Corporate RE seen changing for good.

As corporate America adjusts the way it does business in reaction to the economic downturn, many of its in-house real estate executives find their field is undergoing massive changes, some of which they believe are permanent.

Numerous corporate professionals have had their positions eliminated through downsizing, decentralization or mergers. Outsourcing is the term of the 90's as corporate executives form alliances with outside firms that can perform services previously done in house.

In addition to becoming smaller, there is consensus that the trend is for these departments so serve more of a strategic rather than transactional function in the corporations and for the personnel of these departments to reflect that transition. Real estate is also becoming, many believe, a more important item on the corporation's balance sheet and a more integral part of their overall objectives.

"The business cycle will always be there," said one corporate executive. "We are experiencing fundamental changes."

These developments have prompted a study by the Industrial Development Research Council (IDRC) that is the brain-child of industry executives. "Corporate Real Estate 2000: Management Strategies for the Next Decade", being conducted in partnership with MIT, will examine the changes in corporate real estate and devise a working model for these departments and their companies that is more strategy-based.

According to Joel Parker, director of Research for the Industrial Development Research Foundation: "Real estate for corporations really is a strategic resource. It is a resource you have to think about up front or you really lower your ability to adjust down the line."

Situation Wanted

Richard Eyre, president of the New York Chapter of the National Association of Corporate Real Estate Executives (NACORE) and the director of real estate for CBS, Inc., said all companies are operating with smaller staffs, while others are disbursing their real estate functions to the subsidiaries.

"Some corporations have decentralized their program and, in those cases, they have, in a sense, outsourced the whole real estate division," he said.

Eyre said he is not sure that is advisable because the corporation forfeits some of its control, and it is more difficult to ensure company standards are upheld and to sage the subsidiaries from the pitfalls. The headquarters real estate department, he said, may lose its function as "corporate watchdog."

Some executives have turned to consulting, either by opening up their own shop or contributing their services to an existing firm. Others are looking for work with other corporations.

A number of professionals said that, while "in the old days" the corporate real estate executive was a facilities manager who made sure leases were signed and all offices had furniture, today these corporate employees need financial know-how, a sense of development and planning and an ability to add value.

Mike Evans, with Ernst and Young, Real Estate Services, based in San Francisco, which does consulting to corporations, said they are recommending to some companies that they eliminate the $60,000 facilities manager and hire a person with development and planning skills for $150,000 to $250,000.

Peter Brooks, partner with Austrian Roth & Partners, and a former senior vice president and head of the Corporate Services Division for Chemical Bank before the merger with Manufactures Hanover, agrees that the personnel requirements for some companies are changing. With all the consolidations and mergers going on, he said, the corporate exer will need greater financial knowledge.

"It may not be they are getting rid of corporate real estate," Brooks said, "but they are changing the people they want to have on staff."

But, Brooks said, how the departments will be staffed varies from one corporation to another depending on their needs.

"A lot of corporations rent their real estate and a developer is going to be no help at all," he said.

Change in Thinking

Ken Philbrick said he is one of the "victims" of corporate downsizing. Formerly the director of Real Este and Facilities for Colgate Palmolive, Philbrick is now a free-lance consultant. He is a strong supporter of the need for a change in approach for corporate real estate execs and an advocate of outsourcing.

"Corporate real estate executives up to today have been thinking too tactically rather than strategically," he said." . . . They have failed to build their case with senior management."

According to Philbrick, corporate real estate departments have to become a business partner of the corporation rather than being looked upon as a luxury. Therefore, he said, they have to show they are adding value.

A corporation's real estate executives, he said, need to understand their corporation's culture and the culture of the subsidiaries -- what their business is, what the products are, long and short-term goals. They have to prove, he said, that what they do with real property assets can improve the company's profitability.

"All of these effect real estate," Philbrick said. "You're going to end up with a lot of excess square footage if they are going to get out of the coffee business.

"It's not sufficient for us to keep pace with what's going on," Philbrick said. "We need to be ahead of the game."

Philbrick predicts that future corporate real estate departments will have two to three senior managers with a minimum of 10 years experience. They will have to be, he said, strategic thinkers, have good interpersonal skills, and be able to form good trusting relationships with senior management and subsidiaries. They must also be financially oriented and know what drives the profit and loss of their firm.

During the 80's, Evans said, many corporations, particularly, high-tech, continued to expand their real estate holdings without any long-range planning.

Silivon Valley, where Ernst and Young does a lot of their consulting, was developed the "most helter skelter," Evans said. Many of the high-tech companies, he said, own or lease 60 or 70 buildings there.

"There are no economies of scale at all," Evans said.

