CoreNet Global’s Corporate Real Estate 2020 research project analyzed the current and future state of the industry. It focused on the future business environment and to collect and distribute best practices, tools and studies to meet future business needs effectively. This article focuses on Portfolio Optimization & Asset Management. A second article appears on FMLink, Enterprise Leadership. The remaining articles may be found on the CoreNet Global Web site through the following links:
Today, portfolio optimization has come to mean far more than leasing strategy or lease administration. The so-called “smaller and smarter” portfolio we see today isn’t just the result of the 2009 recession and ongoing cost containment pressure. It’s also the result of flexible work strategies and flexible workplaces — both of which emphasize mobility, telework and other forms of “distributed work.”
So what’s driving the corporate real estate (CRE) portfolio of tomorrow? The answer is found within this and other Corporate Real Estate 2020 domains such as Workplace, Outsourcing and Service Delivery, Partnering with Other Key Support Functions, Sustainability, Technology Tools and of course, Enterprise Leadership.
The concept of portfolio optimization in the corporate world continues to change and adapt to business cycles, technology and even new business theories.
New Definition of Enterprise Portfolio
As businesses approach 2020, even the idea of what comprises an enterprise portfolio is shifting — from a simple concern with real property and fixed assets to a more broadly based understanding that includes human and capital resources, technology and other components that contribute to a company’s ability to compete in a global marketplace. This new definition creates new opportunities as well as new challenges regarding portfolio optimization, forecasting, measurement of asset effectiveness and integration of resources.
Portfolio optimization is ideally driven by real-time data, management input and often-complex metrics that measure the supply and location of resources against the needs of the organization and that can be aided by a variety of technologies and tools created by both internal and external providers.
The idea of a fully networked enterprise without geographic boundaries has replaced the traditional view of the corporation as a fixed entity defined by its geographic location(s), so optimization of all the resources in the portfolio enables real estate professionals and senior management to make intelligent decisions about people, technology and real estate, both for the present and the future.
Portfolio optimization is challenged by many of the factors that are also seen as advantages in the current business climate. Globalization has made the world smaller, opening up new markets for products and services, but it also has multiplied the number of market and regulatory forces that must be taken into account.
Technology has enabled talented employees to reside anywhere, but it has also made it easier for those same workers to more easily change their employers without giving up the quality of life they enjoy in their current location.
And while advances in technology will enable more accurate and timely collection of data needed for effective analysis of portfolio assets, the complexity of managing this data may increase as new types of tools are integrated into the enterprise framework. In this environment, the importance of data, technologies and employees communicating effectively with one another cannot be overstated.
Bold Statements
- Demand forecasting will improve and significantly narrow the band of uncertainty in regard to future requirements. Forecasting will become less dependent on management’s predictions and better able to use external factors to predict demand.
- At the same time, we will develop the ability to future-proof portfolios with built-in flexibility to respond to the residual uncertainty.
- Technological innovation will enable integration of data streams from different parts of the organization into cross-functional dashboards to better support realtime decision making.
- Significant progress will be made in developing a set of tools to achieve financial optimization of the global portfolio in collaboration with corporate treasury, finance and taxation functions.
- Organizations will recognize the potential detrimental impact of cost cutting on productivity, changing the conversation from cost containment to value creation.
- Competition for talent will yield a more distributed work force, dramatically altering space demand. Fifty percent of workers in developed economies and 25 percent in developing economies will use AWS/ teleworking, improving optimization, driving down costs and reducing carbon footprint.
The importance of shared knowledge and understanding across the business enterprise will only continue to grow in coming years, fed by the growth of technology and the accelerating pace of change. Lines between various entities in the enterprise will continue to blur as the maintaining of separate silos within a company becomes ever more a drag on growth, as well as increasingly indefensible regardless of a company’s historical culture.
In this environment, the very idea of what constitutes the workplace is in flux, as is therefore the role of the CRE team. CRE professionals have unprecedented opportunities to add value to the enterprise while guarding against increasing costs related to this significant portion of a corporation’s expenses.
As we advance toward the benchmark year of 2020, real estate will increasingly grow into an essential part of long-range planning, and the need for accurate modeling and forecasting will create new demands on CRE resources. While no one formula or process will fit the needs of every company or industry, managing change and preparing for a more demanding environment with more tools at hand will enable CRE professionals to add value to the organization and prepare for their enhanced place at the table — and the increased exposure that comes with it.
In Pursuit of the Holy Grail
Demand forecasting will improve and significantly narrow the band of uncertainty in regard to future requirements. Forecasting will become less dependent on management’s predictions and better able to use external factors to predict demand.
“The biggest gap in our strategic planning is demand forecasting,” said one CRE executive for a major consumer brands manufacturer.
Accurately predicting headcount is considered a “Holy Grail” of CRE because it gets you a seat at the table. But the main concern isn’t so much about CRE’s ability to drastically improve real-time data gathering and information analysis in support of key decisions like future demand for work space, it’s about the inability to control external factors as the 2009 recession is still demonstrating.
The key takeaway here is that demand forecasting has improved and will continue to get better, but truly accurate and reliable long-term forecasting is probably unachievable.
