Should CRE expertise be embedded into business leadership?

Corporate real estate knowledge is often thought of as a standalone function. It’s not something that is usually considered part of the manager’s toolkit of knowledge. Does a manager really need to know everything about choosing between cities when relocating an office? Traditionally the answer has been no.

I would argue that CRE expertise inside of the business where decisions are made could be the single biggest improver of business decision success in the future.

As businesses become more complex, rates of M&A increases, and the world becomes more global, corporate real estate decisions become more complex and have increasingly significant financial impacts. If someone with real estate expertise isn’t directly involved in the planning phases, projects could progress to a point where the real estate is at the end and will simply be what it is with minimal ability to optimize.

The number of true, broad CRE experts in the world is a smaller number than it should be. Embedding this knowledge with the businesses serves two purposes: ensuring that CRE impacts are factored into the start of the decision and spreading the knowledge of CRE more broadly. Both of these impacts will improve the quality and success of all strategic business decisions significantly.

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Question everything you know about CRE.

Corporate real estate is a canvas that is to be painted on. No two solutions should ever be the same. The way you made decisions yesterday should not be the way you make decisions tomorrow. Always assume that the CRE ground has moved under your feet.

These may sound like random thoughts that simply emphasize the role of change in CRE. But the reality of this industry is that our job is to support our business today and create a platform for the business to be successful into the future. Our job is to make sure that we provide a solid foundation for our business to operate from.

What does this really mean? It means that no decision we make can be made in a silo. Everything we do impact someone outside of ourselves. If we put the business in the wrong part of the city, they may have difficulty hiring. If we don’t design the office to ensure productivity and flexibility, the business will have a higher cost hurdle to overcome. If we put a 9-year lease in place for a business that is only going to exist in its current form for 3 years, we’ve put a potential 6 year added cost burden on the company. If we sign a 2-year lease on a space that the business expects to operate in for 10 years, we add a risk of moving before the business would like.

Just because we know how to optimize a real estate deal or implement the most modern workplace doesn’t mean those things will work for the business we are supporting. Just because we know all of the market factors (labor, real estate, financial) doesn’t mean that those factors really matter in a particular decision. It simply needs to be about the business.

Real estate is a canvas to be painted on.

Trust and Commercial Real Estate

The single biggest roadblock to explosive growth of CRE as an industry is a general lack of trust. It’s amazing to me how often lack of trust is the driving factor in the way corporate real estate groups are setup or the way that CRE projects are implemented.

There are two distinct sides to the lack of trust issue:

  1. Internally to Organizations. Business leaders don’t trust the delivery of service or the costs required to implement sites to their specifications. Lack of understanding of what CRE really is.
  2. Externally in the Market. Market participants have very little ability to judge the quality and financials of their decisions relative to the full set of options. Invisibility of data.

Every CRE team I’ve worked with inside of organizations has been structured differently with a different mission, varying services they offer and who they report to. This includes whether the facilities management function is provided within CRE or independently. It also includes whether real estate is viewed as a cost of doing business (reporting to finance or treasury with a primary focus on reducing costs) or a business enabler (reporting to operations with more free reign on how to run projects).

When you move from a finance team at one organization to a finance team at another there are always differences but generally, the function of finance remains consistent from one company to another. Real Estate is the complete opposite. In part, this is due to the broad possible scope of real estate covering finance, architecture, project management, customer relationship management, design management, facilities management, lease administration, tax & accounting and various engineering competencies. What kind of person do you hire into this crazy function?

But real estate teams are also directly influenced by the way that services are paid for. The primary role of real estate is usually the execution and management of leases to give the business sites to operate within. The cost of these functions is often paid by external parties to the corporate real estate group. Leases generate commissions that are paid by the landlord. The single biggest asset of most real estate teams is the leases that they have to give to 3rd parties for implementation. Large firms leverage these commissions to also get lease administration, financial modeling, some consulting, full-time transaction managers, project managers and other related services paid for completely outside the business’s P&L. When a large portion of your tasks and/or organization are not only 3rd party but paid for by someone other than yourself, it creates some interesting dynamics.

As you can imagine, in the past this arrangement led to some unsavory business relationships. Many jurisdictions (state and countries mostly) have enacted varying laws to manage the way that these 3rd parties can deliver services and receive or use commissions.

