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Study shows big firms should rethink approach to space.

Even though corporate real estate is a significant asset, productivity variable and high cost for any large organization, most aren't applying the level of rigor, analytics and new approaches that they devote to other strategic functions, and the result is significant missteps, according to new research from The Boston Consulting Group (BCG).

In the BCG study, more than 40% of corporate real estate executives say that business units' projections of space demands are typically off by 100%.

According to BCG, corporate real estate executives are too removed from business units; the executives and the business units themselves are not willing enough to pursue, and pay for, flexibility in leases and workplace models; and, too frequently, inaccurate forecasting models are used.

"Just as business strategists increasingly embrace uncertainty and unpredictability in their scenarios for the future, real estate executives must also make room for more uncertainty as they plan and project.

"They should more aggressively use such techniques as portfolio visualization, life cycle analysis and other proven techniques of long-range strategy," said Sandy Apgar, the BCG director who spearheaded the research.

Apgar added, "By relentlessly decreasing operating costs per square foot--the agreed upon 'best practice' in corporate real estate--regardless of how the business might change in the future, real estate executives run the risk of under managing one of the largest variables on the corporate books.

"In many cases, the real 'best practice' is to pay more up front for flexibility. In short, real estate groups within companies need to work more closely with individual business units and, together, come to terms with the need to pay a bit more for flexibility later."

The BCG research points out that the best-performing corporate real estate groups interact frequently with business units--but too few corporate real estate units do this.

* Only 7% of corporate real estate groups engage in monthly updates with business units, according to the research.

* And 20% of corporate real estate groups admit that updates with business units aren't routine.

* 70% of companies surveyed do not have a mandate from senior management to business units to use corporate real estate groups for real estate transactions.

Alternative workplaces--'hoteling,' home offices, etc.--are proven to increase flexibility, according to BCG research. "But companies haven't implemented alternative workplace programs to the extent that we believe they should and ultimately will," said Chris Howe, a manager and core member of BCG's Infrastructure and Real Estate group.

According to the study, the majority (60%) of corporate real estate executives say they'd pay up to a 9% premium to build flexibility into leases. "But it doesn't appear that these executives have the influence or the information to achieve the right level of flexibility," said Neel Bhatia, a consultant with BCG. "While they continue to emphasize flexibility in their portfolios, few of their companies are really pushing the boundaries with new workplace models."

The BCG survey examined the real estate practices of 16 companies in a range of industries, including consumer goods, energy, financial services, manufacturing, pharmaceuticals and retail. The research was conducted in late 2005 and reported to the participants in early 2006.
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Title Annotation:Property Management
Publication:Real Estate Weekly
Date:Jun 7, 2006
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