Winds of Change

As the economy emerges from recession, corporations are rethinking their approach to their real estate. And UMS Advisory president Rakesh Kishan sees the changes as lasting, influenced in part by the maturation of outsourcing relationships.

Rakesh Kishan on Corporations’ New Approach to Real Estate Management

As the economy emerges from recession, corporations are rethinking their approach to their real estate. And UMS Advisory president Rakesh Kishan sees the changes as lasting, influenced in part by the maturation of outsourcing relationships. Drawing on his long-term experience advising Fortune 500 companies on real estate and facilities management initiatives, Kishan outlines these new approaches to corporate tenancy for CPE editorial director Suzann D. Silverman.

Q. What are the biggest changes that you see in corporate thinking about real estate this year, and do you see them as temporary or longer lasting?
A. The changes that we see today are going to be longer lasting because the world economic structure is fundamentally changing. Real estate is there to support the business, and when the global economy and global business environment start to shift—and I would say these are tectonic shifts. … I think our definition of what normal is is going to change—I think real estate will change, as well. … And (the business) environment will emphasize the importance of emerging markets and growth much more than in the past. …

So now let’s bring it to real estate in particular, the changes we see today in corporate thinking about real estate: One is a far greater awareness of the downside risks of real estate—a far greater sensitivity—because many of the decisions made where the horizon was much more rosy have come back to haunt many companies. … What that has left you is much greater control and centralization of the real estate function across highly diversified and decentralized companies to drive better real estate decision making within the enterprise. …

The second change—that I think will be longer lasting, as well—is how they use real
estate. … There won’t be rigid layouts. … Work is no longer confined to a building. … That’s the demographic change as well. The next generation of workers is much more mobile, much more socially connected with smartphones and smart technology. And they can collaborate without having to be in a conference room. So the second piece is, I think, the design of real estate to make it much more flexible and much more aligned with the

three major technology trends we have in our society today: One is cloud (technology)—where you can access. Another one is social networking—where you can collaborate, connect. And third is mobility—where you no longer are stationed at a desk.

And the third (change), I would say, is people now know that they need to make real estate decisions based on a far better business outlook—and a far more volatile business outlook. We don’t have 10-year plans today. It’s more agility—being able to adapt to emerging, very short product life cycles or new competition in the market.

People are going to expect a corporation to have far more reliable information on the portfolio and better connectivity with the businesses that drive a forward-looking real estate decision versus a reactive. … Greater connectivity to the business strategy decision making and greater information on the portfolio so they can better support it. And for that reason, people will centralize the technology in which the portfolio data for all of their access around the world is tracked and kept effectively.

Q. Looking back at the past year, what have been the most effective changes that corporations have already made to their real estate strategies?
A. The strategies that have worked are: A) They have become closer to the business. B) The real estate suppliers that have been supporting them often have been fragmented; they’ve consolidated them. You see this everywhere—it’s not just real estate suppliers, it’s the HR suppliers, the IT suppliers—they’ve all been reduced, consolidated and put under master contracts, global contracts or regional contracts.

And the most important is the ability to execute globally. … The companies that are beginning to do that have really helped their business thrive, survive and sustain performance in the downturn. Being able to very quickly get a business up and running in a market that’s showing signs of growth and demand is what real estate is there to do. Or get out of a region that’s showing contraction. … So the ability to execute upon that need has been extremely valuable for corporations. Of course, some organizations are better at doing that than others.

Q. We’ve talked in the past about the concept of managing through cycles rather than in response to market swings. What have been some of the most effective approaches you’ve seen to really making an effort to manage through the cycles?
A. This is where agility and adaptability is becoming the corporate mantra today. Business cycles used to be somewhat predictable. But now we have periods of sustained economic extension that defy the logic of any business cycle. … What we see today is those business cycles can be highly volatile and unpredictable at a product level. A new smartphone or a new product introduction can completely destroy a market, a legacy market, or completely establish a brand-new, multibillion-dollar market space. …

So the notion of business cycles today and product cycles is much shorter, much
more volatile and with a perishable window of opportunity where either you act or you’re pretty much shut out of some market space.

