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Strategy: no disconnect.

One day, not long ago, a group of executives were sitting around a conference table debating several issues all involving their company's real estate. Possible solutions flew like the pigeons of St. Mark's square: They should move into new headquarters. No, they should expand their existing building. They should consolidate offices. They should open more. They should seriously consider a distribution center in Spain. No, everybody says Amsterdam is the place to be. Everyone believed his was the wisest "real estate strategy." Finally, the CEO,who had been listening quietly, removed his glasses and said, "I don't want to hear any more about 'real estate strategy.' I don't run a real estate business, so I don't want a 'real estate strategy.'" What's that they say about heating a pin drop?

Still, the wisdom of that CEO, who runs a high-growth, high-tech company, cuts right to the heart of what chief executives need to know: Real estate is too central to your corporation's ability to reach its overall objectives to think of real estate strategies outside the context of corporate strategies.

"Many corporations have one set of strategies designed to meet their corporate objectives and another set for their real estate objectives," says Martha A. O'Mara, a professor of real estate development at the Harvard University Graduate School of Design and an independent corporate real estate strategy consultant. But the two sets need not be mutually exclusive. Certainly, the real estate division's plan to secure a factory in Brussels, for example, reflects the corporation's intent to start producing there. But ideally, real estate should not serve as the pan in which the corporate pie is cooked (an analogy one top executive has used to explain his belief that real estate's only role was to "hold" his company's personnel and equipment); rather, it should be an ingredient that helps the pie achieve culinary excellence.

"Too often, management tries to impose an artificial propose on its real estate," says Stevan Sandberg, executive managing director of advisory services at Cushman & Wakefield, a New York City-based real estate services company. "They wonder, 'Should our real estate decisions be based on cost reduction or income generation or equity growth?' Well, it depends. The only role real estate should play is to support and help achieve corporate goals." That may mean reducing occupancy costs by innovatively housing employees one time and spending money on a new facade to improve corporate image the next.

To make this kind of synergy work, CEOs need to consider early in the decisionmaking process how their real estate can fit into the overall corporate strategy. Take the case of The Guardian Life Insurance Co. of America, for instance. The company had outgrown its headquarters building on Park Avenue South in New York. So much so that 40 percent of its New York staff occupied rented space in five other area buildings. On top of that, its primary building, which it owns and has occupied since 1911. needs an estimated $31 million in renovations to make it efficient, comfortable, and capable of handling the cabling and power requirements of our high-tech age.

"My first thought was that we simply needed to find a larger, more modern building," says CEO Joseph Sargent. His management team came together and developed five parameters that would guide their search for new facilities:

The property must

* be available for purchase, rather than lease,

* be available immediately,

* be able to house all the New York workers in one place,

* allow for future growth,

* benefit the company.

This last parameter was somewhat vague, but certainly included being able to accommodate Guardian's growing telecommunications needs. But what else? The question started a discussion about how the company's real estate requirements could dovetail with its corporate objectives, which included broadening the financial services it provides and publicly reinforcing its stability as well as its 138-year history. These considerations steered them away from a building in outlying Westchester County.

"It was an incredible bargain," says Sargent of the suburban alternative. "It would have met our real estate needs - if those were the only criteria. But we didn't see how it would help us get closer to our corporate objectives. So we kept looking."

When a building in New York's financial district came on the market, Sargent and his team knew they'd found Guardian's new headquarters. "The company started out just a few blocks from there in 1860 and remained in the area until 1911," he says. As its early press clippings exclaim, the move will mark a homecoming for the company - a graceful and clever way to tout its longevity. That the new building is located in the Wall Street area beefs up its claim as a financial services organization.

Recognizing how the site pushed Guardian a little closer to its corporate objectives made it easier to overlook the one parameter it didn't quite meet: It was available only for lease, with an option to buy after 20 years. Leasing is somewhat antithetical to the insurance industry's practice. According to "Benchmarks III," a study by the International Facility Management Association, 87 percent of insurance companies own their facilities. Why? Part of the reason has to be the perception of stability that ownership fosters. But for Guardian, this site allowed the company to look past standard industry practice. The new HQ's location and its link to the company's past make it a visible and persuasive symbol of stability.

