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Corporate Real Estate Industry Sets Course On Strategic Goals

The corporate real estate industry thrives as its managers, like adept navigators, have steered through the whitewater turbulence of downsizing in the early- to mid-1990s and continue to align their courses with the strategic business goals of their companies. Real estate service providers have assisted along the way by generating an increasingly sophisticated array of services designed to help corporate real estate managers clear the decks and concentrate on the basics.

Those basics involve a historic shift in the functions of corporate real estate. Not long ago, corporate real estate departments were mainly purveyors of transactional services, but that changed to a strategic focus with the demands of worldwide competition, understanding the changing nature of the company's business units and the need to integrate with those units. And by enlarging their sphere of operations, corporate real estate managers have enlarged their contributions in providing value-added services to their companies.

Fewer firefighters, more planners Arthur Elman, vice president of corporate real estate for Roseland, N.J.-based Automatic Data Processing, puts his finger on the change. "There's a necessity today for the corporate real estate executive to be less a firefighter and more a strategic planner," he says. "He has to know the business and be able to partner with the business units in order to align corporate real estate strategy with business strategy."

Matthew Cullen, general manager of Detroit-based General Motors Corp.'s Enterprise Activity Group, which includes all of the company's real estate functions, concurs. "Corporate real estate directors are moving to a strategic focus vs. the transaction approach in understanding the changing nature of business units and the need to integrate with those units," he says. "There's a need to understand business-unit strategies and translate them into real estate requirements." GM knows whereof it speaks, managing a portfolio of 300 million sq. ft. in 170 countries.

Craig Morris, senior managing director for Northbrook, Ill.-based Grubb & Ellis Corporate Services Group, observes the same trend. "Companies are allowing real estate directors to become part of the business strategy at a higher talent level," says Morris. "It's giving them an opportunity to grow, and many are getting paid better. A lot of them are educating themselves as they go."

Kent Weigel, senior vice president of the corporate property services division at Seattle-based Washington Mutual Bank, also sees more opportunities for corporate real estate managers in the expanded playing field. "We're becoming more involved in long-term strategic planning, enabling our business units to meet their markets," he says.

As corporate priorities change in a swiftly-moving business environment, pressure builds to stay ahead of the curve. Lewis Pierotti, real estate director of Columbus, Ohio-based Banc One Corp.'s Retail Banking Group, says corporate users are looking at ways to streamline their operations and focus on core competencies. There is a lot of pressure to bring new, creative approaches to asset management, project management and strategic planning. "The increased emphasis on growth creates the need for much quicker turnaround," he says.

Robert Aumiller, executive vice president and pricipal at Baltimore-based MacKenzie Commercial Real Estate Services, adds, "In the last few years there's been more of a strategic approach by users in how to lease, buy and develop space," he says. "They want to reduce costs and have flexible options."

Creating partnerships With corporate real estate managers joining their companies' top-level planning teams, more opportunities are being created for partnering with other business units. Weigel pinpoints a movement toward the shared services concept between corporate real estate, human resources and telecommunications. "These three functions relate to how the workplace comes together, and sharing services makes it easier to provide solutions to their individual needs," he says. At the same time, opportunities also arise for strategic partnering with other business units.

O.B. Upton III, executive managing director of corporate services for New York-based Cushman & Wakefield, agrees with Weigel. "Within real estate, we're seeing more integration of information technology and human resources," he says. "These three components work closely together to determine the corporate infrastructure backbone."

Corporate real estate is also being affected by other issues including e-commerce and globalization. Frank Robinson, vice president of corporate real estate for San Francisco-based McKesson HBOC Inc., singles out e-commerce as the hottest issue in corporate real estate today. He says corporate real estate managers need to understand the e-commerce strategies of their companies so they can dovetail their efforts and form programs in support of those strategies.

In respect to globalization, Upton says there's a trend in that direction as growing numbers of companies set their sights on overseas expansions. "There's a demand for 24/7 global technology platforms," he says.

