Five years after the start of the financial crisis, cost efficiencies, technologies and new ways of working are making an impact on the corporate real estate market. But how are these issues translating into actions in the sector?
Firms are still aiming to cut operational costs. “Companies have been looking much more forensically at what their location planning requirements are; what their operational need is; how much non-operational stock they are holding; how they can offload that space; how they can reduce their operational footprint; and how they can raise revenue streams from surplus space,” says Jon Hutt, director of corporate real estate at Savills in Cambridge, UK.
Martin Laws, lead partner in occupier consulting at advisory firm Deloitte Real Estate, agrees: “Corporate real estate has, quite rightly, been much more under the cost microscope.” But he warns against cutting costs haphazardly. “It is easy to take short-term actions such as cutting facilities management standards or deferring non-critical maintenance and refurbishments. But these actions are often just deferring a cost – and a problem – to a later date,” he adds.
Indeed, recession is a time when many companies take stock. “The really forward-thinking corporate occupiers are using the recession to think hard about how they can take advantage of the property market today to create the ideal portfolio to act as their springboard coming out of recession,” says Mr Laws.
“And where the company has flexibility in its leased portfolio – with leases coming to an end or with break options – this is a great time to have pragmatic discussions with landlords who are keen to have the certainty of new lease commitments extending beyond the current tough market. Other examples include looking at more radical and flexible ways of working – often requiring technology investment – that not only impact a company’s property cost base, but also its workforce model and costs.”
Louise Ellison, manager of responsible property investment at global real estate fund manager Prupim, also finds clients more focused on costs. “Total occupancy costs are now being looked at by corporate occupiers. They are paying increasing attention to energy costs, all service charge items and local property taxes, such as business rates alongside rent. Our asset management strategies look at ways to improve the energy efficiency of our properties,” she says.
As new technologies, flexible working and cost-cutting are added to the mix, new trends in acquiring, selecting and managing corporate facilities are beginning to emerge. “We are seeing an increasing trend for outsourcing real estate services,” says Guy Douetil, managing director of Europe, the Middle East and Africa corporate solutions at real estate advisory firm Colliers International.
“It started about 20 years ago in the US and 15 years ago in the UK with companies asking service providers to manage their estate for them while they retain a small in-house team,” says Mr Douetil. “The providers will manage the leases, and deal with project management and facilities management for the companies. However, it is still an immature market with only something like 5% of the £20bn [$31.5bn] to £50bn market touched at the moment.”
“Uncertain business times inevitably lead to corporates being rightly cautious about their real estate decisions and commitments,” says Mr Laws. “There are still occupiers willing to commit to long-term leases, if the landlords are prepared to make it very attractive, as you can see from the incentives offered in some of the major London deals through the downturn.”
Increasingly, corporates are becoming more vocal about their specific needs and the market needs to be able to respond to these. “Other [corporates] are seeking more flexibility. An evolution to the serviced office concept is seeing developers providing some specialist space, such as call centres, as fully serviced facilities on a much more flexible pay-per-desk basis. Thankfully, the property supply market has recognised that it has to offer many more options other than the standard full repairing and insuring lease if it is to meet the demands of the corporate market,” says Mr Laws.
The outsourcing trend that has resulted in changes to many business areas has also been felt in corporate real estate. “There are clear cultural differences impacting on the outsourced management of corporate real estate,” says Dr Lee Elliott, regional director of Europe, the Middle East and Africa research at real estate advisory firm Jones Lang LaSalle. “Anglo-Saxon corporates have been more accustomed to the outsourced model, whereas continental European corporates have been more hesitant amid concerns around the loss of control. Further afield in Asia-Pacific, Japanese corporates are slowly adopting an outsourced corporate real estate model, as are emerging market corporates in China and India.”
Companies are trying to become more creative when relocating or expanding, with some approaches more successful than others. “The length of the recession together with the lack of available debt and little speculative development means that when businesses want to relocate or expand, there is little good quality space available,” says Mr Douetil.
“We have seen a move towards pre-let or 'design and build' but this means making a decision very early on, which corporates are not always keen to do. Overall, they want to operate a more efficient estate, reduce costs, use their space more efficiently, and attract and retain staff,” he adds.
Making the move to a secondary location can sometimes be the answer, according to Mr Hutt. He says: “Some companies in certain sectors are considering moving out of central business district locations to secondary locations, because the latter can offer significant cost advantages without impacting on their ability to service their clients. However, this is not across the board, as in some markets the market drives the location need.”
Own or lease?
Mr Laws believes it is still a very mixed picture when it comes to weighing up the advantages of owning compared with leasing. “Company by company and sector by sector, the illiquidity of real estate means that many companies simply have to live with the legacy of property decisions made possibly decades earlier,” he says.
“There was a general theme in the 1990s and 2000s that most corporates should not play at being property companies and that a pound invested in property could earn a much better return if invested [into a company's] core business. But current historically low corporate borrowing rates for many blue-chips have seen some buy in the leases of their long-term facilities and become freehold owners again. Others saw their lease costs escalate in the last boom property market and are looking at ways to hedge the risk of that situation being repeated in a future, more benign economy,” adds Mr Laws.
“In the UK, the average corporate will own 20% and lease 80%, whereas on the continent companies own more than they lease,” says Mr Douetil. “The trend has moved away from ownership and towards releasing capital investment into the company itself. Companies have to strike a balance between investing in real estate and their core business. But corporates are beginning to look at investing in property as a way of securing better returns than with the banks.”