Monthly Archives: September 2010

Rule of Thumb

By Ken Ashley

(DENVER) September 16th, 2010

While perusing the most recent edition of the CoreNet Leader magazine, this piece on performance measurement in a real estate portfolio by Mark Jervis and Glenn Corney caught our attention. The article, and indeed, the real estate trade organization CoreNet Global, supports real estate professionals that work on very large portfolios and have teams of people to support the real estate function. They regularly perform complex analysis of almost every imaginable factor related to a lease.

It’s not surprising that those responsible for many millions of square feet would want to let top-level executives in a company know what they are accomplishing. After all, real estate is usually the second largest cost after payroll, and decisions can have major impact on the company (and the real estate executive’s career).

Less Is More, More or Less

But what if you don’t have a squad of folks assigned to real estate? How should a mid-cap company approach measuring real estate issues? As Jervis and Corney suggest, if one can determine and communicate what the company is trying to accomplish first, then measurements can follow that support goals and objectives. Many times the opposite occurs, which can lead to executive overload and the dreaded shoulder shrug. The article aptly calls this the “so what” factor. In case you are not familiar with this phenomenon, then ask a teenager to clean up his room.

The art here is not in creating strategy; every business leader worth his or her corner office can do that. The issue is translating that strategy into the practical so that those involved in real estate make decisions that align with and support the strategy you set, instead of allowing local or unit level decision makers to act on a whim. In the absence of direction and accountability, we have seen local managers locate the office near their home without regard to other factors, pay more than needed and overdecorate new offices. These are a few of the many sins of the unwatched, but, why not, if you have no direction and little accountability?

Measure Twice Cut Once

Once the strategic direction of the company and its real estate is clear, then one can begin to develop dashboards replete with KPIs (Key Performance Indicators) to give feedback on metrics that matter. And yes, less is most certainly more.

So, if you as an executive at a mid-cap company don’t have a big real estate team, what are measurements that can help evaluate and guide the company’s use of real estate?

In mid-cap companies, the measurements typically fall into four major categories:

  1. Benchmarking  – Do we spend more on our facilities than our competitors? What are the industry trends, and are we on the right side of the curve?
  2. Space Utilization – How does the enterprise use the space it leases? This is commonly expressed as square feet per person in the office world.
  3. Portfolio Planning – Look at the whole basket of leases and determine if you are spending more or less, year over year.
  4. Transaction Management – If you have more than a few deals going on in a year, then you will want to know how fast they get done (cycle time) and develop standards so that you have consistency from deal to deal and city to city.

Say That Again?

We talked about keeping it simple, but how often should one present the stats? Of course, this is largely dependent on corporate culture and the desires of senior leaders. GE, which is well known for its “six sigma” approach to everything in corporate life, would be one extreme. An entrepreneurial and fast growing company might be the opposite.

A good rule of thumb is to do an annual achievement review at a minimum (we call this the “State Farm” discussion, in honor of my cheery insurance agent that comes around once a year). If your portfolio is dynamic, large, or fast changing, then you may need more frequent attention to measurements.

So, keep it simple, keep it reasonable, and your real estate portfolio will surely hum right along. Now, if only we could get this economy to adjust to our growth metrics!

Pop Up Office?

By Ken Ashley 

(LOS ANGELES) September 10th, 2010 

We’ve observed the resurgence of the trend of so called pop up retail over the past year or so with interest. The concept can apply to any holiday store (those stores where you buy your Halloween costume are an example). It is also being used by toy companies and retailers of high-end clothing. The short term nature of the opportunity makes it cool to many (“Limited Time Opportunity!”) and since the commitment is very limited, the financial risk is minimal. 

The same idea can be found in restaurants where proprietors can be up in running in no time and with very little capital. This New York Times article profiles a number of offerings in San Francisco that cooking up or at least serving yummy things in  temporary space. 

So, can pop up work in office? This is not an entirely new idea. For years project teams have moved around offices in accounting, engineering and in all types of consulting gigs. But these spaces are usually inside existing semi-permanent space and long term leased office space. And yes there are executive suites which will allow one to office for a pretty penny, but this is like renting a hotel room vs. an apartment. Executive  suites are a solution, but they have their drawbacks. 

We hear from companies that want to start a beachhead in another city or from entrepreneurs that they want a sense of identity, security and the ability to 

The ultimate Pop Up office?

 

function with some independence for a short term. The traditional solution for this requirement is to find a cheap sublease and hunker down. This takes time, and carries with it risk that the sublandlord fails to pay their own obligation and the subtenant gets evicted. In addition, subleases are looked at as an afterthought by landlords and getting a document negotiated and approved can be painful. 

In the last downturn, several landlords offered so called “smart office” suites that were built-out for small offices with fresh carpet and paint. They were ready to go at a moment’s notice IF you liked the layout the landlord had built for you including the “sheetrock” walls. Back then you still had to rent a copier and deal with cabling issues. They weren’t really that temporary. 

Now with changes in wireless technology, advances by furniture purveyors and all the office vacancy around the US, we wonder if pop up office V2 will spring to life? 

