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Turn Corporate Real Estate Into 'Real Corporate Energy'

Flexibility as a guiding principle

2Sep

On-going strategic management of Corporate Real Estate can contribute to improve business agility, innovation, growth and profitability.

The Corporate Real Estate 'springboard': Create, store and release business energy

Corporate Real Estate (CRE) is usually managed by adopting an 'accounting' approach, with KPIs, metrics, and measurements - implemented in company-wide ERP systems or, sometimes, dedicated specialized applications - which monitor day-to-day, short-term operational efficiency, and productivity. The need to optimize space planning and generate savings in occupancy cost, together with the aspiration to enhance financial returns, frequently drive CRE management.

In the current business environment, where disruptions and rapid shifts in market conditions have become the new normal and future is not easily predictable, companies have to stay agile, think creatively and have resources and 'energy' readily available to make rapid moves and stay constantly ahead of the competition.

Under these market conditions, a standard CRE 'accounting' approach is no longer sufficient to adequately support an organization because it is often static and not aligned with the constantly-changing overall business strategy. Depending on the current phase of a company 'journey', CRE should be leveraged to support the business, whether its priority is growth, profitability, agility or innovation.

CRE could be regarded as a 'springboard' where 'Real Corporate Energy' can be created, stored, and released in the form of cash, capital or finance, people motivation, and creativity or brand equity and company image. In order to best serve the broader company objectives, effective CRE management should consist of a balanced combination of 'accounting' and 'strategic' approaches.

Accurate budgeting and controlling of CRE operations would still be a relevant good practice, but a short-term CRE accounting platform - based on a complete and accurate data warehouse equipped with analytical functions that can carry out performance assessment and benchmarking - should also incorporate tools for the execution of long-term, dynamic strategies and tactics.

Alignment of CRE and overall business strategy

Some examples below show how broader business strategies and CRE strategies could be aligned through the execution of specific tailor-made tactics.

In a market downturn, when a company initiates a major strategic initiative to reposition its services and to align its culture and image, restructuring of a CRE portfolio can free-up the financial 'energy' needed to fund the rebranding of headquarters and branches, and be instrumental in driving change towards a new image and culture.

When a business needs to decrease debt, cut operating expenses and increase its agility, CRE can provide support through the disposal of surplus assets, sale and lease-back deals, space rationalization at portfolio level and negotiation of early termination clauses in leases.

In other cases, pursuing CRE environmental sustainability and corporate social responsibility initiatives can deliver significant returns in terms of lower operating costs and image of a company. In low-margin industries, companies should closely monitor real estate market cycles and take advantage of favorable conditions to renegotiate lease terms, reducing rental levels, optimizing termination and break-option dates.

For those businesses experiencing rapid growth of on-line activities, the very key question to address would be: do we really still need CRE? If so, in which form? Or should we move from capital-intensive, low-yielding CRE to high-return core business? Outsourcing of CRE risks could be the solution to increase flexibility and free up financial resources to fund the core business.

Once the broader business objectives are defined, one of the main issues is the timely execution of the supporting CRE strategies and measures. The execution of decisions involving CRE is usually a slow process, compared to the speed of the core business, because CRE is not 'liquid' and involves a multiplicity of internal and external stakeholders.

Transformation, the new normal

Change and transformation is the new normal and therefore companies should always pursue physical, financial and operational flexibility of CRE, at portfolio level, to increase agility and be prepared for future rapid execution of decisions.

CRE can be 'measured' across three correlated dimensions: asset specialisation, cost, and flexibility. Flexibility should be part of a sound CRE strategy and should be pursued very early in the process. For example, issues with highly specialized assets, such as those in Pharma and Biotech, or other industrial properties, could be partially mitigated if flexibility is incorporated as one of the guiding principles at feasibility and design stage.

One possible tactic, in this case, would be keeping the building structure and layout as standard as possible, introducing specialization with the equipment, services, and plants that are installed in the building. Another possibility would be designing a property in such a way that build-up and decommissioning can be done in 'modules', therefore allowing better risk management, efficient utilization of capital and alignment with occupancy needs or production profiles over time.

CRE flexibility as a guiding principle

In the current volatile and unpredictable business environment, companies must incessantly review their market positioning and competitiveness and possess the intrinsic ability/agility to make rapid adjustments or 'brave' moves to take advantage of business opportunities or avoid failures. CRE should be constantly aligned with the overall 'trajectory' of a business and contribute the 'energy' needed to execute broader strategies. 

In order to pursue this dynamic alignment between CRE and the broader business strategy, a well-balanced combination of 'accounting' and 'strategic' approach is key. This mixed approach requires strong leadership and must be founded on a solid platform of data and information. The complication here remains the substantial gap between the speed of execution of broad business decisions and decisions concerning CRE. To mitigate this difference, flexibility of a CRE portfolio should be an integral guiding principle for any CRE management culture.

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