Other companies in other industries struggle over the issue of ownership, too, but their reasons are different. "Corporations hold real estate, even if it's only what they occupy, primarily for control, but sometimes purely for investment purposes," says Robert Steers, a principal in Cohen & Steers Capital Management in New York. In other words, companies that own their facilities believe that after factoring in tax considerations, depredation, and appreciation, it's cheaper to own than to lease. Maybe. Every situation is different, with more variables to ponder than you can shake a balance sheet at. While the IFMA's Benchmarks III study puts the average owned-to-leased facilities ratio across all industries at 67 percent to 33 percent, the range this average represents is enormous: The insurance industry, looking to own a piece of the rock. weighs in at 87 percent owned, but the more ephemeral telecommunications industry owns only 17 percent of its facilities.

Still, there are no "rules of thumb" to help establish just how much real estate a corporation should own. says Steers. "Individual corporations must decide what works for them."

Chris Lowery, senior managing director of financial consulting for Cushman & Wakefield, believes most companies should keep as little capital as possible tied up in any real estate. "If a company can generate a 15 percent return on its operations year in and year out, the wisest move is to finance its real estate at 7 percent with third-party capital or lease it," he says. His point: use capital to fund core business activities, not real estate.

While industry averages of facilities ownership may not affect your own buy-or-lease decision, knowing how competitors cut costs and raise productivity can help. In the 1980s, companies like Xerox, Motorola, and Eastman Kodak started applying the standard principles of benchmarking to real estate. They formed groups to share such information as the cost of utilities per square foot, the average square footage each employee occupied, and what percentage of workers were enrolled in Alternative Workplace Strategies (AWS).

Over the years, certain organizations have emerged as clearinghouses of industry-specific benchmarking data - KPMG Peat Marwick acts as the facilitator for the largest bank benchmarking exercise; LaSalle Partners for a group of insurance companies; and Balderston. Guthrie and Associates manages the benchmarking results of the aerospace and defense industries. Real estate services firms such as Cushman & Wakefield maintain vast benchmarking databases that help them identify problem areas in a client's real estate portfolio.

Benchmarking has become a standard means for gauging the effectiveness of individual real estate-related practices. It gives corporations the opportunity to compare their costs to industry averages. However, "companies must remember that industry averages are only rough guidelines," says John Coppedge III, Cushman & Wakefield's executive managing director of international operations. "No two organizations are exactly alike in all particulars, so trying to match or beat industry averages may end up being both frustrating and costly."

Then what good is benchmarking? "Often it's the successful processes behind the numbers that are important," explains Helen Arnold, Cushman & Wakefield's benchmarking expert. "Inevitably, when a company sees that its competitor, or its industry as a whole, has drastically lower occupancy costs, for example, executives start asking the question that leads to improvement: 'What are they doing right that we can apply in our company?' Looking deeper, they find a practice other companies are doing that seems to be working for them. The next question is, 'Will doing that work for us, too?' The answer may be, 'No, not given our corporate culture or objectives,' but at least they considered it and can move on to the next thing."

By looking at the successes and failures of companies trying to improve their bottom lines - triumphs and defeats that are reflected in benchmarking results - "best practices" are identified. These may vary from company to company, but benchmarking studies typically use large enough samples to weed out anomalies. When USF&G Corp. built its new headquarters facilities in Baltimore, the construction project came in 5 percent under budget, thanks in part to a budget tracking system the team members developed that allowed them to monitor project costs in minute detail. Construction teams for other corporations developed their own such systems with similar results. And voila, a best practice-using a fast, detail-oriented budget tracking system for building construction projects - was identified.

"Strategically," says Arnold, "benchmarking and best practices give corporations something to shoot for. Perhaps switching over to what a benchmarking study has identified as a best practice isn't feasible for them now, because some prerequisite or infrastructure isn't in place. If they start making small shifts in the way they do business or in their working environment, or if they build that infrastructure into the design of new facilities, eventually they'll be able to switch over to that best practice."

Harvard's O'Mara likes the idea of "small shifts." "In corporate real estate," she says, "the majority of the time, it's not going to be one big change that suddenly spikes up productivity or causes facilities costs to plummet. It's a series of tiny implementations - a little savings here, a small boost in productivity there - that add up to big profits. Benchmarking helps give you an idea of where you can make those improvements."

