An effective CRE strategy includes location, workforce, workplace, technology, culture, and (above all else) patience

It’s easy for those in the industry to fall into over-simplifying what corporate (or commercial) real estate is. This world we have chosen is extremely broad. It covers every industry that exists or used to exist. It covers retail, office, warehouse, and manufacturing. It covers big enterprise and mom and pop businesses. The business world happens because of CRE. If you don’t have a place to operate from, your business isn’t going to go far.

An effective CRE strategy (corporate or commercial) involves understanding what is important to you at both the time you are making any given decision and the times after that decision when you are stuck with it. Just because you are signing a 3-year lease doesn’t mean you aren’t making a 10+-year decision. It takes overcoming a lot of friction to pick up and move an existing site. Importantly, the things you worry about today often aren’t the things you will be worrying about tomorrow.

Now, tie in the fact that the decision has more than just a time-based impact. Your CRE decision making impacts how the on-going business will recruit, hire, find customers, and generally operate. The decision also dictates a large degree of the intra-office culture that will exist (offices in the ‘burbs have a different vibe than offices in a downtown). Get the decision wrong and you could negatively be impacting operational profitability.

Let’s step back from any given location decision. Managing a real estate portfolio, even one as small as just 30 locations, because a time consuming and complicated activity. If you miss one lease event, you could easily cost your company a lot of money and operational flexibility. If you aren’t familiar with your negotiated lease clauses, you could be spending money on something that is actually the landlord’s responsibility. Don’t keep your data up-to-date and it becomes surprisingly easy to forget about a location that you have somewhere.

It’s no surprise that CRE teams often roll-up to the finance organization. Understanding lease accounting rules and the impact of a lease on your cash versus GAAP reporting is complicated. That lease you are signing is essentially a financial instrument; if you don’t understand it’s financial qualities, you don’t understand the document at all. But at the same time, if you treat the decision as purely a financial one, you will quickly find yourself with a real estate portfolio that does not reflect or support your operational reality. Rolling up your CRE teams to HR or Operations doesn’t solve anything, it just leads to similar problems.

None of this even starts to address the problems with CRE technology. Let’s start with the fact that there is no equivalent to SAP for real estate. Sure, IBM Tririga and other platforms make a claim to being enterprise capable. But the reality is that operationally, these systems rarely live up to the hype. It’s no wonder why either. Real estate is the owner of no data except for leases (location, clauses, lease costs) and building plans (seats, space). They get data on headcount  (new hires, work-from-home, leavers, etc.) from HR. They get data on many of the financial aspects from Finance (non-lease costs including taxes, facilities operations, utilities, insurance). Getting all of that data to connect and talk correctly can be a significant ordeal.

I mentioned the changing decision environment above but it comes back here because on-going changes to business operations impact the overall management of the real estate portfolio. If you are shifting to more work-from-home, you need less space. Suddenly decide to bring all those people back in, you need to have somewhere to put them. Consolidating back-office locations is a great idea but can increase operational risk. Move back-office support back into multiple hubs puts you in a position of mixing types of space all over again.

CRE is often like the tides. Everything changes on approximately 3-year cycles. Expand, contract. Risk mitigation, operational aggression. Focus on the culture, focus on cost. Up economy, down economy. Something is always changing and CRE is always at the front of it for execution but rarely in terms of really understanding what the business is trying to do.

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The 3 core metrics of corporate real estate.

There are three classic metrics used to evaluate the “efficiency” of a corporate real estate portfolio:

  1. Occupancy Ratio: Square feet per person: the amount of space in the portfolio divided by the total number of employees and contractors. In a traditional one person to one seat workplace, this will always be higher than the Density Ratio because you will always have more seats than people. Agile/Flexible workplaces try to drive this number well below the Density Ratio.
  2. Density Ratio: Square feet per seat: the amount of space in the portfolio divided by the number of seats available for people to work from. Hard to move too much because you need a certain amount of space in an office but generally targeted in the 150 to 250 range depending on region and type of office. It is possible to go tighter but that can lead to productivity issues.
  3. Utilization Ratio: Seats per person: the number of seats available divided by the number of people that occupy those seats. Traditional one person to one seat workplaces would target occupancy in the 80% to 90% range with many thinking 90% may actually be too much to account for churn and growth. Going over 100% means that you have more people than seats and can be a really good thing.

