Any corporation with more than one office/branch/site is large enough to have real estate portfolio objectives. With just a handful of locations, the C-level executives are likely very hands-on in determining the best solution as real estate opportunities or decisions present themselves. Once the number of sites grows to a point where that oversight is delegated though – whether placed under the responsibility of another staff member such as Regional VP’s, Controller, VP of Finance, General Counsel, or a dedicated Director of Real Estate – there are three styles that the management can typically be classified under:
1. Reactionary – Most direction comes from the field or operations groups as needs arise. Most often these type of corporations are decentralized in terms of real estate decision making. While the executive group must ultimately approve major obligations, the business case is usually created by a local or regional manager and the real estate department oversight role is to help facilitate the transaction.
2. Proactive – Under this category, corporate management is involved in defining some type of regular real estate objectives and the real estate overseer is often a relative direct report to the CFO or COO (sometimes their VPs in larger groups). Their actions are driven primarily by expiration dates of upcoming leases, and they usually communicate regularly with the field to determine needs well in advance or with sales/marketing to anticipate new facility requirements.
3. Strategic – The real estate group is the driver of real estate actions based upon corporate objectives and a portfolio approach is applied to reducing costs by evaluating efficiencies, forecasting demand, assessing market opportunities, and considering logistics if applicable.
In terms of involvement, each one of those levels successively requires a greater time investment. In terms of net profit, each level also successively provides a greater return to the corporation. Why?
Lets look at an expansion scenario under each of those management styles. Let’s say that a location runs out of space for employees or product and needs to expand. For purposes of simplicity, we’ll assume that the corporation only leases space and does not desire to own property:
Reactionary – If left to chance, the timing of this event rarely occurs in coordination with the natural expiration of a lease. Therefore, the company’s only realistic option is to negotiate with the existing landlord. This situation is not competitive because the number of prospective bidders with contiguous space is limited to one. Further, the objectives met are usually that of the local manager and not necessarily the corporation. These objectives could be the same, although they may not be. The local manager’s compensation may not be directly tied to expenses, so the lowest cost solution might not be the driver – perhaps he cares more about investment of his time and/or business disruption. Certainly those are important factors, they just might not be top priority from a C-level viewpoint. This group may or may not use tenant representation, often selecting a local tenant rep “if needed” or for relocations but not necessarily on renewals.
Proactive – Under proactive real estate management, the corporate RE manager would have been alerted in advance through regularly scheduled conversations with the field. The space demand might have been solved by diverting some business to another branch with capacity (empty seats or warehouse space for example), or alternatives such as splitting off a function such as accounting or marketing into a new office could be considered. Even if the preferred solution is to keep everyone together, figuring out how to split the operation – and assuring that you have enough time to execute if required – will open up more alternatives both with the existing landlord and with other locations. This will almost certainly result in a more competitive market rental rate and terms. This group often has tenant representation.
Strategic – Because the strategic RE manager routinely forecasts space demand and tracks inventory of open seats (office) or storage capacity (warehouse) factored against growth rate metrics several years in advance, this need was probably anticipated occurring during the original lease negotiations. If so, the tenant likely has either expanded at the last lease event or has some type of negotiated expansion option in place. Alternate strategies such as diverting business to another branch, reconfiguring the space to add additional capacity, or a lease termination option may be utilized. In any event, the more options that have been explored or considered, the greater the flexibility of the tenant, and the lower the ultimate cost. This group virtually always has an integrated tenant rep corporate services partner in a strategic role.
So why doesn’t everyone use the Strategic Method? Well, you have to walk before you can run, and the Reactionary Method is the one that will occur by default since companies tend to focus on running their business and delivering their product. Real estate just happens to be seen as consequential to the operations, not a strategic component. In firms with fewer locations, the C-level executives and the local staff are usually well in sync so can usually do ok with a Reactionary plan. The issues arise as the company grows and management is not conversing regularly enough with whomever is determining real estate solutions. Eventually, the company usually gets stuck in some bad lease situations, or a decision is made by a local manager who promptly leaves the company, although his poor decision on a 5 year (or longer perhaps) lease obligation remains. At that point, the company usually ratchets up a level or two.
The reason that investment in real estate strategy provides such a high rate of return on time investment is that: 1) the savings are usually direct to the bottom line (ie. there is no cost of goods or significant capital investment), 2) the results are usually transparent to operations (saving an additional $.50/SQFT/Year on the lease won’t make any difference to the employees or production) and 3) the effects are multiplied over a number of years (3-10 are typical). Investing time in studying and effecting the best facility solution will always result in less cost to the corporation.