Service provider roles change As corporate user roles undergo dramatic changes, no less is occurring on the service-provider side. Service providers are becoming consultants and partners with their corporate clients as they move to broader levels of activity. Eric Friedman, partner in the Cleveland office of New York-based Deloitte & Touche LLP's Real Estate Solutions Practice, says, "The days of swinging from the trees and bringing home carcasses for service providers are over."

Alex Dominguez, director of real estate for Atlanta-based Chick-fil-A Inc., says service providers are trying to establish themselves on a national basis through mergers or consolidations. Weigel also says there's consolidation among service providers and a willingness to invest in their own infrastructure and leverage that across a broader base of customers. He foresees alliances among users and service providers similar to the proposed Big 3 auto alliance in which GM, Ford and Daimler-Chrysler may buy parts together.

Elman sees a trend toward more willingness to take on jobs that do not generate commissions such as financial analysis and "what-if" scenarios. Pierotti notes that publicly traded service providers have depressed stock prices and are not growing as rapidly as they would like, so they are diversifying their services in the hopes of capturing additional business.

In Friedman's view, there has been a shakeout among the boutique or specialty service providers. He draws support on that point from Tom Murray, senior vice president of St. Louis-based Colliers Turley Martin Tucker. "Demands have risen, and the cost of business has gone up to the point that boutiques can no longer operate effectively," he says.

As a provider, Aumiller says his firm is being asked to furnish a bundled service package as the one source for all. "I find myself more and more on the inside," he notes.

Mark Klender, national director of corporate real estate consulting at Deloitte & Touche LLP, Los Angeles, sees broader and deeper services from service providers and says they're becoming more customer service-focused in order to retain clients.

Brian Schwagerl, senior manager for facilities planning at the Hearst Corp., New York, agrees with Klender. "They're starting to get a better sense of how to provide a full array of multi-disciplined services to clients, not just deals but true guidance," says Schwagerl, who also is president of the New York chapter of NACORE.

Outsourcing stabilizes Regarding outsourcing, the general consensus is that it has stabilized and is increasing although the rate of growth may be slowing.

Elman points out that even though corporate real estate departments are not growing, there is more work, opening the gates for a variety of outsourcing without giving up financial or strategic controls. Upton sees more outsourcing emphasis on program, project and facilities management. Friedman says outsourcing products are becoming more specialized to include portfolio strategy, recapitalization and finance consulting as well as e-business strategy. In addition, property management accounting and lease administration continue to be in high demand. All should be wrapped in a consultative package, he advises.

Dominguez comments that outsourcing is finding its niche. While it is easier to ramp up for services in a strong economy, he says there are some proprietary functions that should not be delegated to third parties such as long-range planning, site selection and market decisions.

Elman says that much of what service providers do is non-mission work related to the company's income stream or expense stream despite more partnering between parties.

Sources have different views on whether companies are taking back some of the activities that they outsourced to service providers. "Some companies are taking services back they outsourced because they went too far down the path," says Cullen. "They found it was a painful experience, so many are 'in-sourcing' today. We were more methodical in deciding what services to put outside. We weren't as far down the path and knew that we needed to maintain intellectual capital in this area."

Morris sees a back-and-forth movement on outsourcing but no real taking back of services. "Once users take this route, there's no real reason for them to staff up again," he observes.

Some, like Denny Tender, associate vice president at the Irvine, Calif.-based Nathan Howard Group, are seeing a reverse in this trend. "Industrial property managers here are still handling their real estate in-house," he says. "With the great market, owners are seeing profits and there's no reason to outsource."

While the extent of outsourcing may vary between companies and industries, most would agree that it's a ubiquitous presence on today's corporate real estate scene. The 1999 NACORE/Deloitte & Touche Occupancy Cost and Outsourcing Initiatives study concludes that outsourcing is here to stay and describes it as central to a new business model.

