Real Estate Forum - December 2008

Corporate Strategies
By Richard Kadzis
Downturn Presents Opportunity
For Improved CRE Management

HARKENING BACK THREE US PRESIDENTIAL

election cycles: “It’s the economy, stupid!”

The “knock-on effects,” as termed by Bob Bach of Grubb & Ellis, of the subprime collapse and resulting credit crises are hitting the corporate real estate sector as much as any other part of the general economy.

Headlines with words like “fear” and “mass layoffs” support the view that next year will see the bottom of the cycle for the property markets, as CoStar recently predicted.

But for those overseeing real estate portfolios on a global scale, 2009 may very well turn out to be a case of “now, more than ever.” That’s because regardless of the economy, CRE’s twin charges never change. Cost cutting is a permanent state. And so is the C-Suite and shareholder expectation that CRE delivers value, whether the global economy cycles up or down. Competitive advantage, innovation, speed to market and financial performance trump even an unprecedented global malaise.

Still, while the cost-cutting pressure is constant, it’s more pronounced than ever right now. So is risk management. That’s why some of the leading issues for CRE in 2009 will be a more intense focus on risk management and business continuity; efficiency with effectiveness; cost management with value output; emphasis on better capital planning; growing the C-Suite mandate for CRE to govern all real estate activity.

Short and long term, the ongoing CRE mandate will remain to deliver value to the corporate enterprise. The dual shocks of the US, and now global, market reactions have given way to a downturn, so that the long-term view for CRE is very much tempered by day-to-day survival.

Jobs are on the chopping block, and so is real estate. This comes as no surprise. Following the dot-com crash and 9/11, big companies like these were caught with too much surplus space. The good news is that many of them were engaged in aggressive space consolidation well before the full force of current economic conditions hit. They were reducing requirements as part of a trend that began in 2001, and ending around 2005 with commercial and industrial vacancies returning to historical averages.

The space-cutting push became more relentless after 2005, when companies began to mainstream flexible work practices like mobility and space utilization, eventually realizing that it reduces energy consumption.

When the real estate recession of the 1990s jolted everyone, CRE reacted by creating higher-level value for

itself and the enterprise. It was during this period that ‘bleeding-edge’ adopters like Cisco Systems, Nortel and Sun Microsystems worked with CoreNet Global (then known as IDRC) to launch Corporate Real Estate 2000.

It shifted the CRE industry paradigm by changing the nature of work and the workplace by reducing space and costs, while creating value in the form of higher productivity, customer satisfaction and other indicators.

Will the current jolt “drive more CRE managers back toward the value protection mode?” wonders Michael Joroff of Massachusetts Institute of Technology, who coauthored the first CRE 2000 study on the “Changing Nature of Work.” Today, he predicts, “there won’t be a similar paradigm shift, but by 2020 there is going to be a very significant transformation” around the CRE delivery model.

For those overseeing real estate portfolios
on a global scale, 2009 may very well turn
out to be a case of “now, more than ever.”

Interestingly, CRE is fast becoming a driver of the enterprise. For the past decade, Robert Osgood of Flad Architects has studied how companies and their CRE organizations are aligning, and how strategic drivers like innovation and speed to market are now enabled directly by CRE. “The underpinnings of the model are based on the application of a business framework to real estate, rather than an architect- or broker-based scheme imposed on a business,” Osgood has found.

Joroff believes this transformation is already visible even in the face of the current crises, which has already brought leasing activity to a crawl. But it all adds more to the claim that now more than ever, it’s always a good time for effective demand-side management. ◆