These metrics are extremely flexible because they can apply to a single location (small or large), geography, or even to the entire portfolio. They can tell you where you “most efficiently” use space and where you are “least efficient.” Anyone who has worked even a week in real estate instantly recognizes good targets for each. If that person has been around for a year or so, they can even tell you the benchmarks for each by region of the world (culture plays a huge role in real estate metrics).

Plenty of people quibble about whether square feet should be usable or rentable or something in between but the reality is that it doesn’t really matter. As long as you are consistent with the measure you use, you’ll get a result you can work from.

The single biggest difference in how companies use these metrics is the type of workplaces they have:

  • Traditional workplace: one person to one seat. Utilization ratios approaching 90% mean that more space is needed to accommodate growth.  All of your measures become very straightforward because you know your people, you know your assigned desks, and everything else is just calculated from there. Typically, future workplaces simply try to better enable to employees assigned within the four walls of that site.
  • Agile/flexible workplace: more than one person to a seat. Utilization ratios around 90% mean that the facility is being used entirely wrong. A typical Utilization ration in flexible working would by at least 120% and can even begin approaching 200+% as people get used to it. In this model, calculations of metrics for a given site can get a bit trickier as you now regularly have people who may be assigned to the site that never actually come in.

The targets and uses of these metrics will and should change by organization and geography. But these are the three metrics that are most fundamental to CRE – on either the corporate or service provider side. Get the direction of these right and you will find your portfolio improving. Never set a target or direction and you will have a real estate group struggling to understand their mission.

Real Estate is the link. What are the chains it is connecting?

Commercial Real Estate sits in the middle of everything a business does. With that said, every business leverages their real estate differently. Some treat it as a financial cost center, others as an operational lynchpin, some have real estate floating out as its own thing, and still others as a hybrid between these. There is no right way to manage your real estate, but there are several wrong ways.

The question you must ask yourself is who sits at the ends of the chains connected by your real estate? These two sides are both customers of the real estate function. Neither is more or less important, but they have competing needs and requirements that must be balanced.

For a retail location, you are connecting your sales to your customers. For a warehouse, you are connecting your manufacturing with your retail outlets. For a headquarters, you are connecting your corporate functions to the rest of your business. Other types of offices could have many types of connections to clients, the market, other businesses, etc.

Real estate is the ultimate in balancing conflicting requirements. If money wasn’t a requirement, every single employee would be given the workplace environment that most makes them productive. However, money and location are extremely limiting factors in all real estate decisions.

Money is the biggest limiting factor as the office must be built to last for a relatively long period of time. Location is a close second, I debated making it the biggest factor but never quite convince myself to pull the trigger. There can be no “perfect” real estate solution because of these built-in factors. The best we can do is to be optimized given the various limitations.

Thinking about the User Experience of CRE #ux

CRE is a complex area, trying to identify the user or customer in the decisions we make is not always simple. The most obvious users of a workplace environment are the employees that sit there. However, the reality is that it is designed based on the theories to increase productivity based on business definitions. The employees aren’t actually the customers of the design even though they are the ones who occupy it.

Similarly to building location decisions. One would think that the location is determined based on the employees who will occupy it, but here again, the business is the actual customer as they are trying to target a pool of potential labor. The commute of any given employee is a byproduct of the business’ selection rather than something that is being optimized for.

This may sound a bit anti-employee but in reality, it’s about balancing the needs of the many. The target user isn’t actually any given individual, it’s the ideal target which may be a combination of several different types of people.

Now, designing for the average and not the actual comes with many drawbacks. No one will ever have that “perfect” commute in. No one will ever find every aspect of their workstation right for them. No one has ever gotten everything they wanted from a system. The goal is to actually fit the needs, requirements, and wishlist of most while creating a degree of flexibility to allow as many as possible to make it work.

The user experience in real estate isn’t simple or straightforward. It takes a lot of thought and balancing of needs.

Welcome to 2018, the year of CRE.

2018 is going to be the year of CRE. It’s been a fun time to date but now is when we get serious. The cards are finally all lined up to be knocked right down. This is the year we finally develop a single…

…definition of what CRE is!

It’s going to be a big year, folks. Just imagine being able to easily explain what we do in this field. Can you imagine it?

Is CRE for offices different than CRE for industrial different than CRE for healthcare? Is CRE largely the same as architecture in many ways? How closely are the worlds of brokers, lease admins, facility managers, workplace strategists, portfolio managers, and project managers actually linked? Can we finally agree on Corporate Real Estate versus Commercial Real Estate?

Without this definition, it will be impossible to develop consistent standards across this industry.

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.

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.