In a summary of the report published by NACORE, Deloitte & Touche's Klender says the model consists of a small group of in-house corporate real estate executives performing key, higher value-added services such as strategic planning and real estate analysis, providing decision support to senior management and serving an increased customer-service role as liaison with internal business units. More routine day-to-day facility and operations processes are outsourced to service providers. In this model, the in-house team serves as process and project manager, overseeing the outsource vendor's services. He concedes, though, that outsourcing may not work for many companies.

The study says the number of service areas reported and outsourced has not increased since 1997 (the previous survey), and outsourcing appears to have stabilized. Increased outsourcing was found in three service areas: space alternation, lease administration and mailroom. There was no change in 10 outsourcing areas and decreases in seven. The sharpest decreases were reported in real estate development, real estate law, environmental monitoring and location analysis. Partially explaining three of the decreased areas was the fact that a high percentage of companies reported they no longer engage in those activities - real estate development, ADA/code compliance and environmental monitoring.

In addition, the survey found that 66% of the respondents outsource on a highly selective basis by type of service. One-fourth of the companies indicated they do broad outsourcing using multiple service providers, down from 39% in 1997. Only 13% of the firms that outsource services said they do broad outsourcing to one service provider. "The lesson to service providers is to focus on your core competencies and perform them deeply and well," Klender remarks.

What companies want What kinds of qualities are corporate real estate executives looking for in service providers? The report concludes that experience is most important followed by pricing. Other industry sources cite such factors as competence, trust and flexibility, high quality management, creativity and a senior-level service team. Robinson cites the importance of proficiency with Web-enabled tools. Upton summarizes with a list of seven factors: quality of people (which he ranks No. 1); breadth of services; geographic coverage; technology platform; cultural compatibility with the client; creativity in providing value-added solutions; and flexibility.

Real estate pros generally agree that the trend is toward one-stop shopping because it is a lot easier for companies to deal with one source vs. multiple sources. That does not mean, however, that specialty service boutiques are pulling a disappearing act. Schwagerl observes that there are still a lot of boutiques around and says there is room for both in the marketplace, while Dominguez is a boutique booster. "We're going to specialty providers because the work is very quantifiable, and we can measure performance," says Dominguez. "Dealing with multiple sources is no problem. Technology has made that easy."

One of the more interesting effects of the outsource movement is that many who worked for corporate real estate departments are now facing their former employers across the table as service providers. "Being a former employee brings a perspective to service providers and helps them better understand my side of the table. That gives me more confidence," says Robinson.

On the economic front, many wonder what effect rising interest rates will have on corporate real estate. Klender says it may impact the cost of borrowing, making it harder to own properties because of cost and the competition for capital within the company. According to Aumiller, many companies will think twice about expansion and put some decisions on hold.

Others, though, take an opposite view. GM's Cullen sees little effect because he says real estate issues are not affected by interest rates. "Corporate real estate requirements are not as sensitive to interest rate fluctuations as speculative investment real estate," he says.

Whatever the level of interest rate, a disconnect clearly exists between users who want flexibility and shorter leases and landlords who want long-term leases. As Aumiller puts it, "Companies want to keep their options open and determine what gives them the most flexibility vs. build-to-suit."

Outlook for 2000 The consensus is that the corporate real estate industry is healthy and growing in 2000 as it focuses on support of business models that generate core business growth. Although some downsizing of corporate real estate departments is continuing, it has for the most part run its course

"This is an exciting time as both corporations and the real estate industry awaken to the fact that the real estate business has a tremendous impact on the bottom line," says Cullen. "Real estate professionals are the key to the cost reduction and profit performance for which people strive."

Murray, however, sees a downside. He says many of the publicly held national real estate companies are not sharing in the industry's success. "Firms must innovate to prosper and the larger the company,the harder it is to do that," he says. "Significant debt also creates barriers to innovation because resources have to be spent servicing that debt."

Friedman says corporations are taking a more disciplined view of their real estate portfolios, and what is not strategic will be divested. They are also becoming more sophisticated and discriminating in selecting providers. "Even if there's a downturn, those providers offering value-added services vs. opportunistic services will continue to prosper," says Friedman.

