such as Corenet that cover the basics of real estate finance and accounting. Some of these courses are offered on line so there are several options for the aspiring CRE executive to gain a working knowledge of real estate finance.

Another avenue for gaining knowledge of commercial real estate is to study for a real estate brokerage license in your local area. In fact, you may want to spend some time as a commercial broker to gain experience and learn first hand the rudiments of commercial leasing and deal structuring. One option is to seek a summer internship in corporate real estate. I worked with a number of summer interns over the years, and I recall how beneficial the experience was for both the interns and the CRE department. Many of these interns went on to successful careers in corporate or commercial real estate.

Another critical knowledge domain for the aspiring CRE executive is the subject of market analysis. CRE executives must have a working knowledge of real estate market dynamics; the effects of supply and demand on pricing, absorption, and property value. Many of the large real estate brokerage firms provide quarterly market reports on line. It’s a useful exercise to study these reports to become familiar with the terminology and key variables in real estate market analysis.

In summary, I’ve touched on a few of the knowledge areas that must be mastered along the road toward becoming an effective CRE executive. I’m frequently asked if taking a formal course in real estate finance and marketing is the right strategy for entering the CRE management arena. I would certainly endorse this approach; although such an option requires significant investment in time and expense. I prefer the option of learning on the job, supplemented with short courses offered by such associations as Corenet or IFMA.

In my next blog post I’ll delve into the subject of real estate technology and what the aspiring CRE executive needs to know for starters.

In this blog entry I would like to introduce the topic of CRE leadership and management. I hope to explore the topic over the next several weeks with the hope that these personal observations will be useful to those readers who aspire to make corporate real estate management a long term career. As background I spent nearly thirty years in various CRE jobs both at Xerox and later at Dun & Bradstreet. I also worked as a broker at Jones Lang LaSalle and as a consultant at PricewaterhouseCoopers. In the last ten years of my career, I shifted to the IT industry as a technology analyst at Gartner Inc., and focused on real estate software solutions, most notably Integrated Workplace Management Systems (IWMS).  Also at Gartner I led a major research study in conjunction with MIT on the changes in the workplace enabled by information technology. The study report, “The Agile Workplace,” identified trends that are now playing out and have become mainstream today.

It’s with these thirty years of experience that I presume to have some insights in the success criteria for effective CRE leadership and management. Notice that I distinguish between leadership and management. It’s an important distinction and one that must combine to ensure success as a CRE executive over the long term.

In terms of management skills, the CRE executive must develop impeccable planning and operational capabilities. The superior CRE executive must approach planning from both a strategic and tactical perspective. On one hand the planning should address long term objectives, and integrate portfolio plans with business strategy.  On the other hand, the plans must have a short term focus and address priorities important to the business units and corporate management. Obviously the plans must address financial goals, but also address employee productivity and satisfaction. The CRE executive is not only a portfolio manager, but the executive must also be a workplace manager and provide the environment to support workplace flexibility and employee collaboration.

The CRE executive must have a strong grounding in financial management and have astute analytical and budgeting skills. In addition, the management skill set should include strong negotiating skills, as well as strong communication skills. In this regard, I encourage CRE managers, to submit papers to professional publications such as those for Corenet and IFMA. I would also encourage CRE managers to submit proposals for presentations at both national and regional meetings of these organizations. These communication efforts strengthen the manager’s personal brand and enhance visibility within the industry.

On the leadership side, I would begin with the topic of innovation. The successful CRE executive develops the ability to seek out opportunities for positive change by creating a vision for future success. When MIT and I explored the topic of the agile workplace we discovered amazing examples of workplace innovation, both in terms of strategy and implementation. Along with innovation, the successful CRE executive is an effective team builder and collaborator not only within the CRE organization but within the over-all corporate organization. Listening skills are crucial to effective leadership, and those CRE executives who rise to the top are distinguished by their ability to gauge expectations and “sense” the underlying mood of the enterprise, what I call “reading the tea leaves.”

This leads me to the final topic under CRE leadership, and that’s a highly developed set of political skills. The CRE executive must create and sustain a viable network of advocates within the corporation, and within the broader real estate industry.  Invariably the CRE executive will encounter “push back” even hostility among individuals or groups primarily around change initiatives. I recall the battles I fought in the early stages of workplace innovation, particularly by those middle managers who resented the loss of private offices, or the advent of telecommuting which was perceived as a loss of control.  With these political battles, it’s imperative that the CRE executive has built coalitions and relationships that can be brought to bear when needed.

In the weeks ahead I’ll drill down into these topics, and hopefully provide a roadmap for those readers who are aspire for a career in corporate real estate management. In many respects I believe we‘ve entered a new phase of CRE management which will be highlighted by greater senior management emphasis on portfolio and workplace excellence.

Performance management in corporate real estate has matured rapidly over the last ten years due primarily to the evolution of sophisticated real estate management systems. With the advent of integrated workplace management systems(IWMS), and now cloud based point systems (like Visual Lease), CRE organizations have a wide range of options in the type and utility of portfolio management systems. A key feature of these systems is the ability to customize performance management to fit the specific needs of the organization. For example, some organizations prefer to have the performance measures be “role based.” Here, the system provides different metrics that are specific to different roles in the CRE organization: leasing specialists, project managers, maintenance managers, etc.

Here are my top performance  metrics that are generally applicable for most corporate real estate portfolios:

·      Cost per square foot. Perhaps the most general performance metric of a corporate real estate portfolio is the unit cost per square foot. This would reflect the annual total cost of the portfolio. Separate costs for leased facilities and owned properties are usually presented. For owned properties, I recommendestablishing market values to assess marketability. These assessments can usually be completed by your real estate advisors, on a periodic basis.

·      Square foot per employee:  This will reflect the efficiency of the office portfolio on an annual basis. For organizations that have adopted shared office techniques like office hoteling, the ratio should be lower than for traditional 1:1 (workstation per employee) utilization.

·      Leasing Churn: This metric reflects the percentage of leases renewed, retired, or extended on an annual basis. The higher the churn rate, the less efficient the portfolio. Ideally, CRE managers prefer to stabilize the portfolio with selective options, or longer lease terms. Lease term should now be considered in the context of the new FASB standard which puts the net present value of all leases of more than 1 year on the balance sheet as assets and corresponding liabilities. (beginning in early 2018) The longer the lease, the higher the values, so tradeoffs between stability and churn will have to be made.

·      Escalations as a percentage of total annual rental:  This metric will reveal whether a specific lease is abnormally costly as a result of excessive CAM or other charges. It will flag the lease for a potential audit to determine if there are over-charges from the landlord. One possibility is the landlord is erroneously including capital expenditures in the CAM calculation which would greatly inflate the cost.

·      Employee satisfaction with the work environment:  Consistent with the use of the “balanced score card,”  CRE managers should survey representatives from the employee base on their satisfaction with the work environment. Normally, surveys are conducted bi-annually, on representative facilities. The degree of satisfaction will provide insight on office standards, décor, and services. In my own experience, these surveys combined with cost and utilization metrics cited above, give useful perspectives on prioritizing leasing actions.

·      Sustainability:  Portfolio performance metrics would be incomplete without measuring the environmental quality of the portfolio. Here attention should be paid to the energy efficiency, carbon footprint, or other indicators that reflect the environmental quality of the portfolio. Many corporations today place significant emphasis on sustainability; so it’s wise to include some rating system in the portfolio performance dash board.

Conclusion:  Performance metrics give the CRE manager and his team the necessary indicators on how the portfolio is performing on a cost, utilization, environmental ,and customer (employee) satisfaction basis. These metrics should be readily available from the Lease Management system amplified with survey and environmental data, and customized to meet the priorities of the organization. The old adage, “You can’t manage what you can’t measure,” certainly applies to real estate portfolio management.

Space (square footage) is the universal unit in corporate real estate management. It defines the basis for rental, allocation of costs to different occupant groups, is the primary factor in developing space requirements for different utilizations such as offices, work stations, conference rooms, storage spaces, etc.  Most companies develop a set of space standards as a means to design office layouts, allocate space to various functions, and use to forecast space demand over time.

In today’s mobile era, with the use of smart phones, WIFI, and mini-pads, work style has become universally mobile. Typically, most office spaces are unassigned, except those job functions which require on-going office accommodations and complex information technology such as call center employees, administrators, stock traders, etc. Managers usually require private offices in their role as supervisors, but this is rapidly changing as Millenials move into management positions and typically prefer the informality of open plan workstations. With the advent of office hoteling (i.e. unassigned workstations used on a reserved basis) the ratio of headcount to office space has increased significantly, with ratios of 2:1, and even 4:1 employees per workstation is now common.

So what are the various techniques to plan and allocate office space? First, there’s the issue of space definition. BOMA (The Building Owners and Management Association) has developed space definitions which are broadly used in the commercial office industry. BOMA’s original space standard was published in 1996. An update was released in 2010 referred to as “Version B.” The original 1996 version is referred to as version “A.” In both cases the standard defines usable, rentable, and gross space. It also clearly defines common areas, which form the basis for CAM or common area maintenance charges. The new standard includes definitions for storage space such as basement spaces, and also outside spaces such as balconies, etc commonly used in tropical markets.

Most CRE managers and commercial office landlords subscribe to the BOMA standards, which are used in the calculation of rentable space. Space measurement is universal in most US markets with the exception of Manhattan, where it seems as if the rentable space is anything the landlord says it is.

The first step in developing a space plan is to reach agreement on a planning factor usually expressed as square footage per employee. If the organization has a high number of mobile employees, then a ratio of 4:1 or 5:1 (square foot per employee) is used. With an office of primarily stationery employees such as a call center, or trading floor, then the ratio would be 1:1. Other standards would include space for conference rooms, training rooms, storage, etc.  A design consultant usually is engaged to translate the space forecast into a space layout.

In terms of chargebacks, most CRE managers allocate space and cost on the basis of employee utilization. Occupancy costs are fully loaded with rent and associated costs and then allocated on a pro rata share to the user organizations. In most cases, the standard ratios cited above are used in the calculation. For example, if the ratio is 2:1, and the company standard is 100 sq. ft per workstation, then the allocation is 50 sq. ft per employee times the number of employees times the fully load occupancy cost per square foot. Occupancy cost will vary by organization depending on whether the rental is net rent versus gross rent. With net rent other occupancy costs will need to be added such as utilities, taxes, insurance, maintenance, and capital amortization. With the new FASB standard, rental will now appear on the balance sheet as both assets and liabilities. For purposes of chargeback, it will be the straight line amortization of rental that goes into the calculation for operating leases, and a separate line item for interest expense relative to financing leases. Chargebacks can be set up in the lease management system, so that monthly allocations are automatically charged to other units within the organization or to separate sub-tenants.

Space management is one of the critical responsibilities of the CRE executive, and having a robust lease management system that ties with the space management module is a key to a successful real estate andfacilities management program.