Picture the scene; a company wants to open an office for 6 months in Chicago to determine if a new division can make it (Tempco, lets call it). Tempco’s forward thinking landlord offers to lease space in a designated area of a building for only 6 months. Tempco works with the landlord, furniture vendors and the communications guys to develop a beautiful, completely wireless and short-term solution. 

Perhaps the landlord makes things even easier by offering a short license agreement running a few pages as opposed to a huge lease. The other vendors could have the equivalent of an Amazon.com where one could point and click their way to leasing furniture and gear that meet their needs. 

Then, after 6 months, it can all go away. No fuss, no muss. 

The landlord gets revenue on otherwise empty space, and likey at a higher rate per foot than normal. The furniture and phone folks get to earn revenue on their mountains of existing inventory. Tempco gets exactly what it needs in the meantime. 

And maybe, just maybe because the landlord was so progressive and accommodating, when Tempco becomes the next growth company in Chicago the accommodating landlord gets the first bite at the apple for a much bigger and traditional office need. All those serving Tempco have the opportunity to develop a relationship, which many in the product business could use in this and every economy. 

So, to our friends in the landlord community: we challenge you to think outside the “pop up” box on a short term and creatively different basis. We will certainly be happy to write about real world examples of pop up real estate in office; just reach out to us.

Labor Day

By Ken Ashley

(ATLANTA) September 3rd, 2010

How (and where) does corporate America labor as we approach Labor Day 2010?

According to The Wall Street Journal: “Corporations moving into new offices often are asking architects for open floor-plans and fewer offices…and The White House is asking federal agencies to look for ways to consolidate offices and cut the amount of space they use.” The article, published August 18th in Journal (Office-Leasing Rebound Could be Deceiving – article reprinted below) goes on to say “In many cases, tenants are taking less space than they had before—both because they have fewer employees and because they are able to use space more efficiently.”

The article reports a dramatic increase in leasing activity which most every tenant representative broker we have spoken with can confirm. If corporations are sheep, they sure are following each other in lock-step.

It also discusses a trend that began as a trickle 20 years ago, but is now a raging waterfall; ripping out offices and putting more people in fewer space per square foot.

So leasing activity is up and densities are increasing. We asked our friend Stephen Swicegood, Managing Director of the Atlanta office of Gensler to provide some context and  a little look-back on this trend of doing more with less in America’s office workplaces.

“Just a few years ago, office density averaged 250-350 rentable square feet (RSF) per occupant,” he said (source 2007 survey by the International Facility Management Association (IFMA)).  Today, RSF per occupant is often 30-40% lower, according to Stephen. He says that a good rule of thumb for estimating space needs, using the historic 250-350 RSF/occupant could leave you renting more space than your competitors.  Depending on your industry the benchmark is 175-225 RSF/occupant, and in some cases even less.

More WE Space and Less ME Space

Of course the economy has forced cost reductions in many areas, but in a classic reversal of form over function, operational issues have been on the minds of management teams as well. In other words, how we work is as important as where and at what density.

“Many companies today are looking to foster innovation, which comes from collaboration and transparency” says Stephen.  “That leads to open plan workplaces with more workstations and fewer private offices….workspace footprints are also shrinking, because people today have all their files and reference materials on their computer, not in drawers and file cabinets,” he says.

In many cases, space savings is taken straight to the bottom line, but forward thinking companies are focused on a key word: productivity. “Some of the reductions are reinvested in more collaboration space, sometimes characterized as ‘less ME space and more WE space,’ but the overall sq. ft. per person trend is heading inexorably downwards, says Stephen.

Kids These Days

The increase in collaboration space or the so called “corporate Starbucks” can certainly serve to meet the needs of a multi-generational workforce. Some workplace studies show a decrease in so called “focus work” and a real need for common meeting areas.

Also, with the increasing effectiveness of wireless networks and mobile devices, the need to tether to a fixed location becomes more an emotional than a real technical need. And as many are discovering, the Gen Y workforce simply works differently than older employees. As we heard it put recently in a presentation at a CoreNet Global event, many in their late 30’s and beyond are digital gypsies. Younger folks are clearly digital natives and comfortable in both digital and disparate environment.

What’s That You Want To Do In My Building?

It will be interesting to see what occurs over the next 10 years, but corporate real estate directors and their brokers are looking for newer, efficient buildings with flexible landlords who understand what corporations need and Gen Y employees want. The newer buildings already are energy conscious and have very efficient floor plates. We would suggest the next major change is not necessarily about the physical plant but in in how landlords deliver their services and allocate money to tenants.

Flexibility on how and when customers use tenant improvement allowances (“TI”) is a major issue because the old model of building space out and leaving every wall static for 10 years is not reality today. Tenants will be looking to bank TI and use it for almost anything workplace related in the space – including communications gear.

We discussed parking in another post, but other issues are delivering services during non-traditional working hours, creating the right amenities to appeal to Gen Y workers, and modifying building rules to accommodate the changing work force (“can I throw a frisbee on the lawn?”).

It is a brave new world for landlords, and those responsible for corporate real estate. Those paying attention to the trend will adapt and facilitate the changing labor force (or else..!).

