Effectiveness or Efficiency? Is your firm tracking the right Real Estate Metrics? TENANT PERSPECTIVES. The Challenge of Real Estate Management

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1 Effectiveness or Efficiency? Is your firm tracking the right Real Estate Metrics? By Joseph Hamilton, SVP, Cornish & Carey Client Solutions The Challenge of Real Estate Management Managing real estate for a business enterprise is an important and challenging proposition. Real Estate is usually one of the most significant cost components of most businesses and often requires a very large capital investment. It typically also requires a fairly long term financial commitment in a business environment where rapid change is increasingly the norm and flexibility is more highly valued than ever. The work environment defined by a company s real estate can be a key determinant in overall productivity. Also very importantly, a firm s real estate is an integral and defining component of a business s culture and brand. It truly touches the life of each employee every day and requires a wide range of business skills to manage effectively. However, as a result of its multi-faceted importance, real estate doesn't fit neatly into most companies organizational structures and often lacks a clear charter and set of metrics to define success. With a need to serve many masters, it can be far too easy to serve none well. Questions regarding the primary focus and appropriate organizational platform for the real estate function must be addressed. Should real estate be considered a financial function with cost and capital management its main focus? Should a firm's facilities management be considered a Human Resource activity with cultural fit and enhancement the primary metric? In this age of increasing focus on workplace technology tools, should real estate be considered an IT function? Or, should marketing and sales oversee real estate with an emphasis on the brand and sales productivity aspects of this function? Given these questions and issues, there is not a consistent organizational or measurement approach to the management of the real estate function in business enterprises. Too often, real estate management is relegated to a reactionary service function focused almost entirely on meeting housing needs with little or no attention paid to overall financial, productivity, cultural and branding implications. Typically, activities are focused on incremental decisions with no regular focus on an evaluation of the overall portfolio fit with changing business conditions. This incremental, housing focused, approach represents a significant opportunity cost to both the enterprise and the executive leading the real estate function. As a service function, real estate performance is often only raised to the Executive or Board of Directors level when there is a large capital requirement to approve or when the financial performance of a company is suffering and there is a need to trim costs. The impact of real estate is much too important to be managed in this reactionary fashion. The Key: Planning and Target Metrics definition To truly optimize real estate management in a corporation, both efficiency and effectiveness must be maximized in the context of the enterprise s business plan. Efficiency is doing things the right way while effectiveness is doing the right things. The key to managing efficiently is a clear set of metrics acting as the guide, decision making filter and measurement tools for the real estate function. The key to managing effectively is ensuring alignment with the company s overall business objectives in all aspects of real estate, i.e., housing, financial, cultural and branding.

2 Maximizing Effectiveness through Strategic Planning The first step to more than an incremental housing approach to real estate management is the development of a true real estate strategic plan that is integrally tied to and driven by the company s overall business plan. Creating and regularly updating this plan is crucial to the establishment of a clear and appropriate charter for all real estate decisions. It is best constructed with a base of the company s overall business plan combined with a short executive interview process tailored to the key inputs pertinent to the enterprise at that time. This can and should require only a short time commitment but, when done thoughtfully, can provide invaluable communication benefits with the executive team to help elevate real estate as a proactive competitive weapon. In fact, we would argue that the development of a real estate strategic plan is a net time saver to a corporation. One of the outcomes of such a plan is the identification in detail of the key real estate decision drivers for the enterprise at that time (including cost, flexibility, talent acquisition and retention, operational fit and technology). By providing a clear framework for future real estate decisions, including the matrix to be used to make choices from various market alternatives, this up-front planning process helps shorten and improve transaction evaluations. The time spent up front in planning is offset by increased effectiveness and efficiency in eventual transaction decision making. The development of a real estate strategic plan also offers the opportunity for a top down review and validation of long term projected staff levels and their associated space requirements. These projections often overstate required space needs and overlook opportunities for new workplace usage paradigms that the strategic planning process provides the opportunity to raise and address at a high level in the organization. The most important output of the real estate strategic planning effort is a clearly defined set of real estate drivers and objectives that have been agreed upon and communicated in advance and can form the basis for the set of quantitative and qualitative metrics against which the success of the real estate function can be organized and measured. Anything of Value Can and Must be Measured Corporate real estate is so important and multi-dimensional that a simple set of metrics is not easy to define. However, such measurement is crucial to ensure that this function is both properly focused and that advance communications exist with executive management regarding goal setting. There are fundamentally two sets of metrics for real estate management: 1. Quantitative, financial and space utilization metrics 2. Qualitative, cultural and productivity metrics Quantitative Metrics Some quantitative metrics apply well across different businesses and industries but they are typically most effective when they are tailored to your enterprise s specific economic model and