Back in November of last year I cited a study by CBRE that seemed to debunk several myths about the Millennial generation and the office environment. The essence of the study was that while Millenials had certain preferences and attitudes about the workplace, in general there was little difference between the generations about their desire for workplace flexibility, preferences for urban settings, more collaboration, and more autonomy.  However, in a recent article about Millenials in the March 15 issue of Fortune magazine, the theme of the article is about how to attract and retain the Millennial generation. This is a different question than the focus of the CBRE survey, and it raises questions about how Millenials will influence the locationand layout of office space as a way to attract the Millennial worker. As a reminder, Millenials are defined as those born between 1981 and 1996.

I’ve written about co-working as a good model to define the Millenial preference for workplace location and design. Specifically Millenials   first and foremost  demand flexibility in the workplace. This would mean that Millenial workers would be offered maximum flexibility in where and when they work. In essence Millenials wantmaximum work/life balance. The Fortune article quotes an HR executive from PWC who said that their surveys reflected that95% of their Millenial workforce demanded workplace flexibility and that  a quarter of the Millenials surveyed said that their work/life balance was still difficult to maintain, despite policies that offered telecommuting, flexible work schedules, and other practices aimed at improving work/life balance.

Millenials prefer urban locations for both living and working. Thus, corporate real estate executives should consider urban locations for future office sites to attract the young professional worker. Urban redevelopment in most major cities has been prompted in part by the MIllenial demand for funky urban settings. This is particularly true for such urban markets as Silicon Alley in New York and the South of Market development phenomenon in San Francisco.

Another key to the Millenial demographic is the high value they place on environmental issues. Millenials are motivated by a sense of purpose, and one key value that they would look for in an employer is the commitment to sustainability. Maintaining high environmental standards in office design and operations will be a plus when recruiting Millenials.

The Millenial generation has little patience for hierarchy and status. This attitude suggests that office design needs to reduce the traditional focus on hierarchy as a measure of office size or type. Enclosed offices are becoming obsolete, and even CEOs now opt for an open office to project an egalitarian and non-hierarchical image. In many cases, non assigned workstations have become the norm, where office workers use reservation apps to reserve a workstation or conference room. The Millenial generation is highly tech savvy and thus, offices must be equipped with the latest in network technology to include WiFi, broadband connectivity, and high speed printing capabilities.

Perhaps the single most important variable in the Millenial workplace conversation is the notion of corporate culture. The Fortune issue cited above which focuses on the 100 best companies to work for, cites corporate culture as the most important variable in attracting the young professional. Workplace design goes a long way in establishing and sustaining a corporate culture.  Thus, how a workplace is laid out, its décor, its perks suchas health facilities and food courts, and its focus on collaborative spaces all taken together reflect a culture of teamwork, purpose, and wellness, all values that are important to Millenials.

The corporate real estate manager has a critical role to play in attracting and retaining a quality workforce. And the primary target of these new recruits is the Millenial. Thus, designing a corporate real estate strategy that is Millenial friendly should be a top priority for corporate real estate.

It was early summer of 1995, and I was aboard a French SST Concord traveling at roughly Mach3 from New York to Paris. The CFO of my company had received an alarming call from European headquarters. Apparently the General Manager of the French company had unilaterally contracted with his brother-in-law to build out a new French headquarters in a suburb of Paris. The GM had not put the project out on competitive bid, and it was feared that beyond the conflict of interest there was the specter of kick-backs and other fraudulent issues involved. My mission was to confront the French manager with this issue and attempt to shut down the project pending a competitive bid process. Needless to say the French manager refused and was subsequently fired by senior corporate management.

This brief tale highlights some of the more exotic issues with international real estate management. As a general statement, Europeans are quite independent and insist on a degree of autonomy in running their businesses. In managing a far flung international portfolio, it’s wise to have local advisors overseeing projects and lease portfolios, to inject a level of local control in the process.

So what are some of the best practices needed to manage an international portfolio versus a US only portfolio? From my experience, here are five that top my list:

·      Understand local cultures and practices and attempt to work within them wherever possible. Avoid imposing standardized policies and standards; it will only antagonize local management and slow down the process. Maintain a level of flexibility and use local advisors to handle lease negotiations and project management activities. Consider using advisors that have pan-continental services, with offices in the US to insure coordination. Such firms as Jones Lang LaSalle or Cushman and Wakefield are examples of international service firms with a global presence.

·      Be mindful of unique real estate practices. For example, in the UK there’s a practice called “upward only rent reviews.” This refers to the somewhat bizarre practice of only escalating the rent periodically. US practitioners are typically bewildered by these local industry practices.

·      Insure that the lease management system has language and currency translation capability. It’s critical that international portfolios can be normalized both in currency and space data. Most international portfolios are denominated in metric units such as square meters versus square footage.

·      Involve your local advisor in lease and other contract negotiations. Perhaps the greatest risk in negotiations is differences in language. I recall negotiating a lease in Japan when my counterpart kept saying “hai,hai,” to many of our deal points. I wrongfully interpreted this response as his agreement. But I later learned that “hai” means “I understand,” not “I agree.” Big difference!

·      Integrate the international portfolio into the over-all real estate database, to provide a company- wide view of the real estate portfolio. But have local lease administrators update and maintain the database to insure language, currency, and space accuracy from country to country. I would typically designate someone in the country’s finance group to take on this responsibility, and report on a dotted line back to lease admin in the corporate office.

Conclusion: Managing an international real estate portfolio requires focus on local practices, cultures, and differences in language. But beyond these local differences, real estate management is essentially uniform in the underlying economics of the transaction whether in the US or internationally. Understanding how the concept of discounted cash flow affects the economics of the deal is true whether in New York, Amsterdam, or Tokyo.

In my last Blog posting I covered the subject of co-working; an office concept which entails using office space on a shared basis. Unlike executive suite operations such as Regus serviced offices; co-working is less formal, collaborative and aimed at the millennial generation. Co-working is growing rapidly in most major urban areas, particularly in central business districts. The outlook for growth is stunning, with nearly 2000 locations anticipated within five years. One of the most successful operators, Wework,  now has a market cap of over $5 billion, with no slowing in growth expected.

But co-working is not without its drawbacks. Here are the major issues I encountered in researching the topic:

·      Interruptions: Perhaps the greatest complaint cited in co-working is the distractions from working in group settings. While private work spaces are available, the incremental cost can be prohibitive for the individual entrepreneur. Also for small work teams, the ability to have private meetings is limited.

·      Security: Co-working facilities have limited security which raises the specter of theft. And many co-working facilities have limited storage capacity for laptops, files, supplies, etc. In addition unless the individual can use private workspace or conference facilities, the issue of private conversations or phone meetings is typically compromised.

·      Legal issues: Co-working arrangements are more like health club memberships rather than traditional lease agreements. On one hand this provides a level of flexibility for the co-working user to cancel on short notice, but it also could result in inconvenient termination by the co-working operator.

·      Inconvenient individual office assignments: In most cases the co-working user does not have an assigned office location. This means that unless the user arrives early to secure the most desired location, they may end up next to the front entrance or some other undesirable location. Assigned locations typically require an incremental cost.

·      Undesirable co-working neighbors. Another complaint that comes up in the dark side of co-working is the problem of working with jerks. These are the users who are loud, profane, and just basically obnoxious.

·      Lack of team culture: Another complaint about co-working is the inability of work teams such as a corporate sales team, or research groups to develop a sense of identity and culture typically characteristic in traditional office environments. Additional cost would be required to secure dedicated space such as a separate team room, but this diminishes the practicality of operating in a co-working space.

There are many advantages to co-working, and for many younger free-lancers the co-working alternative provides the services, infrastructure and collegiality, that is missing in a work-from- home set-up. For corporate users, co-working provides another location alternative for its mobile workforce. But potential users of co-working space should carefully evaluate their circumstances, priorities, and needs before committing to the co-working alternative.

One of the early research notes I wrote at Gartner in 1999 was on the executive suite operator, Regus. I was intrigued with this company in the context of mobile office alternatives. Regus provided high end fully serviced and provisioned office space for individuals or small groups on various pricing schemes. Regus was growing quickly butsuffered from the tech bust in the early 2000’s and went bankrupt in 2003. Regus has since recovered and is now one of the leading providers of executive suite offerings.

I recently revisited the subject of co-working and discovereda huge industry that spans the globe with over two thousand locations, principally located in major metropolitan areas such as New York, Chicago, San Francisco, London, Hong Kong, etc. Co-working as distinct from executive suites like Regus, was invented in 2005 by an entrepreneur, Brad Neuberg, who started a cooperative called the “Hat Factory.” It was a small team of tech workers who formed the nucleus of the co-working site and now the concept has grown exponentially with over 2000 co-working locations worldwide.

The primary driver of this growth is the rise of the contingent worker, which represents about one third of the US workforce according to government estimates. With the advent of mobile technology and cloud computing, millennials, those between the ages of 20-35, seek non-traditional work environments as well as a sense of community. Co-working meets these needs by offering informal and edgy workplaces, and a spectrum of services that might include WiFi, marketing training, social events, and even conferences aimed at the young, independent entrepreneurs.

One of the fastest growing co-working companies is WeWork, founded in 2010, by Adam Neuman and Miguel McKelvey in New York City. WeWork is now the fastest growing lessee in the United Sates. It now has over 52 locations and is reported to be adding 3-5 locations per month.  With 45,000 members, WeWork recently received new financing of $355 million, and is valued at over $1 billion. It enjoys a 40% profit margin, with a 98% occupancy. Investors include JP Morgan Chase, Goldman Sachs, and Mort Zuckerman who is also a key board member. WeWorkprovides a broad spectrum of services and amenities, including free beer, as well as offering group health insurance.  Pricing starts at $45 per month for entry level membership up to $500 per month for a private individual office.

WeWork is diversifying by planning entries into other markets. It’s reported that they have several follow on services in the works, including “WeLive” combining office space with micro-apartments, and “WeSleep” an Air-B&B like hotel concept.

One possible market for co-working is the corporate real estate market which could use a co-working service as an extension of its office locations. Sun Microsystems pioneered this concept back in the 1990s with its “network of places” program. Sun opened telework centers in major metro areas as alternative office locations for its mobile workforce. The federal government has also established telework centers in and around major metro areas as a way to reduce commute time.

There’s no question that co-working fills a real need for the young independent worker who desires non-traditional work environments and the social benefits of working with others. It’s rapid growth underscores the problems with telecommuting or work from home such as loneliness, lack of stimulation, and the absence of colleagues and mentors. 

In my last Blog entry I discussed the future of the corporate real estate profession. The central role of the corporate real estate executive has been to manage the company’s real estate portfolio including property acquisition, disposition, leasing, and the day to day operations of facility management. For some large companies, the charter of CRE has expanded to include physical security, sustainability, and now even the charter may include company wellness programs. In an open online survey conducted by CoreNet Global, a strong majority of respondents – 80 percent — said that corporate wellness initiatives represent a “significant trend,” while only 20 percent said that they were a “passing fad.”

And, more than 62 percent reported that their companies had instituted wellness initiatives in the last six months; 38 percent said that they had not.

