Skip navigation

Corporates, servicers air views on key issues

Our second in a series of exclusive research surveys tackles the world of corporate real estate.

Editor's Note: The world of corporate real estate is getting tougher. As with so much that is current about the nation's commercial real estate markets, attitudes and latitudes are changing at lightning speed.

Which is why National Real Estate Investor's editors called upon the expertise of Intertec Publishing Corp.'s Corporate Marketing Research Department to survey a portion of NREI's readers in June and July, to gauge their involvement in the corporate real estate issues of the day and to find out what they're thinking about tomorrow.

The response was pretty astounding, even by typical survey-return standards. Essentially, we mailed a 20-question survey to 1,000 of NREI's corporate real estate readers and another 1,000 to our readership in the service-provider category. Making the job easier was the fact that NREI's entire circulation is audited by the Business Press Association.

We received 700 completed survey forms, of which 462 were service providers and 238 were corporates. That equates to an impressive 35% overall response rate, which is anything but typical of the "normal" survey response rate. It could certainly prove that the topic is an interesting and noteworthy one to many of our readers.

Co-sponsoring this research with us was Grubb & Ellis Co., based in Chicago. In fact, our interest in conducting this research can in large part be traced back to comments made earlier this year by Grubb & Ellis' outspoken chairman, Neil Young. He is among the leaders in the forefront of corporate real estate service providers, and he is adamant that the way brokers and other servicers have conducted business is about to radically change forever.

"Compensation I think is so vital because we're an industry that is consolidating so rapidly," says Young. "There are estimates that 50%-60% of the people in our industry will not be in the industry under the same name they are under today by the year 2000. Which means there is unbelievable pricing by firms for survival."

"We're going to go through this period in the next two to three years when people sort out the compensation issue, what services they really want out of the [corporate/service provider] relationship and what the measurements are that both firms can agree on so that everyone is satisfied."

Steven Scruggs, president of Grubb & Ellis' corporate and institutional services division, says corporate clients are demanding more and better quality services in return for higher fees. "And service providers are moving toward an 'unbundled' instead of 'bundled' fee structure, rather than being compensated with full transaction fees and giving other services away," says Scruggs.

"My feeling is that if it's just about money in the relationship it's not sustainable," says Young. "If it's about adding value to the client on a continuous basis so that you help them look better inside their organizations, that works."

Some impressive respondents Probably the first question that we need to answer about our survey is who filled out the questionnaires.

On the corporate side, 65.1% carried the title of vice president, CFO, controller, assistant vice president or director.

Of the servicers, 49.6% were chairman, president, partner, owner or CEO of the company.

What this tells us is that we worked from a pretty credible base of respondents, which allowed us to move on to perhaps the most frequently asked question in the corporate real estate world: to whom do service providers and corporate real estate executives report?

The largest percentage of corporates (34.3%) report to the company's president, with 23% reporting to the vice president/senior vice president level.

On the servicer side, many (38.5%) report to a company director, with 36.6% reporting to the president and 17.3% reporting to the CFO level.

Compensation structures How servicers are paid is probably the hottest topic these days in corporate real estate. Are there serious movements afoot to change from commission-only to fee-only or fee+ commission? We can extrapolate some interesting trends from our survey respondents.

Our corporates told us that they compensate their service providers using a wide variety of methods, the most common being fee-only (33.9%). Some 30% still provide commission-only payment, while 26.5% use a fee+commission structure. So it appears to be nearly a dead-heat between fee-only and commission-only from corporates.

Of our servicer respondents, the majority (59.7%) said they are paid commission-only. Still, a large segment (41.3%) is paid through a fee+commission arrangement. And only 10.6% said they were paid in a fee-only fashion. This gets back to Neil Young's point about the need for service-provider firms to create steadier streams of income, rather than on a deal-by-deal basis.

Even more interesting, of our corporate respondents who said they compensate their service providers with by fee-only, 55.1% believe there is a shift toward a fee-only compensation structure. But only 18.8% of those that use a commission-only structure believe that trend exists.

Of our servicer respondents, 37.4% believe there is a trend toward a fee-only compensation structure. And even among the respondents that are compensated on a fee-only basis, only 44.9% believe the trend toward fee-only exists. The same percentage believes that the trend does not exist.

Is fee-only a fair compensation method? Overall, 52.8% of our servicer respondents said fee-only is a fair way of valuing a company's service and 45% believe it places a better value on services. Of the respondents that are compensated through a fee-only structure, 75.5% believe it is fair and 57.1% believe it places a better value on services.

