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:
- 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.
- 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.