And my recent dinner meeting with a group of CRE leaders reinforced this interest, where it was the main agenda item.

With intense competition for talented employees, it ‘s likely that companies would institute programs that would support the health and well being of their employees. These programs typically would include smoking cessation training, substance abuse, physical fitness facilities, company sponsored events such as road races, and other activities that add to the employee’s physical fitness. Some wellness programs also provide counseling, yoga, and other activities that address the mental as well as physical health of the employee.

Wellness programs result in healthier employees, reduced absenteeism, and higher productivity. There is substantial evidence that wellness results in improved employee recruitment and retention, and improved financial performance.

From my experience, a company wellness program is best managed by the human resources organization. There is most likely a manager or executive responsible for the program who reports into the human resourcesdepartmentand may have counterparts in the operating divisions that oversee local wellness initiatives.

But what is the role of the CRE organization in company wellness? Most likely, CRE management would serve in a support role, particularly in managing the facilities needed for employee wellness activities. These would include the provision of physical fitness facilities, the contracting with local health clubs, and possibly the contracting with consultants that would serve as on site coaches or counselors.

There are certainly examples where the CRE organization has direct responsibility for company wellness, but this would be the exception. The CRE organization is better aligned with sustainability initiatives such as energy management, and environmentally oriented construction such as the LEED (leadership in energy and environmental design) standard.       

Another area of focus that is closely aligned with the CRE mission is physical security. This would include the development of physical security standards for company facilities as well as the provision of security technologies such as card reading devices, closed circuit TV monitoring, and perimeter alarm systems.

The CRE department is already challenged to meet disruptive changes in the real estate market, the most urgent example is the imminent change in FASB/IASB leasing standards. As the economy goes through a possible downturn in the months ahead, there will be a significant demand to rebalance the company portfolio through subleasing and dispositions. My advice to CRE managers is to maintain your current charter, and decline efforts to add to your responsibilities such as company wellness initiatives at least in the near term. While a popular trend, company wellness is best managed by those responsible for employee recruitment and retention.

Earlier last week I attended a dinner in San Francisco of a group of corporate real estate executives. During the evening I had a chance to speak with several of the attendees, and queried what were the major issues being discussed by the group at their 2 day meeting. A number of topics came up including the subject of Corporate Wellness, Sustainability, and Strategy. But the most urgent question on their discussion list was “what is the future of the corporate real estate profession.” This question led to a number of speculations but no real consensus.

Perhaps the greatest concern was one of irrelevance. Would the growth of outsourcing, and shared services render the role of the internal real estate profession as superfluous or irrelevant? Real estate and facilities management is not a core activity in many companies, (so the argument goes) and there are senior executives who want to eliminate or outsource non-core functions. Another concern is the possibility that another corporate function such as Information Technology or Human Resources would absorb the real estate function and depend primarily on outside service firms for transactional support.  A third possibility is the emergence of specialty service firms who combine technology services with real estate and facilities management services. This scenario is popular with companies who outsource much of their IT activities and are partial to the outsourcing model to reduce operating cost.

I think this concern is unrealistic if not disingenuous. Real estate represents the second highest cost for most companies. As new companies emerge, they will need real estate of some kind for product development, workplaces, and manufacturing. Service firms alone cannot fully understand the needs and unique cultures of most companies, and at a minimum, management will need executives with the domain knowledge and experience to direct and manage outside service firms. If anything, the corporate real estate profession will grow with globalization, as international firms expand into global markets.

The relevance (and growth) of the corporate real estate function and profession will be highly correlated to the degree with which the function is closely tied to the business strategy of the enterprise. Thus, it is a matter of success whether the corporate real estate executive focuses on strategy and process versus transactions and operations although these functions are critical.There are many examples where the corporate real estate function developed strategies which delivered substantial cost reductions, asset  enhancements, or progressive and flexible workplace environments. These are the corporate real estate professionals who earn a place at the senior management table, and prosper. Those who focus only on transactions and day to day operations become candidates for outsourcing. The choice is clear, and many at the dinner the other night were professionals who exemplified these principles of strategic leadership.

A major question I am asked on occasion is what is the best way to organize the corporate real estate function.  There are several fundamental principles that should be considered to answer this question.

• First is what is the scope of the real estate function?
• Does the scope include only transactions?
• Or is the function broadly responsible for planning,  budgeting, and managing the acquisition, disposition and on-goingmanagement of the facilities portfolio? 

The over-all mission of the business will greatly affect the real estate organization structure. For example, a retail business will require a distinct set of competences in store location, design and build-out. A high tech company will need different skills and functions that will emphasize collaboration, access to skilled labor, and proximity to universities and other knowledge based services and resources. A professional services firm will require yet another set of skills and competencies, so the focus of the business will highly determine how the real estate function is staffed and organized.

Another key variable in the organization topic is the focus on sourcing. To what degree is outsourcing of various functions such as leasing, design, construction management, and facilities managementa preferred method of achieving the necessary skills to manage the company’s real estate portfolio? For many companies, outsourcing non-core functions to service firms is the preferred approach. In some cases companies will engage a single service firm to manage all aspects of the real estate function and limit the role of internal real estate organization to strategy and service oversight.

A discussion of organization structure is incomplete without a consideration of business processes. I learned from my days as a consultant that many clients suffered dysfunctional organizations because how they were organized was inconsistent with their work flows and processes.  Once the client went through a rigorous review of processes, the problems with organizational structure became much clearer. The review would typically uncover redundancies, communication problems, and confused roles and responsibilities. I always encouraged the client to undertake a rigorous review of key processes before considering organizational changes.

Another key consideration in the organization discussion is an honest and frank discussion of company culture. The real estate organization must embrace cultural norms of the corporation to insure a level of trust and compatibility with management, operating unit clients, and other staff groups like finance, human resources, and information technology. Perhaps one of the major sources of conflict is between the real estate organization and the IT group. Here the issue is one of control and responsibility. The real estate group insists on controlling facilities projects while the IT group insists on certain controls governing security, power and air conditioning, and cabling. This organizational conflict is heightened around data center projects, where competing roles and responsibilities are the source oforganizational rivalry. Some companies use matrix management structures to insure collaboration and cross functional communication. The matrix has increased in popularity with the advent of collaborative technologies and mobile communication. But the matrix structure can be complex, and management must insure clear processes and accountabilities to avoid organizational chaos.

Finally, the organizational topic must lead to a focus on technology. How is the real estate organizationusing the tools such as lease management systems, design and project management applications, and process support tools in the planning and management of the company’s real estate portfolio? Here again processes lead to the appropriate selection of technology tools, whether in the planning, transacting, or on- going management of the portfolio. With the advent of cloud computing, it is now possible to selectbest-in-breed solutions and integrate in the cloud using various APIs. (application program interfaces) This trend will reduce the cost of real estate technologies as well as reduce the time to acquire and configure various solutions.

The corporate real estate function continues to evolve as companies go through disruptive change such as globalization, outsourcing, and technology innovations.  It’s probably inevitable that how a company is organized today to manage its real estate portfolio will change tomorrow. Staying on top of these changes and adjusting accordingly will be a major challenge for the successful corporate real estate leader.

The long awaited new lease standard has arrived! The International Accounting Standards Board (IASB) released its version of the new lease standard last week with implementation scheduled for early 2019.  The US accounting standards board (FASB) is expected to release its version shortly with implementation to follow soon after IASB’s.

To recap, the new standards strive for greater transparency in financial reporting by putting all leases on the balance sheet as assets and corresponding liabilities. The IASB version differs from the US standard in one key respect and that is all leases are to be treated as capital leases, while the US standard will differentiate between capital leases (Type A) and Operating Leases (Type B) The latter will amortize leases using the straight line method whereas Type A will split out interest expense versus principle expense like a mortgage.

I have written extensively about the new standards and invite readers to review the following Blog postings on Visual Lease’s web site, under Bell’s Blog:

• The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?
• Why Do We Need a New Lease Standard?
• A Correction to the White Paper: “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?”
• Update to the FASB Rulings on Lease Options
• Lease Standard Update- Possible UnintendedConsequences

Here is the press release from the IASB regarding the new standard:

http://www.ifrs.org/Alerts/PressRelease/Pages/IASB-shines-light-on-leases-by-bringing-them-onto-the-balance-sheet.aspx

In a subsequent release the FASB offered guidance on implementing the new FASB lease standard last week:

https://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176167771931&mc_cid=6e3b4

These new lease standards will have a profound effect on capital structures and financial reporting. It is estimated that the new standards will add $3.5 Trillion in assets and liabilities onto company balance sheets. Certain industries will be impacted disproportionately because of their heavy use of leasing. These would include retailers, airlines, shipping companies and companies with large portfolios of leased properties such as restaurant chains.  Heavy users of IT assets which are typically leased like cloud computer entities will also be significantly impacted.

Both the IASB and FASB have encouraged companies to immediately begin the transition process to these new standards. In effect companies will most likely maintain two sets of books, one for their traditional lease portfolio and one reflecting the new standards. Perhaps the most urgent priority is to insure that their lease management system has upgrades to calculate the new asset and liability values as well as new performance measurements such as return on assets, and debt to equity ratios. Another urgent step is to coordinate with the company’s auditor to insure that the new lease standards are accurately reflected, once the lease portfolio is recalculated.

I will continue to monitor the IASB and FASB progress on the standards update, and will report any developments as they occur in Bell’s blog. Readers are encouraged to review Visual Lease’s offering in their new lease standard module.

During my tenure as head of real estate I always began the new year with a few resolutions that would become goals for the year ahead. These were typically above and beyond department objectives for the year and represented personal goals for some kind of improvement. Here are a few that I recall:

• Strive for personal development either by taking a career development course such as those offered by IFMA or Corenet; or catching up on a few popular management books. I’ve always been interested in strategy so I would seek out papers or books by Michael Porter of Harvard who is recognized as the guru of corporate strategy.  His book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” is a classic on strategy. I also read several books by Jim Collins, most notably:” Good to Great: Why Some Companies Make the Leap and Others Don’t”

• Attend at least one industry conference for both learning and networking experience. I was a member of IDRC for over fifteen years and served as its president in 1996-1997 before it merged with NACORE. Attending IDRC and then Corenet conferences became a yearly habit. When I switched industries and became an analyst at Gartner, I was obliged to attend the Gartner events as a speaker. I absorbed a huge amount of knowledge and insight about information technology which added exponentially to my knowledge base.

• Update my contact base. I’m a strong proponent of networking both for what you can learn from others but also for the help a network can provide. I would constantly touch base with contacts in the brokerage, design, and engineering fields on all matter of issues.  These contacts become surrogate members of your staff and can help to resolve issues or problems quickly and efficiently. I recall reaching out to contacts in various cities when our group was working a deal for a new lease or construction project. What was the market outlook? What are the issues with local codes or covenants? Who’s a superior contractor in the local market? Your contacts in these cities can be an invaluable source of intelligence.