As to the state of the workforce: you might call them free range workers in a really busy office environment. And I bet this Labor Day they will labor remotely.

Here’s the WSJ article:

Wall Street journal

Office-Leasing Rebound Could Be Deceiving

August 18th, 2010

By ANTON TROIANOVSKI

Even as the office market enjoys a rebound of leasing activity, some businesses are giving landlords the shivers by figuring out how to use less space per employee.

Companies that sat on the sidelines during the darkest days of the economic downturn are increasingly making leasing commitments. In the 12 months that ended June 30, office tenants signed 161.3 million square feet in leases nationwide, according to Studley, a commercial real-estate brokerage firm. That is a 5.7% increase over the 12-month period ended in March.

But in many cases, tenants are taking less space than they had before—both because they have fewer employees and because they are able to use space more efficiently. In New York, for example, three of the five largest deals of the second quarter involved tenants either taking the same amount of space or less.

“Until tenants shift into expansion mode … the market will be engaged in a process of musical chairs,” states Studley’s second-quarter report on New York.

The trend bodes poorly for an office market struggling with a national vacancy rate of 17.4%, the highest since 1993, according to real-estate research firm Reis Inc.

Concerns are particularly acute for the hundreds of office properties that are in precarious financial condition because they are worth less than the mortgages that were made during the boom years. They need to fill space to boost rental revenue—and values.

“People should temper their expectations about how quickly office space will be leased up,” said Victor Calanog, research director for Reis. “Where there are leases being signed, companies are trying to be efficient with the space they’re using.”

Businesses aren’t expanding as much partly because they are uncertain about the strength of the economic recovery. They also are figuring out how to use less space per employee by setting up more-collaborative work environments.

Law firms are increasing the number of attorneys assigned to a single secretary while eliminating libraries and filing areas. Corporations moving into new offices often are asking architects for open floor-plans and fewer offices. The White House is asking federal agencies to look for ways to consolidate offices and cut the amount of space they use.

In Houston, NRG Energy Inc. is moving out of 260,000 square feet across two buildings into less than 220,000 square feet of office space in a new property, Houston Pavilions.

The New Jersey-based power company’s employees will work in a space with no enclosed offices, reducing the amount of space per employee the company needs to pay for, and, executives say, helping people work more efficiently.

“You get efficiency from a real-estate standpoint, but you gain even more efficiency from the way people interact or share information,” Denise Wilson, NRG’s chief administrative officer, says.

Law firms have been among the most aggressive in reducing their space. Law firm Baker & McKenzie recently signed a lease to move its offices into 237,000 square feet down the street from its current home in Chicago’s East Loop, allowing it to reduce space per attorney to about 700 square feet from 1,000 square feet, according to Jones Lang LaSalle Inc.’s Bill Rogers, who brokered the deal.

Landlords have taken note. Boston Properties President Doug Linde said in a conference call with analysts last month that law firms were looking to reduce their overall footprint by 10% to 15%—both because they no longer need many spread-out conference and file rooms and because they have yet to rehire laid-off employees. “We have seen a clear change,” Mr. Linde said, according to a transcript.

More efficient use of space could help reduce office demand even when the economy recovers—adding to the hesitation that most real-estate developers feel about investing in new buildings.

The trend “is an impediment for new construction,” says Richard LeFrak, head of LeFrak Organization, a large private developer in New York. “We have all this supply from within. You have to be cautious now.”

In New York, accounting giant Deloitte recently asked the city for $11 million in tax breaks that would support a consolidation of its New York offices at 4 World Financial Center in downtown Manhattan. Under the lease deal, which isn’t final, Deloitte—which now occupies some 934,000 square feet of office space in the city—would eventually move those operations into just 390,000 square feet at 4 World Financial Center, with options to expand to 630,000 square feet.

Deloitte would spend more than $90 million on building and fitting out the space with a new, more efficient design, according to its application for the tax breaks. A Deloitte spokesman declined to comment on the design plans.

The federal government also is looking for more efficient office space. President Barack Obama in June sent a memo to federal agency heads urging them to squeeze $3 billion in costs out of their real-estate portfolios by the end of the 2012 fiscal year by, among other things, consolidating into unused office space and increasing the number of people who can work in an office. Past efforts at cutting the government’s real-estate footprint, Mr. Obama wrote, “did not emphasize making more efficient use of existing assets.”

Interior architects and furniture designers are taking advantage of the movement by working with companies that want to squeeze more people into less space and create more collaborative work environments. Andrew Garnar-Wortzel, a principal at architecture firm Gensler, said flexible workbenches that allow different numbers of people to occupy the same work space are increasingly common.

In the financial sector, Mr. Garnar-Wortzel said, many companies are trying to reduce their footprint to 200 square feet a person or less. Ten years ago, on the other hand, financial firms were looking to reduce their space from 300 square feet to 250 square feet a person, he said.

Pittsburgh-based banking giant PNC Financial Services Group Inc., for example, found itself with more than 300 square feet a person after its merger with Cleveland bank National City Corp. in late 2008. It recently put in place new guidelines that call for about 180 square feet an employee in new offices, according to the company’s director of corporate real estate, Gary Saulson.

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