We also asked both corporates and servicers about the idea of commission-sharing, but only 10.9% of corporates said they are using this method and only 9.7% of servicers said they are paid in such a way.

So, what's happening here? The jury still appears to be out about what constitutes the best, fairest and most equitable compensation arrangement down both sides of the aisle. But the delicate balancing act between putting a price tag on service and providing the proper incentive to perform is likely to continue to shake out for some time. Old habits die hard, it seems.

Measuring performance Perhaps the most frequently asked question by Corporate America these days of its service providers is, "Am I getting my money's worth?" But how is the performance of service providers measured? And on the other side of the coin, how do corporate real estate executives know if they're doing a good job for their companies?

We explored these age-old questions with both our corporate and servicer readers and found some interesting results.

Not unusually, perhaps, we found that a majority of the service providers who responded to our survey (66%) said that bottomline annual savings was the most important indicator of performance effectiveness.

When the same question was asked for the internal operations of corporations, cost per employee ws the most frequently used measuring tool (at 37.4%).

There were a great many write-in responses to the question that proved interesting. For example, many corporate answers ranged from "feedback from business units" to "units opened" to "cost per square foot." Many servicers wrote in answers ranging from "done deal" to "closed transactions" to "results."

So what about benchmarking? Do both sides of the fence do it?

We found that 53.9% of the corporate respondents do indeed benchmark their performance against competitors or other industries. But less than half of the servicers benchmark themselves against their peers or other industries.

Important attributes What are the most important attributes that make up effective service providers (besides being a workaholic)?

Not surprisingly, the No. 1 answer from both corporates and servicers was a focus on customer service. Keeping people happy in this service-oriented business should obviously be a top priority.

And once you get past the service aspect, there were only slight discrepancies in both groups' answers as to what makes up the perfect servicer.

For example, corporates said they looked to track record as second in importance, followed by consultative approach, finance skills, transaction strength, technological adaptability, national scope and international expertise.

For servicers, a consultative approach was ranked as the second most important attribute, followed by track record, finance skills, transaction strength, technological adaptability, national scope and international expertise. It is surprising that those last two, a national focus and international expertise, are so low down the list. They are the very attributes most frequently cited by service providers when marketing their services, giving the perception at least that more companies require a sort of one-stop shop to handle every need.

We also asked our corporate readers if they pursue any continuing education opportunities through organizations or associations, and 62.2% of the respondents told us they do so through memberships in the International Association of Corporate Real Estate Executives (NACORE) and the International Development Research Council (IDRC) (23.5% and 23.3% respectively).

Of our servicer respondents, 67.5% are a member of an association. The Society of Industrial and Office Research (SIOR), Building Owners and Managers Association (BOMA) and the Institute of Real Estate Management (IREM) ranked as the most frequently mentioned associations at 16.7%, 11.7% and 10.4%, respectively.

Working strategically The biggest buzzwords in today's Corporate America are "strategic planning." Without a sound strategy, so the theory goes, you won't succeed. But traditionally, the role of real estate has been rather secondary to the overall corporate strategy. That is until now. As the role of the chief financial officer has been elevated in more companies, so too have CFOs begun to notice the costs associated with owning real estate (often real estate is the second- or third-largest cost of doing business).

So a brighter spotlight is being shown on the way in which Corporate America deals with its real estate assets. And thus, it has become a key in the strategic planning process.

Some of the things we wanted to find out from our corporate readers, based on this new enlightenment of real estate, were if they were involved in strategic planning (which 74.3% are) and at what point thery were brought into the process. The vast majority of corporate real estate executives (61.4%) that are involved in strategic planning are involved from the beginning, which is a good sign that real estate indeed has become integral to the process rather than the traditional stepchild.

But we also asked servicers at what point they are brought into the process. The largest percentage (47.4%) said they were involved after the planning has begun, but before it is finished.

Not all corporate respondents said that real estate is viewed strategically within their companies, but it was a high 73.5%. And 62.1% of them believe that their role as the real estate executive has become more important in their organization.

Of the corporates whose companies do view real estate strategically, 84% of them are part of their company's overall corporate strategic planning.

Over three-fourths (77.1%) of our servicer respondents consider real estate to be viewed strategically within most companies today. However, only 43.1% of brokers indicate that they are part of their client's overall corporate strategic planning.

What that may indicate is a need for improvement on the corporate side to better utilize the expertise of their service providers prior to the start of the strategic planning process.

Have corporate real estate executives been effective in gaining the attention of upper management? Of the respondents in companies that view real estate strategically, 69.2% have been very effective in gaining management's attention, versus 57.4% of overall respondents.