• Constantly encourage innovation. I always had a passion for the “next big thing” and strived to inspire my organization to propose ways to improve our processes or technologies. I recall several innovations over the course of my career. At Xerox I led an effort to develop a Lease Management system we called “Lease-Ad.” By today’s standards this was a pretty rudimentary system written in Microsoft’s database management application. At one point we tried to sell the system to outside users but we ended up letting one of our employees take the system out on his own. Another innovation I developed with colleagues was a consulting group we called “The Harbinger Group.” The mission of this group was to pioneer research in the emerging “office of the future” trend. Our greatest accomplishment was helping a scientist from Xerox’s Palo Alto Research Center bring his network technology in front of Xerox senior management. The technology was a fiber optic networking system that allowed huge amounts of data to be transmitted over fiber optic cable. Xerox management had no interest in the technology (“we’re not in the wire business”) so I helped the scientist hook up with a corporate marketing guy who presented the technology to one of Harbinger’s venture capitalist clients.  The upshot of this introduction was venture funding of over $1M,  a license deal with Xerox, and a new company called Synoptics, which later became Bay Networks and ultimately was acquired by Cisco Systems. The technology became a key component of Internet networking. In essence Xerox walked away from a multiple billion dollar opportunity.

At Gartner I teamed up with MIT and worked for a year developing a research project we called “The Agile Workplace.” This was a multi-client sponsored study and resulted in a landmarkreport on the worker mobility phenomenon. Many of the findings in the report became the basis for all kinds of technologies and practices which now represent the “new normal” in worker mobility.

So what are your managerial resolutions for 2016?

With the New Year it’s a good time to take stock of the corporate real estate domain and consider the challenges facing the managerial profession responsible for the corporation’s real estate assets and services in the year ahead. Here are five major challenges if dealt with effectively will determine in part the success of corporate real estate in 2016.

New FASB/IASB Lease Standard: We’ve been focusing on this dramatic new lease standard over the last several months in Bell’s Blog. Perhaps the greatest factor for success will be the degree of readiness when the standard is ultimately put into effect, now estimated to be in 2019. We believe companies need to start now to prepare for the commencement of this new standard which essentially requires all leases of more than one year to be placed on the balance sheet as both assets (value in use) and liabilities. Much work is required to achieve readiness including software upgrades, process changes, staff training, and portfolio restructuring. (Please read “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?”)

Sustainability:  The environmental imperative has been given added urgency with the United Nation’s commitment to challenging conservation targets. A corporation’s facilities assets represent the largest consumer of energy resources, particularly electrical consumption. “Going green” is no longer a corporate imperative but also represents an excellent source for cost savings. Adopting environmental standards such as the LEED standard (Leadership in Energy and Environmental Design) for construction will insure environmental efficiencies and assure a positive image for the corporate brand.

Staff Recruitment:  Now that the US economy has reached full employment, the challenge of staff recruitment and retention will become more intense in 2016 as employees seek more challenging and lucrative employment opportunities. This challenge is a double edged sword with work-loads in 2016 increasing with pressures to rebalance portfolios (new lease standard) while demand and competition for talented employee candidates intensifies. Corporate Real Estate executives must work closely with Human Resources to update replacement plans, as well as enhance workplace environments with progressive policies and amenities. Employment focus should shift to training, and personal development, as a way to enhance employee skills.

Information Technology Refresh:  Corporate Real Estate Executives must insure that their information technology resources are adequate to meet new challenges such as the new lease standard as well as efficiencies gained through broader use of mobile technologies and cloud computing techniques. It is probable that there will be requirements to upgrade data center capacities associated with growth in servers and storage devices. (All related to growth in private cloud computing.)  

Strategic Alignment: With the continuing improvement in the US economy, corporate real estate executives need to insure that facilities and real estate resources continue to meet the needs of the business units with a top to bottom review of portfolio strategy. Key questions to address: what and where is growth in space needed over the next 6 to 12 months? Are facilities configured to maximize agility and staff flexibility? Are we receiving adequate services at competitive prices from our major service providers? What can we do to reduce occupancy costs through consolidations, space reductions, and alternative workplace strategies such as telecommuting and desk sharing?

The New Year is a good time to review and refresh strategy and processes. 2016 will bring disruptive change to facilities and real estate management. Those corporate real estate executives who fail to address the challenges ahead (such as those listed above) will risk failure and possibly job security.

In the last several blog posts, I’ve explored various aspects about the future and how these trends may affect the workplace. One key variable in the future workplace is demographic differences, or how generational differences will impact workplace design. I suspect we all assume various truisms about the major generations. For example, Baby Boomers (those born between 1946-1964) are viewed as traditionalists and thus, more conservative in their preferences and tastes. At the other end of the scale are the Millenials, born between 1981-1996.  Here we assume a workforce that demands flexibility, choice, high-tech, and urban environments.

In researching this question I came across a study which seems to refute several myths about the generational workplace preferences. In 2014, CBRE Global Research and Consulting conducted a survey of more than 5,500 professionals. Of the respondents,  22% were from the millennial generation closely mirroring U.S adult population estimates.

Myth #1:  Millennials differ greatly from earlier generations in their views of the workplace.

Reality: “As it turns out, the survey found that there was not more than a 10% difference between how the millennials responded versus how others responded to the 250 questions posed.”

Myth #2:  Millennials are more collaborative than their older peer groups.

Reality:  The CBRE report little difference between generations on how they spent their time. In fact, the data suggested that “company culture is  likely a better predictor of how time is spent in the workplace, as opposed to generational differences.”

Myth #3:  Millennials want more informal and socially based communications.

Reality: the Millennials said “they would like more time connecting via email and more time in formal meetings.” This apparently illustrates “the desire to have increased visibility into organizational decision making and a more established seat at the table”

Myth #4:  Millennials want to live and work in the urban core.

Reality: “In fact, less than half of millennials live in the urban core. CBRE reports that a bigger factor is commute time. So long as the workplace is within 45 minutes of an employee’s home, both suburban and urban locations will meet employees’ needs irrespective of their generational identity.

Myth #5:  Millennials demand a more diversified work environment.

Reality: The report makes a case that all employees despite generational identity demand more flexibility and choice in the work environment including private spaces to think and concentrate.

Bottom Line: “Don’t necessarily design the workplace around millennials. Design a well-balanced  office that can accommodate all generations of workers-one that provides a healthy mixture of collaborative, focus areas, and an environment that promotes employee socialization.”

Reference: CBRE Global Research and Consulting, November 2014, “Designing the Office of the Future.”

 In my last Blog entry I wrote that IOT would be a megatrend that would revolutionize building operations by imbedding machine addressable technology in every aspect of the built environment. IOT is not new. In fact the technology has been around since the late 1990s. Gartner estimates that there will be nearly 26 billion devices on the Internet of Things by 2020.

Virtually all aspects of society will be transformed by IOT particularly infrastructure, manufacturing, and energy management systems. Large scale deployments are currently underway globally.  “For example, Songdo, South Korea, the first of its kind fully equipped and wired smart city, is near completion. Nearly everything in this city is planned to be wired, connected and turned into a constant stream of data that would be monitored and analyzed by an array of computers with little, or no human intervention.”

Because of the enormous number and complexity of devices connected to the internet, technology pundits believe that a new protocol – Protocol Version 6 (IPv6) will be implemented that will allow virtually all human-made objects to communicate over the internet. “The internet of objects would encode 50 to 100 trillion objects and be able to follow the movement of these objects. Human beings living in urban environments will each be surrounded by 1000 to 5000 trackable objects.”

IOT is not without controversy. The potential for massive surveillance and other invasions of privacy worry critics. Here are a few quotations about these issues: (all quotations from Wikipedia)

Justin Brookman, of the Center for Democracy and Technology, expressed concern regarding the impact of IOT on consumer privacy, saying that “There are some people in the commercial space who say, ‘Oh, big data — well, let’s collect everything, keep it around forever, we’ll pay for somebody to think about security later.’ The question is whether we want to have some sort of policy framework in place to limit that.”

Tim O’Reilly, founder of Open Source, who popularized the term “open source”  believes that the way companies sell the IOT devices on consumers are misplaced, disputing the notion that IOT is about gaining efficiency from putting all kinds of devices online and postulating that “IOT is really about human augmentation. The applications are profoundly different when you have sensors and data driving the decision-making.”

Editorials at WIRED have also expressed concern, one stating ‘what you’re about to lose is your privacy. Actually, it’s worse than that. You aren’t just going to lose your privacy; you’re going to have to watch the very concept of privacy be rewritten under your nose.”

The American Civil Liberties Union(ACLU) expressed concern regarding the ability of IOT to erode people’s control over their own lives. The ACLU wrote that “There’s simply no way to forecast how these immense powers — disproportionately accumulating in the hands of corporations seeking financial advantage and governments craving ever more control — will be used. Chances are Big Data and the Internet of Things will make it harder for us to control our own lives, as we grow increasingly transparent to powerful corporations and government institutions that are becoming more opaque to us.”

If you’ve watched the new CBS series “Cyber NCIS,” you get a sense of how IOT could wreak havoc on the populace. Episodes have envisioned how IOT has taken over the control of automobiles, airliners, and drones, with disastrous results. And one episode followed a terrorist plot that used IOT to detonate a bomb.

The Internet of Things will transform building and real estate management but we should be vigilant to the dark side of this technology. In the wake of the recent Paris attacks, we shudder at the prospects of extremists using this stuff to attack our homeland.

PriceWaterhouseCoopers (PWC) recently published a report,  “The Future of Work, a Journey to 2022,” in which the consulting firm developed three scenarios of how the future of work may evolve over the next 7 years. The project employed  the scenario planning technique invented by Peter Schwartz, and described in his book, “The Art of the Long View” made famous by Shell Oil which anticipated the oil crisis in the 1970s.  The three scenarios in the PWC report emerge from two orthogonal vectors:  1) fragmentation/ integration and 2)  collectivism/ individualism. PWC labels the three scenarios as the “Orange world” where small is beautiful, the “Green world” where companies “care,” and the “Blue world” where corporate is king. In the Orange world, “ companies begin to break down into smaller collaborative networks and specialization dominates the world economy.” In the Green world, “social responsibility dominates the corporate agenda with concerns about demographic changes, climate and sustainability issues.” In the Blue world, “big company capitalism rules as organizations continue to grow bigger and individual preferences trump beliefs about social responsibility.”

While the report focuses primarily on the human resource implications of the three scenarios, it has little to say about the workplace implications of these three futures. Here are my thoughts on that question:

The Orange world workplace: This is the world of entrepreneurs and free lancers, who favor highly flexible and IT intensive work environments. Incubator, co-working workplaces will proliferate, particularly in urban, regentrified neighborhoods. (think Silicon Alley in New York, or South of Market in San Francisco) Informality will dominate where millennials are the primary users of the workplace facilities, although boomers, and gen-Xers will also grow as a percentage of the workforce as people live longer and put off retirement.