The impact of technology Looking ahead, the main challenges for corporate real estate will revolve around responding to changes in today's swiftly-moving business environment. Those changes are being driven primarily by technology, which will continue to have a tremendous impact on corporate real estate.

"It's like being on the first word of the first paragraph of a novel that's yet to be written," says Aumiller.

The key to technology, says Robinson, is understanding and acceptance. "Users and service providers must understand the web-based tools emerging within the real estate industry designed to provide better communication, faster project completion and lower costs," he says. "Corporate real estate executives will demand these services."

And while understanding is key, sifting through technology to find the best fit is equally important, says Grubb & Ellis' Morris. "In the future, the challenge will be to prioritize technology services, so you're only dealing with the ones most valuable to you," he notes.

On the other side of the chasm, Friedman says service providers will have to figure out how to lead corporations through changes in technology and develop strategies to reach that goal. Upton cites three ways technology impacts real estate: it changes the way corporations use space through the flexible provision of space on demand; it changes the way users and service providers communicate through one web-enabled, integrated database; and it continues to change the way business is done through its high-speed flow of information.

As users and service providers explore new avenues of partnering, further progress in corporate real estate can be expected to enhance value to the companies served.

Conducting a multi-city corporate real estate assignment for a client is one thing, but how about completing 3,300 leases and handling lease administration for 5,500 offices throughout the United States, Canada and the United Kingdom?

That Bunyanesque project is being carried out by Colliers Turley Martin Tucker for the Edward D. Jones investment and brokerage firm, its St. Louis-based neighbor and client since the mid-1980's.

Colliers parlayed some early assignments including management of the Jones headquarters campus into handling all new office openings and office lease management. That program began in 1993 when Edward Jones rolled out ambitious plans to open 8,000 additional offices by 2004 in addition to its 2,000 existing offices.

The current pace of new office openings is 90 a month and Rich Etzkorn, Colliers senior vice president and point man on the Jones account, expects the number to increase to 115 to 120 a month by the end of 2000. Jones already ranks as the nation's largest financial services firm in terms of numbers of offices.

"Our program with Edward Jones represents one of the most far-reaching partnerships ever entered into by a commercial real estate services provider and a major business entity. The key advantage for them is that with their rapid growth, they're able to keep management focused on the core business while we provide professionals who understand the dynamics of real estate," he says.

John Bachman, managing partner of Edward Jones, comments, "Our growth has been phenomenal over the past six years and our relationship with Colliers Turley Martin Tucker has been critical in achieving this growth. Most importantly, Colliers Turley Martin's partnership allows us to stay sharply focused on serving our clients, individual investors who rely on our representat ives to help them with their investment and financial needs."

Etzkorn says his firm employs 40 people on the Jones account. "For all intents and purposes, we are the real estate department. Many people at Edward Jones do not know that we're not employees of Jones." Business volume has doubled since early 1998 and is continuing to grow, he adds.

He explains that while the typical brokerage firm may operate with 20 to 60 brokers under a branch manager, Jones has only one broker to an office. The company hires people who are independent, self-driven and able to work alone. "It allows us to put offices near clients who are small local businesses and local investors," he points out. "We want to where they live and shop." A typical office is 800-900 sq. ft. in strip shopping centers.

Colliers services include site location, lease negotiation, space design, overall construction management and installation of fixtures, furniture and communications equipment followed by lease administration and property management. Colliers also expects to do 1,000-plus lease renewals in 2000 and has handled a total of 2,500 maintenance calls with in the last 12 months, he says.

Colliers reached a milestone when it inked its 3,000th Jones lease earlier this year in Dexter, Michigan, a suburb of Ann Arbor. Amy Van Vurst, a Colliers leasing specialist, negotiated the 800 sq. ft. lease. As far as location of Jones offices is concerned, the most, 100-plus, are in the St. Louis area and the most in one state is 330 in Texas. The most remote location is Kodiak, Alaska.

Overall, Colliers' Corporate Services Division manages property, transacts, leases or administers the portfolio of more than 12, 000 locations totaling more than 50 million sq. ft. throughout the world.

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