Coppedge advocates what IFMA calls "internal benchmarking," a cost-measurement process designed for self-improvement. An example of this is a company that compares its existing density (the average floor space allotted to each employee) to the target destiny at a new or remodeled site. As part of an internal benchmarking program, "management incorporates new ways of operating in order to improve occupancy costs." Each new practice is tailored to fit the company's unique corporate culture and production and personnel needs.

If it seems that there are no universal troths in the world of corporate real estate, that each company must twist and shape every principle to fit its own characteristics, take heart. Experts do agree on at least one rock-solid axiom: timing is crucial. "Whether it's getting a factory up and running as quickly as possible or waiting for a slowdown in production to move into new facilities, when things happen is as important as where and how," says Mitchell Moss, Henry Hart Rice professor of urban planning at NYU and director of its Taub Urban Research Center.

In fact, timing sometimes takes precedence over all other considerations, as illustrated by Coca-Cola's invasion of Eastern Europe. Before the last brick had toppled from the Berlin Wall, Coke had zipped in to snap up all five existing East German bottling plants, leaving Pepsi-Cola dry. "The last thing on Coke's agenda was to get a good deal on the real estate," says C&W's Coppedge. In cases like this, real estate services companies move in after the ink has dried on the transaction to make sure the documents are in order, inventory the properties, and assess the terms. "It really doesn't matter that a company moving into a new market like that may have purchased more space than it needs or paid too much," says Coppedge. "Real estate must always take a back seat to market share and productivity. If a technology firm can make a hundred grand a day by taking over a chip manufacturer in Hong Kong, they shouldn't wait for the real estate people to strike a 'good deal.' What's a good deal compared to a hundred grand a day?"

Even when business is moving at a less caffeinated pace, management should keep one eye on the calendar. "Site selection, negotiation, design, construction, moving in - each step, if taken carefully, consumes a lot of time, certainly more time than top executives usually allow," says Moss. He points to Marriott International as an example of realistic planning. In 1997, the Bethesda, MD-based company began studying its long-term world headquarters needs in anticipation of the termination of its current lease in 2004 seven years hence. "They're going to end up with a headquarters facility that meets every one of their objectives, and they won't overpay to get it," Moss predicts. "They've given themselves enough time to do it right."

"Doing" real estate right starts with the understanding that every property maneuver you make either draws your company nearer to its objectives or pushes it further away. The key to moving in the right direction is making real estate an integral part of your strategic initiatives, an element as imperative to success as apples are to apple pie.

RELATED ARTICLE: Strategy Vocabulary Builder

Benchmarking: David T. Kearns, former CEO of Xerox, defines it best: "Benchmarking is the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders." In real estate, benchmarking compares facility-related expenses in such terms as per square foot and per employee.

CRE/FM: The corporate real estate and/or facilities management department and those who run them. As place considerations have become more complex and profit-affecting, the role of the CRE/FM with top management has morphed from facilitator of decisions to corporate strategist.

Leaseback: The sale of an asset by the owner who then leases it from the new-buyer. Leaseback agreements are used in real estate and as a method to finance business expansion. Often, the seller will leaseback a smaller portion of the property it just sold, helping to trim surplus space.

Portfolio Management, Property Management, Project Management: The first means the active maintenance, repair and operations of an entire inventory of owned properties. The second means the same, except for only one property; also called Facilities Management. The last term has nothing to do with maintenance, repair, or operations. It means the handling and oversight of a construction project, whether it's a new wall or a building.

Programming: Analyzing the way a business does its work in order to design more efficient facilities, floorplans, and work environments. Perhaps a better word would be "deprogramming," since its function is to toss out old concepts for new ones - based not on tradition, but efficiency.

RELATED ARTICLE: Change management

If corporations plodded from point A to point B, turning predictable profits and growing as steadily as a puppy, chances are they'd never have to worry too much about real estate. But they don't. They're dynamic creatures, bounding atop mountains and plummeting into craters, loping ahead and falling behind, consuming other companies whole and shedding limbs. All this commotion inevitably leads to an accumulation of excess real estate and missed chances to bolster the bottom line.