The Green world will emphasize environmental and sustainable work environments. LEED (Leadership in Energy & Environmental Design) certified design will predominate and most of the office growth in the green world will occur in suburban and rural markets, because of the lower cost of development. With its emphasis on sustainability, the Green world will prompt continuous innovation in office design, and advances in mechanical and electrical systems that will embrace technology at every level of design, installation and operation. The Green world will spur development of “the internet of things” where all aspects of building operations will be managed by automated control systems, spanning the entire spectrum including electrical, mechanical, security, and other aspects of the building environment.

The Blue world reflects perhaps the most conservative and traditional office environment. With its emphasis on cost containment and control, the workplace is more formal and more hierarchical with a mix of closed and open workstations. This is the world of high rise offices, and suburban campuses, and even though there will be workplace flexibility, and proliferation of mobile technology, the workforce of the Blue World works primarily from more traditional office environments.

There are megatrends that will cut across these three futures and influence the CRE management tasks and responsibilities in the years ahead:

·      Mobility: the workforce will become ever more mobile as communication technology advances with stunning speed. CRE managers will need to embrace workplace agility concepts both in office design, and operational support

·      Internet of Things (IOT): Virtually everything about the office environment will be machine addressable through the internet. This reality will revolutionize building operations and design. Most aspects of the workplace environment will be automated and regulated by digital technology, and this data flow will be captured and analyzed within building management systems of the near future.

Big Data: The growth of massive data bases and analytical software, mostly based in the cloud, will revolutionize the management of real estate, leases, and the whole spectrum of fixed assets. Forecasting office demand will be like forecasting the weather, and CRE managers will have enormous insight into workplace drivers and costs through the advent of big data and analytics.

Demographics: The changes in demographics will have a profound impact on workplace design and location criteria. The workforce is aging, retirement will be extended, and racial diversity will be the norm particularly in urban and international markets.

Outsourcing: Outsourcing will grow more rapidly. Most corporate functions including real estate and workplace management will invariably be outsourced to service firms. Increasingly specialty service firms will take on the responsibility of non-core activities. This will be driven in part by technology enablers, but also as cost containment becomes a management imperative. 

Some years ago I concluded a research note with a quote from William Jennings Bryant. I think its apropos as we contemplate the future:  “The future is not to be predicted but imagined and acted upon. Destiny is no matter of chance. It is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”

October, 2015 is the month and year when Marty McFly traveled from July 1985 to the future in the famous Delorean time machine. Thus, it’s a good time to review past predictions of the changing workplace, and to rate their accuracy. Predictions of the future almost always miss the mark. Here are a few of my favorite classic misses:*

• “I think there is a world market for maybe five computers.” — Thomas Watson, chairman of IBM, 1943

• “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” — Western Union internal memo, 1876.

• “While theoretically and technically television may be feasible, commercially and financially it is an impossibility.” — Lee DeForest, inventor.

• “The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” — David Sarnoff’s associates in response to his urgings for investment in the radio in the 1920s.

• “Radio has no future. Heavier-than-air flying machines are impossible. X-rays will prove to be a hoax.” — William Thomson, Lord Kelvin, British scientist, 1899.

My entire career has been underscored by a succession of predictions, primarily about the workplace. While a real estate manager at Xerox, I directed a project entitled “Office 88,” which was a forecast of the “new workplace” from a perspective in 1983. The primary purpose of the project was to identify technologies and furnishings that would transform the office environment. This was at a time when office technology was primarily still in the electric typewriter and fax machine era. I think our greatest insight related to the possibility of the paperless office which was way off the mark. Then a few years later, I formed “The Harbinger Group,” which was essentially a research group formed to identify changes in the workplace that would present product opportunities for Xerox. Our greatest achievement was the publishing of a research report, ORBIT II, which was a collaboration with Cornell and a British architectural firm, DEGW. The acronym stood for Organizations, Buildings, and Information Technology, and was a sequel to an earlier ORBIT study. We focused on office design, and services, with the advent of networked computing. Perhaps our greatest contribution was identifying a network technology at Xerox’s Palo Alto Research Center (PARC) that created software that made it possible to send multi-media over fiber optic cable. Xerox opted to license the technology to two Xerox individuals who formed their own company: Synoptics. This fledgling enterprise became Bay Networks and was eventually acquired By Cisco. The Xerox guys made millions (not yours truly) and the birth of client server and multimedia telemetry was born. In essence Xerox invented one of the cornerstones of the Internet, but didn’t know it.

My latest foray into predicting the future workplace was the collaboration with MIT, Gartner and 22 corporate sponsors in a year- long research project entitled, “The Agile Workplace.” (Gartner, 2001) In reviewing the predictions in this report, I would say if anything we were too conservative. Almost all the predictions emerged as reality but much quicker than we had predicted. For example, we completely underestimated the growth of mobile computing and the impact of the smart phone. We also miss-judged the integration of workplace services, i.e. the merger of CRE, HR and IT. Even this prediction was too aggressive:

Through 2006, fewer than 25 percent of enterprises will fully integrate support services and processes between human resources, IS and real property management organizations, losing the potential for 15 percent to 35 percent improvement against financial and customer satisfaction benchmarks (0.7probability).

In the next Blog post I will put forward a few new predictions about CRE and the evolving workplace. Change is accelerating at blinding speed, so making predictions that will stand the test of time is always a risky business.

In a earlier white paper, The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?, I wrote that users should evaluate the effects of the new FASB/IASB on a company’sdebt structure, debt to equity, and other factors that would be affected by the new standard, assuming lease liabilities would be considered as debt. In point of fact, the FASB explicitly decided that Type B lease liabilities should not be considered as “debt.” However, the IASB which treats all leases as Type A leases or capital leases, does consider these liabilities as “debt-like liabilities.” (Their exact words) As one of my accounting friends advised “The accounting for Type A leases requires IASB companies to record interest expense, and segregates payments on the lease liability into operations and financing outflows per the cashflow statement, which is consistent with debt.”

Thus, US companies will experience less impact from the new standard, particularly as it relates to debt covenants, debt to equity metrics, and capital structures. But US companies with significant international lease portfolios subject to the IASB standard, will see their debt levels increase.

Having split my career between facilities management and IT management,  I gained an appreciation of how these two professional disciplines have many similarities, but distinct differences which createpolitical difficulties in many organizations. Both facilities management and IT management have large portfolios of assets, manage significant capital budgets, and complete projects with large financial commitments. Both functions have mission critical responsibilities; and require professional knowledge and expertise, that depends on both experience, management skill, and unique technical knowledge and skill.

IT and Facilities management have traditionally operated in separate worlds with distinct business cultures, differing professional orientations, different vocabularies, and conflicting operating objectives. The CIO lives or dies on the issue of reliability and uptime and business functionality. The facilities manager focuses on cost reduction, stable and predictable capacities and tolerances, and maintainability. The IT organization uses acronyms and other technical terms like MIPs, bandwidth, uptime, and throughput that seem like Greek to the facilities team. Conversely, the facilities staff talks in terms of square feet and cost per square foot. With the advent of technology convergence, virtualization, cloud computing, and high density processing these two worlds now collide, particularly in the context of data center planning and design, and new office projects. With the advent of mobile technology and cloud based applications, information technology has transformed the nature of work and the workplace. Thus, it’s critical that the CIO and facilities and real estate executive work closely in both the planning and implementation of modern office facilities. In fact, many organizations have created cross functional teams to encourage collaboration between the IT and facilities organization. Once scorned as inefficient and politically conflicted, the matrix organizational structure, has grown in popularity as a way to bridge the gap between IT and facilities. Another organizational technique to bridge the gap is to use virtual teams composed of IT, facilities, project engineers, and other disciplines needed for a major office project. The virtual teams work primarily through web based applications that coordinate work flow and control project accountability.

In addition some organizations actually have both facilities, real estate, and IT report to a single executive, to insure close coordination. By cross fertilizing the various functions, team members gain appreciation for the other’s priorities and challenges. When we worked on the “Agile Workplace” project, we discovered several major companies who experimented with various organizational models with some degree of success. The key to success with any model was a focus on leadership,  communication and creating joint accountabilities for project success.

IT and facilities managementoversee large operating and capital budgets. By working together, they have a much greater chance for success than working in isolation.  Now that the data center is the critical entity for cloud computing, it is becoming urgent that facilities and IT workmore closely together, or risk dysfunctional projects with budget overruns, and broken schedules.

A comment on the next few blog entries:

One of my interests as both a former real estate executive and then an analyst at Gartner has been the relationship of real estate management and IT management. I predicted over twenty-five years ago while at Xerox, that IT would transform the workplace and the nature of work. This was before the advent of the internet and mobile technology. We were still working with client server architectures, LANs, and desktop computing. At Xerox, I founded a subsidiary, the Harbinger Group which focused on the office of the future. We did a multi-client study called ORBIT-II in conjunction with Cornell University and a British Architect.  In that study we were convinced that emerging technologies would revolutionize the workplace. Later at Gartner I led a multi-client study we called, “The Agile Workplace,” in which we examined how IT was driving workplace flexibility, to include telecommuting, desk sharing, and co-working arrangements.

These blog entries reflect on this IT-real estate convergence. I hope you find them of interest:

Clicks and Bricks

Virtually the entire infrastructure of the enterprise combines traditional facilities assets: buildings, land, furnishings, and lease contracts and IT assets: servers, storage, networks, mainframes, and applications. In the last half century these distinct asset classes have become ever more intertwined, interdependent, and fused to create work platforms. With the advent of distributed processing in the 1980s, and then net centric computing in the last 10-15 years, the boundaries between space (physical) and cyberspace (virtual) continue to blur. Consider the retail industry. Internet shopping has transformed the nature of retail, where retailers combine traditional store based offerings in combination with web based shopping. Blockbuster competes with Netflix by combining store based rentals with web based services. You can order a DVD on line, receive it in the mail, and return to a local Blockbuster store. This combination of “clicks and bricks” typifies many retail business models whether its electronics, automobiles, or fashion. Shop on the web or the store, or both. Clicks and bricks, the combination of physical infrastructure and web based applications and connectivity continues to transform virtually all industries including medicine (virtual diagnostics); education (virtual classrooms); financial services (virtual banking and trading) and government (self service via web based applications).

This fusion of the physical with digital infrastructure mandates a fusion of management disciplines, processes, software tools, and performance metrics. But IT management and facilities management still remain primarily siloed in their own functional domains with different vocabularies, cultures, and time scales. Beyond the obvious differences, IT and facilities bring vastly different perspectives to their respective functional disciplines. IT focuses on availability, uptime, fault tolerance, and reliability. Facilities focuses on stability, efficiency, capital conservation, and risk minimization. Not that these factors aren’t important to the CIO; but uptime always wins above efficiency. One of the biggest differences between IT and facilities is the time scale dimension. IT assets typically involve a 2-3 year asset life; where facilities assets span decades. IT changes rapidly; hardware and software assets become obsolete quickly sometimes in less than a year; whereas buildings endure for years. IT operations work in real time; responding or reacting to instantaneous changes in the network; whereas facilities operations work in much longer time scales; a typical building project can span 24 to 36 months; whereas software applications can be acquired almost immediately via a web services offering.

