The Essential Real Estate Knowledge for All Leaders
Examine your surroundings. You are in real estate if you are on land. It is both pervasive and essential. Real estate is the largest or second-largest asset on the books for the majority of firms, yet since it is so ubiquitous, it is simple to take it for granted. Real estate management is challenging since it impacts all parties involved, including neighbors, workers, investors, regulators, and consumers. In this piece, I hope to condense real estate axioms that will assist CEOs, board members, and others in overcoming this obstacle.
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Commercial real estate is a strategic asset as well as an operational requirement. However, senior management is rarely interested in it. Real estate is still often viewed as a reactive, second-order staff role in many firms, with an emphasis on specific transactions and projects rather than the larger strategic concerns facing the business. Decisions on layout and location are determined inside business units, mostly based on conventional knowledge and short-term requirements. Employee and consumer preferences may not always be prioritized above proximity to the corporate office. The following five maxims emphasize the things that top managers should know, and they are not meant for real estate experts but rather for the executives who mentor them.
1. Take Charge of the Portfolio
The portfolio of real estate assets held by a business should be worth more to the firm than the total of its individual locations. Executives want a high-level perspective of their real estate position in order to guarantee this, and they cannot obtain it from the site-by-site study that is often the domain of internal staffs and systems. A “snapshot” of the company’s physical footprint, including its locations, types of land and buildings, use and state of key facilities, lease terms and operational expenses, and dangers to the company’s finances and environment, is necessary for executives. Additionally, executives want a dynamic and evolving view of how company strategy is influencing their real estate holdings and how that footprint may vary based on the path chosen. The research is likely to show certain misalignments when they compare the snapshot—tables, maps, and photos—with the “movie,” which consists of complex scenarios of a company’s known and projected demands. The firm can have the incorrect sort of space in certain regions, or too much room in some and not enough in others. Additionally, the analysis will display which leases are expiring when, how much they will cost over time, and how their locations and order of expiry may make future activities more difficult or even impossible.
Equipped with these discernments, a leader may capitalize on portfolio prospects that a site-by-site examination would miss. For instance, offices that don’t need to be in the heart of the city can be moved to less expensive submarkets that aren’t too far away. It is possible to sell, sublet, or remove redundant facilities.
The portfolio strategy is particularly significant during a company’s big transition, such a merger, acquisition, or divestiture. Just as essential as reducing the personnel may be the process of rationalizing an organization’s real estate, or the matching of space and facilities (supply) to strategic and operational demands (demand). Relocations, closures, and disposal are frequently necessary steps in the process of operationally, financially, and physically balancing supply and demand. The global advertising and communications behemoth WPP Group quickly sold J. Walter Thompson’s Tokyo headquarters after purchasing the firm, pocketing a whopping $100 million in proceeds. Furthermore, real estate is sometimes the most valuable and noticeable asset when divestitures are imminent. Bear Stearns, for example, had a Wall Street skyscraper that served as its main asset until the company failed.
Leaders may also learn about a property’s long-term expenses and usage by using portfolio analysis. A facility’s entire running and maintenance expenditures over its useful life, which is usually 50 years or more, can easily exceed the initial costs incurred during construction or renovation. Adopting a portfolio perspective facilitates more efficient scheduling of building rental and sales as well as maintenance expenditures. Leaders may anticipate—and perhaps prevent—project-level behaviors that jeopardize portfolio-wide gains by understanding this life cycle holistically. For example, an executive may make costly changes to the company’s headquarters while more junior managers are looking for ways to cut costs, or a business unit may lease more space to accommodate growth or a reorganization without realizing that another unit has vacant space in a nearby building.
Companies should be aware of their indirect responsibility for the buildings where outsourced operations are housed while they work to cut costs through outsourcing. Even though the workers at those locations may not be employed by the firm, their productivity is greatly influenced by the layout and placement of the facilities. Additionally, if worker health and safety regulations aren’t followed, businesses may face legal action and activist stakeholder action. Businesses like Citigroup and Nike, for instance, that have outsourced a large percentage of their operations have discovered that they have enormous de facto portfolios that need to be managed just as skillfully as the actual real estate they own.
2. Include Flexibility
The agile company makes sure it has the most flexibility possible with all of its real estate assets, even if that occasionally requires making larger upfront payments. Financial, physical, and organizational flexibility include building modular spaces, leasing rather than buying, and dispersing labor.
Businesses that value flexibility typically lease more and own less. For instance, Pfizer has always held the majority of its buildings in order to maintain control and because it felt that ownership would ultimately be less expensive than leasing. Pfizer discovered that selling specialized R&D facilities was very challenging, though, since changes in the sector forced the business to sell buildings rather than invest in pricey retrofits. When the firm eventually requires more R&D space, it intends to look at leasing and flexible-use possibilities.
When Pfizer’s executives started reorganizing its enormous real estate holdings in 2006, they found that roughly 15%
The lease itself provides a means of optimizing flexibility. A corporation may find it easier to adjust to changing conditions if its terms are shorter and include features like expansion and exit clauses, renewal choices, and more frequent and early termination dates. Organizations can also move or terminate activities by arranging the expiration dates of leases, sublet agreements, and departure clauses in nearby sites. As with equipment purchases, astute managers negotiate leases by setting a base price and outlining a range of options, some of which the business is willing to pay more for depending on the level of flexibility required. For instance, they may include modular options on new space for a rapidly expanding start-up, or exit rights after one year (rather than the customary five) for a unit that is up for sale. When corporate real estate managers are aware of how company demands vary, they may make well-informed judgments regarding how much to spend. Expenses up front could be little in uncertain times compared to the hidden running expenses of having too much or too little space, or the wrong kind of space in the wrong location.
Simple physical flexibility is the ability to split or sublease space with ease. Businesses can benefit from less expensive long-term leases in these types of facilities and adjust to changing needs by subleasing a portion of their space to third parties.
It is possible to design entire structures to be flexible. For example, structures that are modular may be swiftly assembled and transformed from one purpose to another. “Shrink-wrapped” facilities, which are constructed from the inside out, might have smaller footprints because they lack the spare spaces that usually find themselves inside a one-size-fits-all structure. A piece of land may be put to many purposes because to this smaller footprint. China’s “disposable factories,” which have a brief lifespan, provide for flexibility in the utilization of money and land. It is not always appropriate to use a disposable structure; considerations like as environmental effects and worker comfort are important. However, the cost of these buildings is just one-fourth that of a permanent plant, they can be rapidly and affordably deconstructed, and they only require one-sixth of the time to create. They are also easy to run and maintain.
Future uses can be considered while designing more permanent structures, which makes it simpler for businesses to switch from an expensive, complicated, or outmoded usage to a new, more profitable one. Simple, universal common spaces, standardized space modules, moveable walls, and easily accessible HVAC and electrical infrastructure are all features of these fungible designs that enable quick reconfiguration of the space when expected usage or running costs vary. It is far less expensive to include flexibility early on than to knock down barriers to make room for new arrangements.
Businesses may preserve their real estate flexibility by being open to the idea of offering employees several workspace configurations. The most obvious example of an alternative workplace is working from home. Although the term “telecommuting” has been around for a while, it was only ever applied to a small number of senior employees and workers who performed self-directed tasks until recently. (See HBR’s May–June 1998 article, “The Alternative Workplace.”) However, many types of employees may now choose to work from home, and as a result, some businesses are exploring ways to reduce their real estate expenses while also raising employee happiness.
