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.

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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.

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.