No where has the critical need for IT and facilities management collaboration been more urgent than in the modern data center. There is a virtual crisis in the modern data center. With the advent of high density equipment like blade servers; the power demand and corresponding heat gain in the data center has quadrupled in the last few years. Historically, data centers were designed to provide 40 to 50 watts per square foot; or the equivalent of 2-3 Kilowatts per rack. Today, power demands of 10KW – 15 KW per rack overwhelm traditional power supply and underfloor cooling. The energy costs of the data center have commensurately escalated to 4 to 5 times historical rates. It’s now common to see data centers incurring $50 to $60 per square foot in annual electrical costs. George Gilder, at a recent conference in Boston, reported that the combined energy consumption of the four major internet companies (Google, Yahoo, AOL, and MSN) equal the power consumption of the city of Las Vegas. Goggle is reportedly spending in excess of $1 Billion a year alone in electrical costs. The data center energy crisis has emerged as a federal imperative. The US Congress has passed legislation for the EPA to study data center energy consumption and return later this summer for legislative recommendations that may involve penalties or restrictions similar to recent legislative initiatives in building more energy efficient automobiles. The broader “green” trend globally will become more intense, necessitating a more collaborative and unified approach between IT and facilities management within the enterprise.

In this morning’s New York Times, it was reported that Goldman Sachs recently consolidated from three floors to two in its major Manhattan office tower. The Times reports that “the changes in real estate have helped Goldman reduce its cost by 17 percent since 2010.” This is yet another example of the value in corporate real estate strategic planning and why I wanted to spend a bit more time on the subject.

In the last blog entry I outlined the key components of the corporate real estate strategic plan. In this blog, I examine in greater detail specific areas of focus in the strategic plan

Plan components:

·      As a first step, the strategic plan (the Plan) should include key objectives, including financial summaries, environmental goals, and workplace flexibility goals.

·      The Plan should include a demand forecast of total square feet over five years as a function of headcount growth or other relevant growth factors.

·      The Plan should include an executive summary, graphically presenting the financial results of the Plan by year, over a five year time frame.

·      The Plan should include a summary of market benchmarks and then compare actual rental rates, and space ratios to benchmarks. This analysis should be   particularly done for major locations.

·      The Plan should include major projects by year, and highlight timing and budget (both expense and capital) for each major project.

·      The Plan should contain a separate section which highlights the major city consolidation plan, including targeted locations, project details, and financial results.

·      The Plan should tie with the two year annual operating budget by location, and then extend the financial summary for an additional three years; for a total five year financial forecast.

·      An addendum to the Plan should include a complete inventory of both leased and owned locations, with action items highlighted that would require lease renewals, extensions, terminations, and relocations within the first two years of the strategic plan. Ideally this data could be a feed from the Lease Management System.

·      The Plan should include a separate section that summarizes the asset and liability values as required by the new FASB and IASB lease standards.

·      The Plan becomes the primary communication vehicle to convey plan objectives to real estate partners including tenant representatives, design consultants, and other third party service providers that would be contracted to implement key projects in the Plan.

·      Similarly, the Plan should also be communicated to key stakeholders such as corporate finance, office of general counsel, IT, and human resources.

·      Ideally, the Plan needs to be kept current through quarterly reviews and updates.

Some Final Thoughts: The Corporate real estate strategic plan is separate from the lease management system. Ideally the lease management system should feed data to the Plan, but the systems are two distinct tool sets with common data bases.

This outline of the corporate real estate plan is only one version of what will vary by company based on the company’s core business, size, culture, and asset types. Retail companies will focus more on location criteria and consumer market demographics. Manufacturing companies will emphasize labor markets and supply chain considerations in its strategic plan. Government entities will have yet another set of priority considerations in its real estate strategic plan. But the basic elements as discussed above will more or less be common across business entities.

Perhaps the most important responsibility of the head of corporate real estate is the development of a detailed and well conceived real estate strategic plan. Without it the corporate real estate function is failing to align its facilities and leases with corporate goals, and communicating these plans to its various constituents.(particularly senior management)

In the last blog entry we reviewed how the strategic planning process evolved from forming the planning team, benchmarking performance indicators, and setting priority objectives. Outlined below is what the strategic plan looks like:

Over-all objectives:

·      Management has set forth the following strategic objectives for the corporate real estate function: 1.) Reduce over-all occupancy costs; 2.) strive for environmental sustainability in the company’s portfolio, 3.) and evolve a flexible work environment that fosters collaboration and employee mobility

·      From the benchmarking phase, the planning team determined that the corporation’s occupancy cost was at the high end of comparable companies in most leasing markets, at least 15% above competitive benchmarks. It further determined that space per person was high (300 sq ft per person) and set a goal to reduce this ratio by 50%. Finally the benchmarking study revealed that most office locations were neither energy efficient nor consistent with current environmental standards.

·      From a review and analysis of leased locations, the team determined that as high as 50% of the lease file was due for termination within 10 years, and 20% of the leased portfolio had leases expiring within 15 years. There was a major opportunity to reposition the leased facilities in more efficient, lower cost locations. From a FASB lease standard, it would appear that the lease repositioning would substantially reduce the total asset and liability levels once new leases were put in place.

·      Another key finding of the portfolio review determined that in at least 20 major metropolitan areas, the company had multiple locations that could be consolidated into two or three major locations, thus reducing space, cost, and improving operational efficiency by sharing support services and infrastructure. The strategic plan referred to this aspect of the plan as “the major city consolidation plan.”

Plan Summary:

·      The plan outlined the key leasing actions to be completed over the next five years, striving to reduce space, and occupancy cost. Over-all annual occupancy costs and associated capital spend was summarized by year over the five year time frame.

·      The plan outlined a set of new office standards that included alternative office techniques like office hoteling and desk sharing. The new leased locations would adopt open plan work stations and a multitude of small and medium size conference rooms for team collaboration.

·      The plan set forth the major city plan and included detailed leasing actions for office consolidations.

·      The plan also set forth environmental standards that would improve energy efficiency, air quality, and office location sustainability.

·      The plan included a financial summary listing occupancy costs by location, by year, over a five year time frame. Associated capital costs, and project expenses were also included in the plan.

·      The strategic plan (once approved) became the basis for engaging tenant representatives in executing the leasing actions across the portfolio, by year.

Summary:

·      The strategic real estate plan was successful in reducing occupancy costs through smaller location footprints, tighter lease rates, and consolidated locations

·      New office standards achieved operational flexibility by adopting alternative workplace standards and worker mobility techniques. (laptops, tablets, and cell phones)

·      By adopting new environmental standards, new locations achieved improved sustainability as offices were relocated into new standardized locations.

 For purposes of the discussion on CRE strategic planning, let’s assume the following:

·      The portfolio of leased and owned property is both long established and diverse. The corporate properties are primarily leased facilities with lease terms averaging five years with several renewal and expansion options. Most of the major headquarters offices and manufacturing sites are owned properties. The portfolio is split between domestic and international locations.

·      The head of corporate real estate is new to the job and is not encumbered with past biases and cultural imperatives. The new director has extensive experience both as a CRE manager and real estate broker/consultant. The real estate team is fairly small consisting of leasing specialists, project managers, and a few specialists like designers and engineers.

·      The new CRE director has been recruited to update and transform the real estate function. Reporting to the corporate treasurer, the CRE director has been given a year to demonstrate progress with the corporate portfolio.

·      Corporate management has set three main goals for the CRE function. 1.) Improve the cost of occupancy 2.) Provide a contemporary and agile environment for the office workforce. 3.) Make the company portfolio more flexible and environmentally sustainable.

The Planning Team:

The CRE director forms a planning team with representatives from his staff as well as representatives from corporate finance, human resources, IT, and lawyers from the office of general council. He also tags representatives from corporate accounting to cover the requirements of the new FASB lease standard. (See earlier blog entries on this subject)

The planning team sets forth the following priority actions:

·      Develop a master listing of all leased properties, with termination dates in descending order.

·      Identify performance indicators of the leased portfolio, to include: cost/sq ft., space per person, net present value of annual rental, expansion options, renewal options, building age and condition, space availability or shortages, location status (security, access to public transportation, convenience to employees, convenience to customers if relevant)

·      Run a parallel listing of leased locations using the new FASB/IASB leasing standard. Identify high impact leases, i.e. high asset value, candidate for purchase? Disposition?

·      Identify performance indicators of owned buildings and properties to include age, condition, energy costs, expandability, highest and best use, current market value, net book value, land value, easements.

·      Identify the technological status of all company properties i.e. telecommunication infrastructure, LANS, WiFi, printers, fax, HDTV, video conferencing, digital security.

Benchmarking:

The next step in the strategic planning process is to benchmark the key performance indicators of the portfolio against market benchmarks and competitive benchmarks.

Key questions:

·      How do company lease rates compare to local market rates, competitor’s rates?

·      What is the average space per person as compared to industry benchmarks? (IFMA, Corenet, etc.)

·      How do owned facility values (NBV) compare to current market values?

·      What are the most valuable, least valuable properties in the portfolio?

·      Identify high cost, or facilities with constrained occupancy in need of expansion or relocation

·      Identify energy efficient/ inefficient locations.

·      Identify locations with significant maintenance / repair issues

·      Identify feasibility of converting to alternative workplace strategy in select locations. (use of desk sharing, telecommuting, co-working sites like executive suites)

·      Is there a need to update company office standards?

In the next Blog entry we’ll look at what a strategic real estate plan looks like and how it would be implemented.

            Much has been written about corporate real estate strategy. A Google search on the topic will yield hundreds of papers and presentations on the subject. Almost every real estate software vendor has posted articles on the subject and related the topic to their software and service offering. But from my experience very few corporate real estate organizations maintain a detailed real estate strategic plan, and worst very few fail to execute the plan that they’ve developed. Why is this the case?

            I suspect that the real estate organizations are caught up in the day to day priorities and flash points and thus have little time to devote to strategy. It requires rare leadership on the part of the corporate real estate executive and senior management to set a high priority on strategic planning and execution. But for those corporate real estate organizations that adopt a strategic focus, the payoff in higher value, cost reduction, and enhanced efficiencies is profound.

            So what are the major components of the corporate real estate strategic plan?

·      Financial: What are the profit goals and what role will the real estate portfolio play in contributing to these goals?

·      Customer support: How do the enterprise facilities support customer care? To what degree will the location and physical layout support the customer? (This is critical for retail facilities.)

·      Company Culture: To what degree will the facilities and interior design reinforce company culture? Is the space formal or informal? Will the facilities support collaboration and innovation? What is the level of privacy required?

·      Employee access: To what degree are the company facilities accessible to the employee base? Are the locations near public transportation? Is there adequate parking? Are the facilities safe, comfortable, and ADA compliant?

·      Security: To what degree do the facilities provide sufficient perimeter and internal security?

