Changing alliances in corporate real estate.

A true story sums up the recent attitude of business management towards property. Last August, a major corporation decided to call a meeting of unit leaders of all their real estate holdings. They booked a hotel and a room that would hold 300 people. On the appointed day, the room was jammed with more than 500 representatives. Headquarters was stunned to realize that they had underestimated their holdings by 40 percent.

Suddenly, corporations who have been similarly nonchalant about real estate are looking at their properties more carefully. IBM, for example, according to Time magazine, is divesting itself of 40 percent of its national real estate holdings. In Westchester County, NY alone, Frank Tomasulo, first vice president of CB Commercial Real Estate, estimates that companies attempting to reduce occupancy costs and increase productivity have returned a million and a half square feet of space to the market this past year. This represents approximately 6 percent of the total existing space available.

At the same time, as corporations downsize to stay competitive, the in-house real estate staff is among the first to be reduced. This has led to increased outsourcing and strategic alliance opportunities for commercial real estate service companies.

In the last two years, more than 50 Fortune 500 companies, including IBM, Kodak, Shell Oil, Exxon, Mobil, Colgate Palmolive, AT&T and Xerox have developed outside relationships to meet their real estate service requirements. Tomasulo asserts that "the consequences of sharing this function and developing new skills will change the face of commercial real estate, perhaps forever. In the past, commercial brokers were involved principally in finding space and negotiating its ownership. Now they must also study how companies use space. Their role has expanded into strategic planning to help business improve the bottom line."

To do so more effectively, CB Commercial has established a unit, CBC/Madison, that is working with major corporations in diverse fields early in the cycle, long before transaction time.

Types of Alliances

According to Jeffrey Waters, senior managing director of CBC/Madison, their strategic alliances fall into three major categories: a single provider selected by competency and geographic coverage; multiple providers selected by region; and multiple providers selected by competency.

Waters reports that the companies which can most readily profit from real estate outsourcing are in general, service and manufacturing companies with multimarket requirements. Ten or more locations with a minimum of 10,000 square feet each could be well served. But size of locations isn't necessarily key. A business with 50 locations of 1,000 square feet would also find it efficient to outsource.

One of the first companies to enlist outside management was John Hancock Mutual Life Insurance Company. D. Timothy Buckley, director of office leasing at the Boston headquarters, oversees 350 leases, comprising 1.4 million square feet. Two years ago, his organization contracted CBC/Madison to negotiate the business terms of all Hancock's leases, acting in each case in accordance with Hancock's instructions. Buckley's staff went from ten to one, himself.

The streamlining provided many benefits in addition to cost economies. Buckley explains that since CBC/Madison is linked to CB Commercial's 85 brokerage offices across the nation, it can readily analyze markets, obtain uniform proposals from landlords, and then, after feedback from Hancock management, it conducts negotiations to hasten acceptance.

Of Hancock's 350 leases, 120 are renewed, amended, or renegotiated each year. In the past year, too, the insurance company has closed several agencies, and the real estate firm is actively looking for new tenants to fill these spaces.

Eastman Kodak embarked on an out-sourcing program in late 1992. Four firms were chosen based upon their expertise in certain services and/or experience with specific categories of properties. CBC/Madison was selected for all U.S. leases and subleases with a single point of contact. H. Bruce Russell, director or and vice president of corporate real estate for Kodak, reports that in choosing are an outside partner his company was looking for "a willingness to grow together. the Our alliance is like a marriage; we can't put all the rules in place in the beginning But with trust and confidence in the other, we will make it work."

Ken Ebner, vice president in charge of corporate properties for Household International, on the other hand, likens the is alliance relationship more to that of a "significant other," since the three-year contract can be canceled at any time for any reason with a 30-day notice.

With two and a half million square feet in 1,000 locations, Household International's goal was to add quality, shorten cycle times, and create consistency in real estate transactions. CBC/Madison is now engaged in reviewing all the company's properties and will then endeavor to create more value in leases that will expire in the next three years, especially those whose terms are higher than prevailing rates.

Ebner's own department, which handles property and facilities management at the company's Chicago headquarters, has been reduced from 85 to 38 in the past five years.

Bottom Line Focus

The net result of all these alliances is that brokers are sharpening their business skills to make sure clients are operating in the most efficient environment possible and are achieving cost savings. IBM, for example, reduced its internal real estate staff from 400 to 50. Payroll costs are obviously reduced, but because of the volume and scope of the transactions now handled on the outside, IBM is Paving commissions that are sharply discounted from the traditional percentage.

In Seattle, CBC/Madison worked with Aetna Life Insurance Co. and provided them with savings in three areas. First, by evaluating work stations and reorganizing work space with their internal facilities people, overall space was reduced by 20 percent. Second, instead of moving offices to the presumably less costly suburbs, the local CBC/Madison specialist reported that the square-foot cost for subleasing recently vacated corporate space in downtown Seattle was less expensive than the suburbs. A third savings accrued because by staying in the city, employees could continue to take advantage of local transportation. A vehicular commute to the suburbs would have resulted in increased taxation for Aetna in order to comply with the Federal Clean Air Act.

To succeed in this new environment, real estate service Providers must expand on their current skills. Russell points-out, "They must have financial knowledge. They have to have an understanding of the client's corporate financial structure, with an emphasis on tax implications of alternative transactions. They should improve their process skills rather than transaction skills, since they must engage a great number of different interests within a corporation to get them all focused on the right objectives. Thirdly, they have to be effective marketers in house - they have to sell the corporate team on their proposals and help the client run its real estate holdings as businesses. "

"In general, the biggest change for commercial real estate," Waters says, "is that of anticipation. In the past, we mainly reacted to specific needs. Now our mandate is to look into the clients' future, anticipate his needs and then accommodate those needs. It is a profoundly different way for brokers to do business."