Ernst and Young is currently helping a lot of companies down-size their corporations and their real estate holdings. They are currently doing an excess land strategy for Grumman Aviation.

"We had a lot of work in the expansion strategies," he said. "Then it hit the skids and its all contraction strategies."

Mike Bell, director of real estate for Dun & Bradstreet Corporation, who was also with Xerox for 17 years, said: "The general thrust is it is less transactional . . ." he said. "The shift is back to a much more business support function."

Room for Creativity

The troubled real estate market has opened up an opportunity for the corporate real estate executive to be creative, said Mark A. Holod, executive vice president of Active Asset Recovery L.P., and the former head of Real Estate for Chase Manhattan Bank.

In recent years, Holod said, "pro-active" real estate management became less important politically for the company. 'Do what needs to be done and contain costs' was what was heard from some senior management, he said.

"The creative real estate director could make an enormous impact on the company by just manipulating the enormous captive asset base," he said.

Again, Brooks said, one should be careful not to generalize. Some of the larger corporations that have "monster amounts" of real estate, like IBM, Xerox, and ATT, are known for the pro-active and integrated stance with their real estate holdings.

"They, almost because they have to, have departments that are very plugged into the corporation," he said.

Real Estate Gains Ground

Some experts also say that, since the downturn in the economy, corporations have begun to re-discover the importance of their real estate, which often equals 25 percent of their assets.

"Real estate was an asset on the balance sheet that was very much overlooked," Evans said. "Today they're looking at it as a way of cutting costs.

"There is a realization that real estate has a value and it can be maximized," he said.

"The recession," Brooks said, "is causing people to focus more on what they use to take for granted."

Philbrick said real estate will be integrated into the business financial objectives and be pushed further up in priority to be on par with the tax, treasury and finance departments.

Outsourcing

While many corporations have always looked to the field for some of their real estate work, "outsourcing" is more popular today as companies look to cut costs and operate with fewer employees. Many corporations already look to service companies for their transactions, and this, many believe, is the way of the future.

These outside services, Philbrick said, have really become an extension of the department.

"As these departments get smaller," said Philbrick, "they're going to have to form strategic alliances inside and outside the company."

The attitude has also begun to shift, Philbrick said, to a feeling that the corporate departments do need help, and there is now less fear and less of an adversarial relationship.

"A lot of times," Brooks said, "we get corporations asking the question 'Should we do it ourselves or should we go outside the company"

Through decentralization and contraction many companies have let go the "old pro" with the most understanding of the company and its deals, said James L. Mooney, president of Landauer Associates, Inc. Real Estate Counselors. They will then need some additional help from the outside, or, ironically, he said, those executives that have been let go by the corporations may be called on by their peers to act as consultants and lend their knowledge. The corporation, he said, gets the benefit of their experience without the fixed overhead costs. The employee-turned-consultant, Mooney said, gets a fee that sometimes exceeds what they were receiving as salary.

"In the long-run they may have done them a favor," Mooney said.

This "musical chairs", however, he said, may be strange conversion for some.

"It's a difficult transition to make -- from life-time corporate employee to an entrepreneur or a person acting as a consultant," he said.

The corporate cutbacks have also meant less outsourcing for some companies. Mooney said their overall level of corporate work is down because some companies are eliminating the advice of objective outside consultants and relying solely on in-house resources.

"They're kind of going bare bones," Mooney said. "They make the decision and move on it."

As an outsource, Mooney said, they put a high premium on understanding the corporate culture, which, he said, is vital to getting the corporate outsource work. Corporations looking for outside help, Mooney said, will find service firms that have a good handle on corporate thinking.

"Some of the major brokerage firms attempting to serve corporate clients have a good understanding of corporate clients and can actually serve corporate clients well," he said.

Studying the Changes

The study by the Atlanta-based IDRC was urged by a number of corporate real estate executives from such giants as American Express, Xerox, IBM, Dun and Bradsheet and others.

"The supplier side and customer side is undergoing massive change," said Robert A. Kotch, AT&T Real Estate Finance director, and the leader of the private-sector committee that asked that the study be connected.

Kotch sees the field of corporate real estate executive evolving into a more asset management function that demands the attention of senior management.

The investigation, a joint venture with the Center for Real Estate at MIT, will consist of 12 to 15 different research projects over a three-year period that will begin in June of 1992

Parker, IDRF's director of Research said, there are no widely-accepted models for corporate real estate as there are for other departments in the corporations. Today, he said, each corporation's real estate department functions in a different way.

"We will produce a series of models much like what is available to corporate finance," said Parker.

Corporate real estate is truly experiencing a revolution, Parker said.

"This is an ideal time to do it because the corporations are changing themselves and the real estate markets are changing themselves," he said.