·      Information technology: To what degree are company locations adequately provisioned for advanced office technology infrastructure (WIFI, CATV, Broadband cabling, Laser Printing, Video Conferencing, Etc)

·      Flexibility: To what degree do the company leases provide options for expansion or termination? What is the capacity of the locations for space growth over the next five to ten years? What leases can be terminated without penalty?

·      Consolidations: What opportunities are there to consolidate locations for efficiency purposes? How much space and cost can be reduced through strategic consolidations? What investments are needed to implement these consolidations? What is the schedule for implementation?

·      Environmental Considerations: What is the status of the company buildings from an environmental standpoint? What upgrades are needed to make the buildings compliant with local and national standards regarding air quality and energy efficiency? Are there issues relating to hazardous conditions such as asbestos or chemical spills?

            In the next several Blog entries I’ll drill down into the strategic planning process. And discuss how the CRE executive can form a planning team and devise a process to step through a systematic strategic planning process. Future Blog entries will also explore how the real estate system can support the planning and implementation process.

            At the time I was the Corporate Real Estate Director of a major multinational corporation with a headquarters in New York City. It was the mid 1990s, and the real estate market in midtown Manhattan was a bit soft. Senior management wanted to move out of New York to an owned (and relatively vacant) office building in suburban Connecticut. Most of the senior staff lived in Fairfield County, Connecticut and wanted to reduce their daily commute. I was faced with a serious dilemma: the lease on the 200,000 square foot headquarters office had at least ten more years and its rental rate was at least $10 over the current market rate. Thus, the possibility of a sublease was remote since accounting rules required that the difference between the sublease rate and the face rate of the lease would mean roughly $2 million per year for 10 years or $20 Million in rental that we would have to write off as a lump sum payment. Obviously management was loathe to take that kind of hit to their bottom line. What to do?

            Our real estate team studied the leasing data for the corporation’s divisions in Manhattan, Long Island, and neighboring New Jersey. As it turned out, there were 3 different leases in mid town Manhattan that expired over a 2-3 year time frame. Would it be possible to move the headquarters staff to the owned facility in Fairfield County and then move the divisions into the Headquarters space? This would theoretically work, but we would have to subsidize the rental as an incentive for the business units to make the move. The other challenge is that we needed to renovate the Connecticut building for corporate headquarters staff, a project that would take at least two years. Thus, we had to lease a temporary facility in Connecticut, to make room for the midtown location to be re-configured for the operating divisions.

            When I explained the strategy to the CEO, he rolled his eyes. “Bell,” he said, “This is not a ‘No Brainer’, this is a “Brainer!” But he told me to go back and develop detailed plans and financials for the over-all strategy. A month later, we presented the plan to the senior management team, and they gave us the “go ahead.”

            We worked closely with the operating divisions and eventually got their reluctant agreement to make the move. Needless to say, they were getting a good deal: prime midtown Manhattan offices on Park Avenue, only blocks from Grand Central, and a rental rate substantially below what they were paying in their current locations.  The task ahead was daunting. We needed to renovate the Connecticut building, and the good news was that it would require 70,000 sq feet less, thus reducing the headquarters footprint from 200,000 sq. ft. of expensive occupancy to 130,000 square feet of low cost owned space. We would have to take a short term rental for two years, while we renovated the permanent building as well as reconfigure the Park Avenue headquarters for the operating division offices. Finally, we had to negotiate with the State of Connecticut incentives to move the headquarters from New York to Connecticut. The payroll was substantial and I had no trouble exacting a meaningful grant from the state.

            All in all, we completed all the pieces of the strategy on time and on budget. The key to success was thinking outside the box. Rather than figure out ways to offset the huge accounting write-off, we allowed other leases to expire as scheduled and moved those operating unit tenants into the vacated corporate headquarters space. This strategy underscores the opportunities that reside in your lease portfolio. By aligning lease termination dates and other factors like market rental rates and space consolidations, there are opportunities to reduce space and costs while streamlining operations. Obviously having up to date and detailed lease data is crucial to any strategic planning exercise.

We are frequently asked why we need a new FASB lease standard. Critics of the new proposed standard complain that the benefits are offset by the costs to implement, maintain, and adjust company balance sheets to reflect the added debt. Let’s recall that the new FASB (and IASB) proposed standard requires placing all leases on the balance sheet as assets, and corresponding liabilities. There are slight differences between the International Standard, and the US FASB version primarily dealing with a distinction in capital leases (Type A) and operating leases (Type B) The International standard requires that all leases be classified as Type A, whereas the US version classifies all non-capital leases as operating leases (Type B) with straight line amortization of the rent.

            Small businesses as communicated by one of their industry groups, takes strong exception to the burdens and costs of adopting the new standards. In 2012, two congressmen sent a letter on behalf of 58 other Congressional members urging FASB to reconsider the proposed standard, as being a heavy burden to small business, and a “job killer.” Congressmen Peter King and Brad Sherman reiterated their concerns in an article published in November, 2014 raising the specter of job loss of 190,000 individuals and an economic hit of $400 million per year indefinitely.

            So do we need these new standards? Before we answer this question let’s review the consequences of less than transparent financial reporting over the last decade. Remember Enron? Enron’s use of fraudulent accounting gimmicks and off balance treatment of debt led to one of the largest bankruptcies in US history. By reporting inflated revenues,  “mark-to-market” valuation of assets, and the use of exotic use of SPEs (special purpose entities) to hide debt, Enron collapsed in 2001, along with their accounting firm, Arthur Anderson.  Their chief operating officer, Jeffrey Skilling, and Chief Financial Officer, Andrew Fastow, were convicted of securities fraud with long jail sentences. The CEO, Kenneth Lay, died during his trial.

            But there’re  more recent examples. How about the financial crisis of 2007-2008? This disaster can be traced to less than transparent reporting of enormous debt as a consequence of using exotic financial tools as Credit Default Swaps, Collaterized Debt Obligations, and the failure of credit rating agencies to accurately analyze and report the effects of these tools on corporate debt and risk. The federal government had to bail out these banks with billions of tax payer money.

            We believe that new proposed FASB and ISAB lease standards will mitigate investment risk by making leasing debt fully visible on the balance sheet. For many companies, particularly retail and other enterprises with vast portfolios of leased properties like fast food outlets, the debt load of their leased properties will be significant. And for entities in the airline industry with large leased fleets, there will be a similar increment to their balance sheets. And even for small companies, who need debt capacity to expand their business, the effects of incremental debt in their financials could negatively impact their ability to secure new debt financing, or even to re-finance current debt.

            The new FASB and IASB lease standards will require diligent management in the transition phase. And yes, the process will incur incremental cost in software, staff resources, and consulting assistance. But the end result will certainly raise the consciousness of senior management about their real estate portfolio, and establish a more detailed understanding of how their real estate practices and portfolio affect the bottom line of their business.

           In years past, someone asked the infamous bank robber, Willy Sutton, why he robbed banks.  Sutton responded, “Because that’s where the money is!” Sutton’s pragmatic answer could be the guiding principle behind software prioritization for facilities and real estate applications. In other words, what are some guiding principles for selecting and investing in software functionality in support of your facilities and real estate operations? To use Willy Sutton’s logic, CRE managers should follow the money in the prioritization process.

         In corporate real estate, it all begins with the leasing process. Having a well thought out leasing and portfolio strategy, is the first step in developing a software application strategy. Everything in corporate real estate begins with the lease portfolio. Corporate leases define obligations, tenant rights, options, costs, and in terms of new accounting rules, assets and liabilities. We know that company lease obligations represent  the second  largest cost on the P&L statement behind labor, and thus, the systematic and attentive management of these costs is crucial to company profitability. Leasing is a complex and labor intensive activity. Typically a medium to large enterprise must  handle hundreds of distinct transactions per  month  generating thousands in leasing cost and related expenditures for utilities, insurance, amortization, taxes, and other related costs. Beyond the lease negotiation and contracting activities, the enterprise must administer a myriad of tasks, including rent payment, lease renewals and extensions, escalations, CAM charges, and cancellations. Thus, the first priority in selecting a software application, is to start with a lease management tool that becomes the central focus for developing a company wide leasing strategy.

         Following the money trail, the second priority is acquiring a space management tool to support space planning, and to assist in space forecasting including  moves, adds, and changes, and the myriad activities and tasks, in managing the details of facilities demand and capacity. As we wrote in an earlier blog, the space management module can be readily integrated with the lease portfolio application so that a leasing record can be linked to space layouts, furniture plans, and human resource data. The space management tool can be enormously effective in planning consolidations, expansions, reductions and collocations of related staff offices .

         The third priority in the IWMS prioritization process, is the selection of a maintenance management tool to handle the various maintenance tasks, such as predictive and preventive maintenance, repairs, and major refurbishments. There are a host of best in class software products to support the maintenance process, and like the space management tool, it is paramount to integrate these tools with the lease management applications and portfolio data base. Like virtually all the applications related to the CRE process, it is important to insure that the maintenance applications are adapted for mobile use, so that maintenance staff can access and input data from the field.

         Underpinning all these applications will be a best in class project management capability, so that whatever corporate real estate function is being considered has a well conceived operating process supported by the project management application. These tools are typically role based, and have pre-determined approval and calendaring functionality, designed to streamline and control the various processes governing the leasing, construction, and maintenance processes.

         Selecting and configuring software in support of the real estate and facilities management process can be a time consuming and expensive endeavor. For many larger enterprises with vast portfolios, it may be wise to go with a single integrated IWMS system, adding modules over time. This offers a single source, with “one throat to choke” if things go off the rails. But now with cloud computing and powerful middleware, it’s possible to select best-in-breed solutions on a prioritized basis, and integrate over time. No longer are user organizations confronted with the “big bang” possibility of going with a full suite of applications at the outset, costing millions and taking years to implement. So going on a prioritized basis is smart like Willy, because, “that’s where the money is!”

            Perhaps one of the most daunting and complex responsibilities of the corporate real estate executive is the management  of lease escalation costs. These costs which represent expense pass- thrus from the landlord to the tenant can represent nearly half or more of the cost of tenant occupancy. The complexity of first negotiating favorable expense escalation clauses, and then managing these costs, can create enormous financial and legal penalties for the commercial tenant, unless managed effectively.

            What are some of the more troublesome challenges in rental escalations, what I liken to leasing land mines? First, is discovering erroneous or fraudulent expense items that fall outside legitimate building owner expenses. These would include labeling capital expenses as maintenance expenses, costs unrelated to the tenant space such as personnel costs unrelated to the building, and fees and other service costs unrelated to the tenant space. Thus, it’s crucial that detailed expense definitions which form the basis of expense escalations are included in the lease, along with a clear statement of the base year. Too often landlords miscalculate escalations because of erroneous base years, or misused expense definitions.

      Another source of erroneous charges relates to miscalculating tenant space as the basis of CAM (common area maintenance) charges. Depending on the specific real estate market, definitions of usable, rentable, and gross space can vary widely and these variances can affect escalation charges by a wide margin.