As another Bold Statement on Portfolio Management shows, industry professionals are more confident about their ability to future-proof with built-in flexibility to respond to “residual uncertainty.” In other words, there is greater assurance that firms can adjust for uncertainty than that they can eliminate it.
In the end, the market will innovate new ways to create flexibility, and companies will increasingly understand how to use third places programmatically, in response to persistent residual forecast uncertainty.
Data-Driven Technological Innovation
Technological innovation will enable integration of data streams from different parts of the organization into crossfunctional dashboards to better support real-time decision making. This Bold Statement could be the harbinger of wider adoption of OSCRE standards. OSCRE is the Open Standards Consortium for Corporate Real Estate, a non-profit group seeking data and system interoperability across the CRE value and supply chains.
The effective integration of data from disparate sources is a key way to improve demand forecasting.
The idea of a crossfunctional dashboard is an appealing one to most CRE professionals, and most survey respondents expect such a tool to be increasingly prevalent as we approach 2020.
A broad range of CRE professionals agrees with the Bold Statement and anticipates strides in this direction during this decade, with fully 70 percent of respondents in agreement with the statement and six percent in disagreement.
Four Areas of Space Flexibility Companies Should Use
- Technical — the ability to shift walls, move things around the office space, etc.
- Spatial — the capacity to build or acquire extra office space (or to shed it as needed)
- Organizational — enterprise planning, multiple shifts at different times of day, etc.
- Financial and jurisdictional — the determination of how much space should be owned vs. leased in order to balance flexibility against costs, taxes, accounting, etc.
Source: Dr. Monique Arkesteijn, Delft University of Technology in the Netherlands
This represents the closest thing to unanimity that can be expected from a diverse group of professionals and points not only to the confidence that this will occur, but also to the desire for a one-stop solution to a diverse set of issues that impact short- and long-range planning.
To illustrate the connection to other facets of Corporate Real Estate 2020, one takeaway on data integration perhaps says it best: “Data integration combined with advanced analytics and dashboards will provide powerful business intelligence tools to support improved, continuous portfolio optimization.”
Effectiveness Prevails over Efficiency
Organizations will recognize the potential detrimental impact of cost cutting on productivity, changing the conversation from cost containment to value creation.
“You can’t cut your way to greatness,” remarked one CRE executive for a global energy company.
It’s true. We saw in the early days of alternative workplace strategies how very few companies grasped the opportunity to increase productivity — and thus profits — by investing in the changing nature of work. It’s a progressive viewpoint associated with effectiveness.
The main drawback to the argument for effectiveness is economic downturns. In times of recession, companies often postpone any number of changes in favor of cost control. But 2009 showed that it doesn’t have to be that one-sided. Companies can have it both ways.
A CRE executive with a regional financial services firm added, “If you shift to employees as a commodity, you absolutely remove competitive advantage. At some point cost reductions become a losing proposition. I think the challenge is, how do you measure productivity and how do you measure value?”
The question maps directly to the space-forecasting question also posed within this domain. With more accurate forecasting, companies won’t get stuck holding as much surplus or empty space. The new adage for better use of the world’s 200-billion square feet (18.6 billion square meters) of existing business space comes to mind: “Fire buildings, not people.” So the question of value creation over value protection is also hard-wired to corporate social responsibility.
In the long run, changing the focus of CRE from cost to value will significantly contribute to enterprise competitive success. It also implies that competition for talent will yield a more distributed work force, dramatically altering space demand.
Long-Term Vacancy Implications
Another related factor is the high probability that 50 percent of workers in developed economies and 25 percent in developing economies will use AWS/teleworking, which will improve optimization, drive down costs and reduce carbon footprint.
During the Dallas Visioning Session that kicked off the global Corporate Real Estate 2020 conversation, one workplace and sustainability expert made an amazing prediction: Commercial markets outside Asia will experience vacancy rates of 40 percent or more by the year 2020.
The idea astounded some participants, but considering the fact that in many central business districts vacancies today often hover at or near 30 percent, along with the idea that 25-50 percent of workers will be engaged in AWS, the 40 percent vacancy forecast may not be too outlandish — especially when lower-than-average employment rates have become the overall norm and companies are emphasizing densification.
The jury is still out on this question, however.
Continuously improving mobile technology and the competition for talent will result in more distributed work forces, but the tradeoff between remote working and face-to-face collaboration, from a productivity and cost standpoint, is not yet clear.
Key Players on the Portfolio
Optimization and Asset
Management Team:
Principal Author
– Keith Pierce
Team Leaders
– Jack Burns, Cresa
– Russ Howell, Jones Lang LaSalle
– Keith Keppler,Cresa
Contributing Editors
– Jack Burns, Cresa
– David Chang, CBRE Global Corporate Services, Asia
– Erica Chapman, Esq., MCR, inVentiv Health
– Steven Chon, M.Sc., MCR, CBRE Global Corporate Services
– Russ Howell, Jones Lang LaSalle
– Keith Keppler, Cresa
– Gautam Saraf, Cushman & Wakefield, India
– Larry Wolfert, MCR, Salesforce.com
Team Liaison
– Bailey Webb, CoreNet Global