3 are measured in business, and not traditional, real estate terms. It is always best if the business terms and measures that are regularly utilized by a company s management team are also applied to this effort. Economic models differ, often dramatically so, by industry. The role and focus of real estate, therefore, can differ dramatically between a very high gross margin software business vs. a high volume/low margin contract manufacturer vs. a health sciences research oriented firm. We strongly recommend that enterprises choose the appropriate quantitative metrics and establish target levels for those metrics based on the realities of the specific business models within their industry. Furthermore, ongoing comparisons to the performance metrics of competitors can be a very valuable tool. An important and universally appropriate financial metric is total annual occupancy costs per person. This metric represents a complex function, including the price of real estate, the average square footage utilized for each seat or desk, desk sharing arrangements, if any, in place and the amount of space actually occupied. While complex in its derivation, it is arguably fully controllable by the real estate function and, therefore, a very powerful single metric of performance and accountability. Other measures, including average real estate costs as a percentage of revenue, are significantly impacted by fundamentals such as overall productivity that are not controlled predominantly by the real estate function. These metrics can be useful but can also be counterproductive as measurement tools as they are arguably either unfair or too easily dismissed. We believe that a small group of powerful and controllable quantitative metrics represent a more effective dashboard than a larger and more complex set of metrics. Many important issues need to be addressed in the construct of the appropriate quantitative metrics including the definition of the number of employees used in these calculations. The increased number of part-time and contract employees as well as shared desk arrangements requires thoughtful definitions to be established. As in many other circumstances, fewer but more thoughtful targets will provide the guidance and accountability desired from this effort. It is also important to note that the establishment of quantitative metrics can be a very useful tool in driving desired change in an organization. A number of very successful management teams have recently utilized this target metric approach to implement rapid change in real estate management within their organizations. Qualitative Metrics By definition, qualitative issues are more challenging to measure but such measurement must be done to ensure that these crucial qualitative impacts from real estate decisions are fully secured. In some sense, the ultimate measure of the cultural impact of a corporation s real estate effectiveness is the firm;s ability to recruit and retain employees. While recruitment success and turnover ratios are certainly impacted by many other factors, they should be included in the real estate evaluation process. Comparing overall turnover trends, comparisons of turnover between different sites and facilities/workplaces and input on exit interviews can provide very useful feedback. The most effective tool in qualitative measurement is in the form of employee satisfaction surveys. These surveys can take a variety of forms and are best when kept simple and consistent over time. Specific feedback regarding commute times, convenience and cost, amenities at or near the office, remote work flexibility, proximity to others with whom they work closely and ease of collaboration given existing space configurations should be included in all surveys. Unobtrusive, web based interviews are a very effective tool to achieve statistically significant feedback with little business disruption.

4 While productivity (revenue per person) is impacted by many factors, it could be very useful to compare productivity between various locations particularly if workplace environments differ to determine if there is a productivity impact from these real estate differences. Opportunities to improve productivity and measure those results should not be overlooked. As little as a 5 percent to 10 percent improvement in overall productivity would, in most businesses, offset the total costs of real estate. Lastly, metrics should be focused on the issues of most importance to the enterprise and not be selected due to ease of collectability. For example, investments and activities most closely related to customer interactions should be tracked and measured where possible. Portfolio Analysis When managing your personal retirement investment portfolio, you not only pay attention to where you are investing your incremental contributions, but also analyze and adjust your entire portfolio from time to time to better meet your individual circumstances. You need to view your enterprise s real estate portfolio in a similar fashion to ensure that you are not overlooking opportunities for improvement in the existing portfolio of real estate assets and leases. A periodic asset-by-asset review of the portfolio should be performed to determine how well each site is performing against operational, facility and cost criteria and benchmarks. Given the increased importance of flexibility to all corporations, this analysis should focus on holding strategies and opportunities to increase the market conformity of all assets thereby making them more easily marketable in the future. Key criteria should be segmented into three categories: Space (the individual locations) Portfolio Market Each facility and the portfolio in total should be analyzed, including: Number and location of sites Square footage by site and in total Number of people housed by site and in total Segment by type of space - executive, administrative, manufacturing, engineering (labs), sales, health sciences (labs), technology (data centers) Occupancy Cost per employee Cost per square foot Square footage per employee Book and Market Value of owned properties by site and in total Annual lease obligations by site and in total Comparison of actual rent vs. market rent by site and in total Projected future staff growth rate by site and in total Forecast of future occupancy costs (effect of market cycle and utilization on portfolio) Level of portfolio flexibility (as established by predetermined criteria) Segmentation of portfolio by size of sites Segmentation of portfolio by occupancy costs at sites This analysis can paint a very clear picture of current and future challenges and opportunities within the portfolio as well as potentially change the context of future new decisions. Changes in own vs. lease, sale/leaseback, new lease termination rights and/or financing opportunities are highlighted from this analysis viewed in the context of current corporate goals and current market realities. We recommend that this portfolio analysis be customized to the specific circumstances of the target company and be updated on, at least, an annual basis.

5 Fully Leveraging the Real Estate Function Cornish & Carey Client Solutions assists corporations in the maximization of the value of their real estate activities. Our portfolio of services includes: Real Estate Strategic Planning Organizational Consulting Portfolio Analysis Financial Advisory Transaction Management Lease vs. Own Analysis Sale-Leaseback Options Build-to-Suit Analysis Leased and Owned Assets Dispositions Demographic Studies Workplace Alternatives Location and Incentive Consulting Strategic Occupancy Configuration Consulting Project Management Sarbanes-Oxley Compliance Portfolio Administration Construction Management Tax Services