            How can a lease management system assist in the management of escalations? A product like Visual Lease provides a module which automatically flags escalation charges that deviate from the parameters in the lease. This feature greatly reduces the time and effort required in scrutinizing and analyzing escalation charges, and can assist in pinpointing charges that may require specific audit review. Depending on the number of leases, the complexity of escalation clauses, the necessary documentation that needs to be researched about a specific charge, the number and skill of lease administrative staff, all these factors define the magnitude and difficulty of managing escalation costs. A typical corporate lease portfolio of 500 leases will generate at least 30-40 escalation billings per month. While most of the billings will be generally accurate, they will require analysis to validate their correctness before payment. By having the lease management system automatically scan the billings against lease terms, including expense stops, agreed- to expense categories, rate increases, allocations, and other specific terms in the various leases, will vastly reduce the time required to analyze and validate the escalation charges.

            As we discussed in an earlier blog posting, there is a real benefit in having a lease audit service combined with a lease management system. This combination provides the capability of bringing in the audit service on particularly troublesome escalation charges flagged by the system. This final line of defense ensures that for major problematic variances in an escalation charge from lease terms, will be challenged with detailed and exacting documentation. The savings to the tenant can be substantial and more than justify the audit fees.

         Many companies today use tenant representatives to handle various leasing actions such as leasehold relocations, renewals, expansions, and extensions.  Tenant representatives are commercial brokers who typically operate exclusively as tenant advocates, while collecting commissions from building owners. This may seem like a conflict of interest, but the industry has self-regulating practices to avoid most abusive behavior. Maintaining a tenant representative relationship builds a degree of trust and efficiency in the leasing process as the tenant rep develops an intimate knowledge of the user client’s culture, policies, and practices.

         The question arises, in the context of the tenant rep and client relationship, of how the user client can use a lease management system as a collaboration tool. There are a number of specific leasing projects where the tenant rep and client can benefit from a broad use of the lease management system, such as Visual Lease:

Critical lease dates: By having the tenant rep have access to the leasing system, the tenant rep can monitorcritical dates well in advance of taking action, and advise the user client of strategic options: whether to renew, expand, or relocate. Having these extra set of eyes on critical action dates, supplements the activities of lease administrators and leasing specialists.

Market rates: The tenant rep can supplement leasing information of user leases with current market rates; providing insight to lease renewals at favorable rates, or whether it’s advantageous to relocate at new but lower rates.

Market conditions: The tenant rep can supplement user lease data with market data such as absorption, supply and demand, competitive offerings, and changes in local tax or other market factors.

Communication medium: Tenant reps can use the leasing system to update the user client on project status, such as renewals, or new leases. The system becomes an efficient medium for collaboration and communication, easily accessible remotely from the field, or in the office. Updates are real time, keeping both the user client and tenant rep current on leasing activity, project status, and rent payment status.

Flagging problems: One area where the tenant rep can add significant value is spotting and reporting irregularities in escalation charges. By monitoring escalation payments, the tenant rep is able to flag errors or overages in certain CAM charges. It is here where the user client can benefit from the experience and knowledge of the tenant rep who typically has broad and deep experience with landlord practices.

Strategic planning: The user client will benefit from involving the tenant rep in the strategic planning of the leasing portfolio, particularly in the context of facility consolidations, or strategic relocations. The leasing system becomes an essential tool in the planning process, by aligning actions with critical lease dates or options. Another important area for strategic planning is the question of lease versus buy, particularly in light of the pending FASB rule change on operating leases. It is usually advisable to gain the input from the tenant rep on lease/ buy questions, and to use the leasing system to flag these questions.

The evolution of the tenant representation industry has matured considerably over the last ten years. It’s now a common practice for user organizations to enter into one or more exclusive partnerships with commercial realty firms, to execute leasing actions as well as to serve as strategic advisors to the corporate real estate organization. It’s both practical and advantageous to include the tenant rep advisor in the lease management system for the reasons cited above. By doing so the user client leverages the knowledge and experience of the tenant rep, as well as leverage the value of the leasing system itself.

There’s compelling logic to combine a lease audit service with a lease management system such as Visual Lease. Commercial leases represent complex legal documents, and each market has its unique peculiarities requiring sophisticated legal and accounting expertise. Leases require constant monitoring, since landlord charges occur continuously, and the issue of erroneous charges including escalation rental increases and CAM (common area maintenance) charges require constant review and reconciliation.

There are several key benefits by having a lease audit firm combined with a lease management system. First, the audit firm can insure that the lease management system contains the required data fields, organized in a way that facilitates efficient lease administration. Second, the lease system can identify problematic charges and flag these charges to the audit staff for review and reconciliation. Third, there will be periodic instances such as lease renewals, option servicing, estoppels, and other lease requirements where the lease administrators will need specialized expertise such as legal or accounting expertise. The lease audit staff can fill this void for these types of leasing actions.

Perhaps one of the greatest benefits of having a lease audit staff associated with the lease management  systems relates to problematic escalation charges. The lease system will flag these unusual charges, but having a lease audit staff available to scrutinize the charges, and reconcile with the lease provisions can save time and money. For example, one of the common errors in escalation charges relates to maintenance expenses. Typically these charges should be limited to legitimate expense items; however, some landlords may include capital items in these charges; a blatant violation of most CAM charges. A skilled auditor will identify these discrepancies, resulting in significant savings, sometimes in the high six figures.

With the anticipated changes to the FASB  and IASB lease accounting standards, there will be enormous pressure to insure compliance with these standards once enacted. Having the legal and accounting expertise on hand will greatly facilitate the transition to the new standard, and to insure that the leasing system is fully up to date in reflecting the necessary balance sheet  accounting for both Type A and Type B leases. The lease audit staff can oversee the transition to the new standard and certify that the lease management system is in full compliance.

KBA is unique as a lease auditing firm in developing a state of the art lease management system. Typically a corporate client would need to contract separately with a lease auditing firm to conduct periodic lease audits. At KBA these services are fully aligned and available as part of the Visual Lease  lease management system. Synergies between these two entities both in terms of management and expertise, accrue directly to the client, ensuring efficient, time saving, and cost saving benefits.

Advances in technology and changes in user behavior are driving significant transformation in Integrated Workplace Management Systems (IWMS) software architecture and delivery.

 IWMS in the Cloud

 Cloud based delivery has the effect of disaggregating the functionality of IWMS solutions from multiple vendors. No longer must users choose one vendor to deliver all the functionality of an IWMS suite. Alternatively, users can choose best- in- breed solutions, and then integrate in the cloud with a common data base, performance metrics, and process engines. The user client can join multiple best –in- breed solutions, realizing higher performance, while reducing the cost of configuring and installing the applications.

This approach avoids the “big bang” implementation of a major IWMS solution which can take years to implement and millions in cost. Cloud based delivery can significantly reduce costs, by eliminating the need for server and storage hardware, data center staffing and facilities and energy costs. An ancillary benefit of moving to the cloud for IWMS delivery is to avoid the accounting effects of leasing hardware for premises based delivery. In a few years all leases, including IT leases will be capitalized and put on the balance sheet. Cloud based delivery avoids this accounting impact.

Growth in User Mobility

IWMS 2.0 is influenced by a rapid growth in user mobility. Most corporate real estate staff, particularly construction, maintenance and real estate project staff will access IWMS functionality via wireless devices. Lease data, maintenance orders, construction schedules, and other portfolio data will be readily inputted and retrieved via mobile technology connected via the internet to cloud based applications.  This trend greatly enhances the productivity of in-field professionals, by minimizing office time and increasing time in the field. It also shortens response time by closing the gap between data input and output. For example, leasing specialists have ready access to lease terms, notices, and other time sensitive data, while on site at a company location.

Sharing Data Between Systems

Today, most modern cloud-based software systems (if not all) expose what is called an “API” that allow that system to seamlessly talk with other systems.  An API is, by definition, is something that defines the way in which two entities communicate.  These APIs are completely invisible to Web-based software users; their job is to run silently in the background, providing a way for applications to work with each other to get the user the information or functionality he needs.  The important part of the API in this context is not so much what it is at a technical level, but what it does at a practical level; simply stated they are the glue that allows all of the great software you leverage today share data.  This has become so commonplace in todays world that if you use almost any website today, I am sure you have unknowingly been using APIs.  APIs are the KEY to building seamless IWMS 2.0 solutions.  (More to come on APIs in future discussions.)

 Conclusion:

IWMS 2.0 represents the natural evolution from large, complex (and expensive) enterprise solutions to small, aggregated solutions that take advantage of cloud based delivery. Many large companies will continue to acquire these large multi-functional applications, and even these are moving to the cloud, but smaller organizations with relatively small to medium sized portfolios will opt for aggregated “best-in-breed” solutions, to achieve lower cost, faster implementation, and more rapid return on investment. 

As a Gartner analyst some years ago, I focused on the real estate/ facilities management software space. I had spent nearly thirty years in corporate real estate, and was perhaps the only analyst at Gartner who had a broad and varied background in corporate real estate. I wrote one of my first research notes, in April of 2003 on the corporate real estate and facilities management space when I identified the key components of what I later named IWMS (Integrated Workplace Management Systems). These elements included 1.) real estate management 2.) facilities management  (CAFM) 3.) Design and Space Management 4.) and Maintenance Management (CMMS) Subsequently, facilities environmental sustainability was added to the list of core functionality.

In November of 2004, I published the first Gartner Magic Quadrant on what I defined at the time as Integrated Workplace Management Systems (IWMS) Initially I received “push back” from the corporate real estate community on the acronym. Many felt that the absence of “real estate” in the acronym diluted the prestige of their position and function.  Software vendors were particularly annoyed with the acronym, but several began to use it in their subsequent marketing. Within a year, the acronym became widely adopted.

I chose these words carefully since I truly believed that the power of these applications lay in the four dimensions, first “Integrated.” Data and processes from the full life cycle of facilities management would benefit from being tied together. Second, I chose the word “workplace” over real estate or facilities, since the nature of how and where people worked was undergoing transformation from places to a multiplicity of settings from home offices, shared work settings, and virtual offices. I viewed IWMS applications as the primary platform for workplace services. Third, I chose “management systems” to emphasize the enterprise nature of the suite of applications. Like ERP, HCM, and other enterprise class of software, IWMS was truly in all its dimensions, an enterpise level of functionality and data management.

Today, the IWMS market has matured greatly. The fact that major software vendors such as IBM, SAP, and Oracle have committed to IWMS with major acquisitions and product development testifies to its market maturity. Another dimension of its market growth is the global reach of its proliferation. The current Gartner magic quadrant (June, 2014) cited Manhattan and Planon as “Leaders” for their broad global presence, and multi-language, multi-currency functionality.

In a future Blog we’ll explore the future of IWMS, what we call, “IWMS 2.0” With the advent of cloud computing, combined with the rapid growth of mobile computing has redefined the meaning and nature of integrated systems  No longer do we think that IWMS can only be achieved through a single massive (and expensive) premises based system. Best- in- breed solutions united in the cloud, is now at hand, drastically reducing total cost of ownership, install time and rapid achievement of ROI.