This all also has the side effect of having most real estate experts migrating to the service provider side of the world instead of working for organizations directly. Most of the work is done by service providers and most of the money flows through the service providers. It makes it difficult for organizations to recruit the best talent.

Just imagine if SAP offered their system free of charge including all of the financial experts and analysts necessary to manage your financial operations at no (direct) cost to you because they receive a piece of every check that is cut or payment made? It would create an absurdly difficult business model for many companies to turn down. It would also create an environment where there is tremendous potential for things to happen not in the best interest of the business needing the service.

This is real estate. It’s why this industry is different than others. It’s why there is so much opportunity for improvement.

The Blockchain and CRE.

Over the course of 2017, I’ve been doing a lot of research and learning around the Blockchain, Bitcoin, Ethereum and offshoot projects. There are some fascinating things going on in this world if you haven’t been paying attention to it. This post assumes that you have a basic understanding of what the blockchain is. If you don’t, go research and come back (I recommend starting with the Wikipedia page for Blockchain).

This is not a post advocating people to go out and buy Bitcoin or Ether. Personally, I do own some of both but only enough to cause me to pay attention to what each project is doing. The decision for individuals or groups to invest in the actual tokens is something that is best left to each individual’s taste for risk in their investments.

For those that care to think out to the future, Duke Long has been running a great series over the past few years about the potential impact of the blockchain on CRE. Last week I left a long comment on one of his posts and Sunday he replied back with a full blog addressing my thought. It was more than I expected but very worthwhile to read.

I often disagree with Duke on his outlook for the industry’s macro trends. Our backgrounds are different, the markets we’ve worked in are different, the trends we think will affect CRE are often different. Yet I still read all of his posts to understand that perspective because he’s right a lot.

One thing I don’t disagree with him on is the potential impact that the blockchain will have on CRE. I think there are some major hurdles to its adoption that are going to be difficult to get over but someone will solve those hurdles. Why?

Why you ask? The blockchain solves the single biggest issue that causes CRE’s inefficiencies: lack of trust.

The entire purpose of the blockchain model is to allow data to be shared, recorded and altered in a way that allows complete strangers to have confidence that their transaction will be correctly recorded and stored. Data integrity around contracts, records, data points, etc is assured by the distributed maintenance of the blockchain nodes. There’s a clear and researchable record of who did what, when. This is true while also still allowing degrees of anonymity.

So much of our industry is kept behind curtains because people don’t trust others. Landlords don’t trust other landlords. Tenants don’t trust their landlords. Brokers don’t trust brokers. Brokers don’t trust CoStar. Consultants don’t trust their data. Market rates are unknowable other than as opinion. The blockchain has the ability to level the playing field by giving every participant an equal starting point.

Why the blockchain won’t save CRE Tech

I’m a fan of altcoins, crypto currency, digital tokens, etc. Bitcoin, ether, litecoin, and their like have a new business model for how they work and what they can do for people and businesses. The blockchain itself has so many possibilities as to be maybe the biggest invention since the iPhone. You can find new articles every single day on applications for the blockchain – insurance, contracts, credit/loans, purchases, etc.

Adoption of the blockchain will slowly occur across many industries and use cases. But I suspect that it will not be taken too seriously in real estate for a long time.

Why? Because real estate brokerages are struggling to use such simple tools as SalesForce. Convincing them to move to a researchable, relatively open, standardized deal tracking system will be a Herculean task. The sharing of any information is a hurdle that too many in the industry are struggling with which is hampering even commonly used tech in other industries. Trying to move to a platform that makes everything theoretically researchable would be a difficult sell.

Maybe there will be a sea change in CRE (commercial real estate) but it isn’t likely in the next several years. The way money works in the industry will continue to hamper technology innovation and adoption. Until someone disrupts the commission model I have little confidence in radical innovation being adopted.

What’s the difference between Commercial Real Estate and Corporate Real Estate?

This is a topic that has bothered me ever since I first got into this crazy CRE industry. CRE is used as the abbreviation for both Commercial Real Estate and Corporate Real Estate with very little differentiation. As far as I can tell, from common usage in various environments, Corporate Real Estate is used when you are dealing with everything about how space is used – workplace, lease admin, project management, facilities management, transactions, financials, insurance, taxes, etc. Commercial Real Estate is most often used when talking about landlords and the leasing of space.