It seems that the servicers with size and scale of larger portfolios do tend to have a larger say in their corporate clients' planning process. Of the servicers surveyed, the respondents with the largest portfolios (5 million sq. ft. and more) are much more likely (at 68.3%) to be involved in the client's corporate strategic planning than those with less than 500,000 sq. ft. in their portfolio (37.7%).

What to outsource Another age-old dictum in corporate real estate involves the sometimes strained relationship that exists between the corporate level and the service provider. Time was when most corporate real estate executives were fearful for losing their jobs as Corporate America went on a seemingly unending drive to outsource everything but the kitchen sink (but not the contract to clean it). This often put the corporates in nearly direct competition with the servicers, which understandably does not always make for a happy working relationship.

First, we asked the question, "Will your company continue to outsource many of its real estate services?" To which 62.6% of respondents told us they will continue to outsource, 13% said they will not and 23.5% said they do not currently outsource.

Corporates that will continue to outsource told us the most frequently outsourced service will be design/architecture (at 82.6%), followed by building/space construction (77.8%), transaction services (38.9%), development (29.2%), property management (27.1%), facilities management (25%), lease administration (15.3%), asset management (11.8%) and strategic planning (5.6%).

The service providers surveyed were more bullish about the continued strength of Corporate America's outsourcing attitude, with 89.8% predicting that corporations will continue to outsource their real estate services. But this group diverged from their corporate brethren when it came to what those services will in fact be. A majority of them (73.5%) mentioned property man agement as the favorite for outsourcing, which compares to the corporate ranking of No. 5 on the list of outsourced services.

Going on down the servicer listing of frequently mentioned outsourced services we found building/space construction (65.8%), design/architecture (62.7%), asset management (56.9%), development (56.4%), transaction services (56.4%), facilities management (55.4%), lease administration (51.8%) and strategic planning (16.6%).

Interestingly, service providers said they have added a number of services over the last three years in response to demand and to gain competitive advantage. They include transaction services, lease administration, property management, development, strategic planning, asset management, facilities management, building/space construction and design/architecture. Other write-in answers included "appraisal," "consulting" and "finance."

The servicers also told us that the majority of them (59.5%) have increased their business with national corporations over the last three years, while 33.3% have seen a decrease in business with Corporate America. And in the same timeframe, 45.7% of the respondents have increased their staffs to meet the increased need. The companies that manage a total portfolio of more than 5 million sq. ft. are much more likely (87.8%) to have experienced an increase in business with major national corporations than those with less than 500,000 sq. ft. (48.6%).

Does that increase in business mean only that Corporate America is trimming and downsizing its space needs, or will it increase its space in better economic times?

When asked their opinion of the space requirements that companies will have in the future, more than half of servicers (51.7%) indicate a belief that it will go down, while only 25.3% foresee an increase in space needs.

What do the corporations say? First, we needed to know their relative size to gauge a base. We found that nearly half (49.1%) of respondents have a corporate real estate portfolio of 2 million sq. ft. or more (in fact, 34.3% have a portfolio of 5 million sq. ft. or more).

Given this information, it's surprising that 57.4% of the corporate respondents said their companies will need more space in the future. Only 18.3% said their companies will need less space.

On the face of it, there appears to be a wide discrepancy in the views shared by these two groups when it comes to future space utilization needs. But it figures that if, in general, companies will require more space it the future, they will need to either staff up internally on the design/architecture and building/ space construction disciplines, or outsource these services (remember that servicers told us that building/space construction and design/architecture ranked second and third on their list of new services added in the last three years).

Balance sheet strategies We hear a lot today about the many different types of creative financing vehicles available not only to Corporate America but to the commercial real estate industry. The terms synthetic lease, credit lease, EVA, etc. have become commonplace in discussing the various options available to reposition the use of commercial real estate.

Corporate respondents most frequently use credit leases (29.1%) with regard to their real estate portfolio, followed by joint ventures (27.8%), divestiture (21.7%), non-recourse mortgage financing (17.8%), synthetic leases (13.9%), tax leases (11.3%), EVA or economic value add (10.4%) and franchising (9.6%).

Service provider respondents manage an average portfolio of 1.15 million sq. ft. for their corporate clients. The most frequently used balance sheet/off-balance sheet strategy with regard to their real estate portfolios is credit leases (42.6%), followed by joint ventures (33.3%), non-recourse mortgage financing (31%), divestiture (11%), synthetic leases (10.2%), franchising (5.8%), tax leases (5%) and EVA, or economic value add (2.4%).

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.