That is how we think the concept of managing through cycles is changing. Cycles are becoming unpredictable and more about very quickly adapting to what the business needs. And being more attuned to identifying what that cycle is going to be in your market.

Q. So managing through cycles isn’t like managing for the long term. You’re, in fact, saying that because of the volatility and the way new technologies are being embraced, you need to be ready to change more quickly.
A. Exactly. If you look at where, historically, the industry thinking has been … if you look at the functional aspects of real estate facilities management, they have over the last decade heavily subscribed to this life cycle management theory, which is you acquire, you operate, maintain, you renew in this depreciation cycle, you dispose, you go into commissioning. … It’s a very sequential, very cyclical kind of long-term view of the asset. … It could (take) 25 years for a real estate asset to go through that cycle. But the business that needs that asset may be gone in three years. And there’s a disconnect there.
Q. How do you see landlords reacting to that?
A. This is where the dynamic tension is in the market. Landlords want predictability, but also their job is to support how these corporations are changing. I think it’s never going to be easy, but they probably recognize the pressure we are all under.
Q. How are corporate expectations of outsourcing services changing?
A. The facilities manager’s purchasing decision has been largely very analytical and very cost driven. You get a lot of competitors. The real estate decision to hire an outsourcing partner has been a very relationship driven and legacy—whoever you dealt with in the past—driven decision, which is very different than what we see in the very formalized RFP purchasing decision for the FM side. … Even on the real estate side, clients are becoming a little bit more analytical as to who they are selecting for their outsourcing partner. … Many of these (second and third generation) global real estate relationships that they have with outsourcing partners are coming under review. It’s, “Where do we go from here? … We’ve had this relationship for 10 years. Where do we go from now?” … That decision is becoming more analytical and based upon how much value these companies have added in the last two or three years, where there’s been some real pressure on the real estate organization.… People are expecting more quantifiable value, more capability in specific regions, and to some degree they are moving strategic planning functions back in house to get more control and independence. … So in a way that’s going to change how they interact or interface with the outside service providers. I don’t think there are any drastic or significant changes in specific expectations. They are just a little bit more analytical in their decision making of how they select companies. A little more formal.
Q. What are your greatest criticisms of the current outsourcing model?
A. We’ve seen real estate outsourcing models in place next to IT and HR and finance and accounting and other models. I think for the most part the real estate outsourcing models compare very favorably and very well to these other shared services or non-core services outsourcing models. … Overall, I think the industry has done well. It is a maturing industry, (but) it is not as established as, say, IT is. There’s always a debate and question of to what extent will this function become an outsource function like IT has become over the years.… I think that’s a big question for the industry. And do we have sufficient competition? We’re seeing the emergence of some smaller players really battling the larger, more established players. I think that’s very healthy for corporations. So I think the criticism is that the industry still sometimes can promise a lot. Perhaps the promises get ahead of the delivery capabilities in some regions. Globally, they can promise fairly well, but in specific regions the delivery may fall below expectations.
Q. Hasn’t that led in the past to more companies partnering with a few firms and having them work together with one of them managing the overall relationship?
A. That is the big debate in third generation. Companies have had global real estate relationships. They’re saying is it best to continue global or do we need to have best in market? So we have one European real estate partner, one in North America, one in Asia who really knows that region, who is the best in that region.
That’s one philosophy or school of thought. The other one is we need one globally to help manage all our transactional activities, whether it’s a lease, disposition, acquisition, what have you. … (Or) to what extent do we just aggregate real estate into its component sources. … Lease administration globally to one company. Proper database management to another company that is really best in that. And then transactions we can regionalize. That’s what they’re thinking. Or at least contemplating. But there’s still an argument for global strategy. What global partners are allowing some of the smaller companies to do—and maybe even some of the larger ones—is to move quickly. They don’t have to communicate a business decision to, say, five or six companies around the world.