Normally this wouldn’t cause any real problems, but in our industry it actually does. The real profits and money come from transactions. Real estate firms and many of the top professionals are attached predominately to the leasing side of the business. This is fine other than the primary need of most corporations is around everything but the transactions. See the tension that can cause?

Many professionals on the transaction side of the business have learned to talk the corporate real estate game while playing the commercial real estate game. Anytime words don’t match actions there are problems.

Many very smart people make their living as 100% at risk, commissioned brokers. They know that their best way of getting in with large companies is by helping to address the real problems that they face – usually not transaction focused. There are many that actually try to do the right thing and spend real time and money to support the non-transaction side of the business. But there are also many that talk the game without providing the appropriate action – not always because they don’t want to but just as often because they either don’t have the organizational support.

I know I’m going to tick a lot of people off with this post because many in CRE don’t really believe there is a disconnect on this point. But I’ve seen it from both sides at this point and know it to be real.

It’s something worth thinking about as you try to figure out who is best positioned to support your CRE needs.

Real Estate Technology is a thing of the past. Long live Technology.

It’s funny, every time I evaluate “Real Estate Technology” I almost always come away thinking “this other [non-real estate] system does that better.” There are a few exceptions – work order/maintenance management, lease administration, room booking – but those prove the rule as they deal with things that only real estate encounters historically.

Ironically, the new FASB rules will soon mean lease administration systems move from being real estate systems to corporate enterprise systems. Why would an organization choose a system that can only manage real estate leases when they will need to track every lease in the company to the same level of detail? This will soon be driven by finance and HR instead of real estate.

Some of the systems that are often touted as being bleeding edge for real estate include site selection/labor analytics, transaction/project management, energy management/smart building, CRM, and workplace forecasting. These aren’t everything but they are pretty representative. If we take a look through them:

  • Site selection/labor analytics: This often gets put into the real estate bucket because it’s tied to the need to identify and select a new building. The reality is that the data used is largely publicly available and the analysis techniques are generic. The real owners of the need are operations who will be occupying the site that understand the type of office they require.
  • Transaction/Project Management: There really isn’t anything so unique here that it has to be a real estate first tool. Sure, some of the data that needs to be managed will be real estate specific but budget/capital management applies just as well to IT, supply chain and some other operations groups. Systems like Slack, Asana and many more are building project coordination platforms that can work for real estate as well as they work for anyone else.
  • Energy Management/Smart Building: Ultimately, carbon reporting is going to be owned outside of real estate at many organizations. This is one of those areas that real estate will always be a critical stakeholder but just as often won’t own the system/data themselves.
  • CRM: This one always drives me up a wall. Brokers view their data as their own. It makes sense given the incentive model for 90% of brokers out there. There’s a lot of money to be made and the level of differentiation between any two brokers is relatively small. Most of the business comes down to owning relationships. SalesForce and others have built industry standard CRMs that stand on their own for every industry except Real Estate. Eventually, that will change because real estate will adopt standard tools more and more. But until then this is the best example of why real estate “technology” is often backward.
  • Workplace Forecasting: On the surface, this is as straightforward real estate as it gets. If I need to calculate the amount of space I need and how the workplace should be designed, that’s what real estate is. But if you look above, as more and more of the data and decisions of real estate move to common platforms, this will as well. Workplace Forecasting is a perfect application of Big Data/AI decisions out of a corporate strategy team. The AI group would bring in forecasts around future revenue, the success of work-from-home/agile policies, cultural trends on space, and work requirements to come up with an ever evolving target of how much space a business or group needs in a market. This becomes a feed to the real estate team to develop a strategy to move from where things are today to where they need to be. But, here again, real estate is the stakeholder instead of the owner.

I’m bullish on the impact that technology is going to have on the real estate industry as a whole. I’m much less bullish on the ability of “real estate technology” companies to survive on their own in this niche. Any system they built will likely be applicable outside of the industry with a few tweaks and generalizations while finding a larger marketplace at the same time. This will squeeze the real estate specialized groups out over time.

It’s good to have a focus today on the niche because real estate is not well understood outside of the industry. The thinking and specialization may turn out something truly unique and special. But to date that hasn’t happened and I don’t see it happening.

For the next 5 to 10 years there will be a strong and robust market for these real estate specific solutions. It’s the longer term that looks bleak.