One frequently overlooked opportunity comes before an acquisition. During acquisitions, lawyers tend to handle real estate matters. They confirm that the seller has - and the buyer will obtain - marketable title to the acquired company's property. "That's the time to get real estate people involved," says Steve Sandberg, executive managing director of Cushman & Wakefield's advisory services. "Get an analysis on the real estate before you do anything else. When you're the seller, if you're not being paid for the real estate, don't sell it. When you're the buyer, find out what you don't need and don't pay for it."

That's just what Martin Marietta Materials did. In June 1998, the company purchased two sand and gravel operations in Kentucky and Ohio. A pre-sale real estate analysis had identified property Martin Marietta did not want. The cash price of the two businesses was reduced by the value of the surplus real estate, which the original owners kept. While financial details were not disclosed, Martin Marietta's sagacious maneuver is clear: the company avoided being saddled with surplus property by first identifying it, then refusing to buy it.

Sometimes, however, the ounce-of-prevention method just doesn't fly - the seller takes an all-or-nothing stance; urgency forces you to sweep up the whole caboodle; or consolidation opportunities don't reveal themselves until after you've pulled the acquisition into the fold. For whatever reason, you're holding real estate you don't need. What do you do?

"A lot of companies just sit on it," says Sandberg. "They think maybe they'll grow into it or they're not quite sure how to separate it from the rest." Big mistake. "There's almost always something you can do." Most common are downsizing and consolidating - eliminating redundant personnel, pulling the remainder of the acquired staff into existing facilities and disposing of the property that came with the acquired business. Then there's the tucking-in route: Consolidating personnel in a portion of the acquired property, remodeling the abandoned floor space for independent use (if necessary), and subleasing or selling it.

Or you can get creative. Acquisitions are prime moments to bring merged staffs together and tout your newly enlarged corporation with a celebratory move to new quarters. Such tactics clear the way to sell the old properties. When California-based FHP Health Care wanted a piece of the Colorado healthcare market, it snapped up TakeCare Health Care, based in Aurora, CO. Planning to send 150 of its California staff to Colorado, it negotiated a 10-year lease for six of the 10 floors in a building eight miles from TakeCare's old digs. It also arranged a new name for the tower: The FHP Building.

Even with FHP's desire to move quickly into a new market, the company gave itself time to consider its facility options and enter into transactions cautiously. Some corporations - expanding fast and hard in umpteen directions on three continents, rolling out new products while its mainstays are still nabbing up new markets like a kid alone in a marble factory - don't have that luxury. And sometimes CEOs don't make it any easier on their real estate teams. Chief execs holding the reins on the corporate equivalent of Ben Hur's chariot don't want to hear that there may be trenches ahead. So, Mr. Hur, what's going to keep you in the race?

"An exit strategy," says Sandberg. "It means answering some tough questions: Can your people pull out of a facility if you suddenly have to sell? Have you structured your facilities to accommodate selling off portions or subleasing?"

If you're expanding through acquisitions or by scooping up whole facilities as you march onward, make sure your real estate/facilities team sweeps in behind you to assess space needs and sell off surplus real estate. "The biggest mistake I've seen is not taking care of the real estate as it's acquired," says Sandberg. "Having to move into a new market too fast to wait for real estate analysis is one thing. But to not send in somebody to sort it all out after the fact just doesn't make sense."

Most times, it's not a jolting realization that causes companies to reassess their space holdings, but gradual understanding or a shift in strategies. Take Philips Electronics, for instance. Through acquisitions, growth, and a corporate separatist philosophy, this widely diversified multibrand manufacturer had divisions and operations strewn throughout the United States. A few years ago, it embarked on a companywide improvement and "rightsizing" program. The real estate department became "a centralized point in a decentralized company," charged with handling occupancy matters across all divisions. Consolidation, relocation, and the application of Alternative Workplace Strategies (such as encouraging its workers to telecommute and space-share) ultimately yielded over 3.1 million square feet of surplus real estate. The company sold off this surplus, reinvesting the proceeds into core businesses, and reduced occupancy costs by a cool $10 million a year.
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Copyright 1998, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:real estate management; includes terminology and related article on change management; The Chief Executive Guide to Global Real Estate
Author:Liparulo, Robert
Publication:Chief Executive (U.S.)
Date:Dec 1, 1998
Previous Article:Bottom line: lost in space.
Next Article:Location: location, location.

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