CRE’s traditional role

CRE organizations have traditionally been hampered by internal and external factors that impair their ability to produce timely, effective solutions.  Major process deficiencies and information gaps divert CRE professionals’ attention from critical activities such as planning, forecasting and relationship management.  As a result, the CRE function may be perceived as slow, reactive and bureaucratic.

• Internal operating inefficiencies are typically caused by:
• Redundant activities and poor communication among functions.
• Heavy reliance on paper and manual processes that slow workflow.
• Inadequate information tools, often consisting of cobbled together standard packaged software with homegrown or custom applications, each with limited functionality.
• Incompatible information databases across business units.

External market-based barriers also negatively impact CRE organizations’ ability to gather, analyze, and report information when it is most needed and to close deals. Most notable of these inefficiencies are:

• Lack of standardization in processes among transaction participants resulting in slow, fragmented and paper intensive steps prone to communication gaps. 
• Limited access to market information due to industry structure.
• Dependency on out-sourced service providers for information technology solutions, resulting in “lock-in” to these systems and services.

The impact of these internal and external limitations can be costly, especially if the CRE organization is unable to respond to real estate needs in a timely and decisive manner. Consider a new business initiative that is projected to generate $10 million in revenue per month. An efficient project delivery cycle time, cut in half from four months to two, would add $20 million in value by enabling revenue generation sooner than typically anticipated. Time to market is a major factor in business competitiveness that requires flexible and fast-track planning solutions. 

The increasing demands for value-added services, coupled with new capabilities, have begun to set the stage for transformation. The question is whether CRE executives will rise to the leadership challenge to direct these industry forces and shape the new environment. 

CRE’s potential role

With almost 30% of company assets in real estate, corporations will continue to rely on CRE executives to better manage the portfolio and improve their processes and service delivery.  CRE executives are well positioned to transform their role, internally within their organizations and externally in the marketplace, because they now have more access to multiple information sources needed for planning, forecasting and strategic decision-making. They have an intimate knowledge of their corporate culture, policies, and initiatives.  They set the criteria for space demand to which the external real estate market must respond.

Emerging internal CRE role

Within their companies, CRE organizations are increasingly establishing themselves as competitive value-added service providers by providing a sophisticated range of services. They are doing this by:

• Understanding key business drivers

CRE executives are increasing their knowledge of what drives their corporation’s business.  This understanding is gained either through business unit-level CRE functions or by having business relationship managers at a corporate level.  This insight into key business drivers provides the foundation for sound portfolio management strategy.

• Aligning the CRE goals to the corporate strategic plan

Portfolio strategy should ultimately support the company’s strategic vision. Fore example, knowing whether the corporation is focused more on customer experience, employee productivity, expense control or growth could lead to very different real estate portfolio management approaches.

• Leveraging new tools and capabilities

The application of the latest industry tools for CRE management is enabling CRE organizations to operate more efficiently and allowing them to provide more value-added services.

• Discovering opportunity for cost savings

Facilities must be constantly evaluated for their unrealized potential, alternative uses, possible disposition or alternate financial strategies (such as sale-leaseback or synthetic leases). CRE executives must proactively seek opportunities to create value throughout the occupancy lifecycle.

• Maintaining flexibility in the real estate portfolio

Diversity in the real estate portfolio and phased lease planning can lead to just-in-time acquisition and disposition of space.  Diverse asset classes (leased and owned facilities, urban, suburban and campus locations, etc.) can help keep balance and provide opportunities for “remixing” to achieve occupancy cost savings.  Phasing lease termination dates within a market allows further potential for portfolio expansion and contraction.

• Balancing internal and external resources

Managing a mix of in-house capabilities and external resources can provide maximum benefits while reducing costs and minimizing risks.

To successfully implement the transformation, CRE executives need to consciously manage internal cultural responsiveness to new methods and tools by soliciting feedback, identifying benefits as well as frustrations, and rewarding efforts to change and develop new skills. This applies to changes imposed on user groups as well as changes within the CRE function such as e-business solutions.  Cultural resistance to change is often the unmanaged element that destroys efforts to improve on current conditions.

Emerging external CRE role

CRE organizations can wield a greater share of influence and control to drive innovation within the extended enterprise (their organizations and their external service providers) by establishing rules, standardizing processes, and adopting efficient solutions.  

Establishing rules

As the buyer, CRE executives have strategic control in the transaction process.  They represent high-quality tenants who are very desirable to owners because they drive up property values, particularly in a weak market.  CRE executives have the right to opt-in or opt-out of a transaction and, therefore, have the ability to establish the ground rules. 

Standardizing processes

CRE executives have the potential to collectively define open industry standards and effectively consolidate information sources.  This would have the effect of reducing transaction costs, improving market visibility and making pricing more transparent.

Adopting efficient solutions

CRE executives can influence innovation and adoption of tools that remove process and market-based inefficiencies within the industry.  Some examples include:

• • Flowcharting capability to guide parties through the e-leasing process
  • Progress tracking of each project
  • On-line work management tools to eliminate process redundancy

Assigned accountability of each party to the transaction

• Workflow tracking across activities
• Amenities-specification capability (to describe the amenities a buyer prefers but not block an owner’s response if a particular property doesn’t have a specific amenity, thus preventing unnecessarily narrow definition of requirements)
• Links to demographic research and report-generation. 

These capabilities would improve asset utilization and enable better financial performance by increasing speed, improving flexibility and enhancing decision making by providing collaborative functionality,

New challenges

Internal operations – corporate  pressures

Planning, forecasting and relationship management activities are becoming increasingly important in today’s value-added, client-focused environment. This new emphasis requires rapid response to ever changing corporate business demands while, at the same time, contributing to the bottom line. CRE professionals are being called upon to complete more transactions, fit-out more facilities, and improve operational efficiencies in less time with a smaller staff.  In many companies, CRE organizations compete with outside service providers to deliver these services, in others outsourced services vendors are strategic partners in service delivery.  Globalization, mergers and acquisitions, boom/bust cycles and organizational restructuring place further pressure on CRE executives to provide timely, flexible and cost-effective solutions. 

Given the internal challenges, the following capabilities for CRE organizations are a must.

• Facilities Information Platforms — CRE executives require a “top-down” view to make strategic decisions supported by information on buildings, leases, human resources, project management and financial data that often resides in a variety of in-house and third-party sources.  A single facilities platform for the entire portfolio that integrates these information sources would significantly enhance the decision-support capability of their tools and greatly increase productivity.  By linking these information silos, CRE organizations can also take full advantage of electronic processing capabilities for automated workflow.

• Knowledge Zones — CRE organizations need to tap the collective experience of internal clients, relationship managers, planners, designers and project managers throughout the company in different markets, business units and time zones.  Many companies are already collaborating globally using the Internet and project extranets that enable teams to share real estate strategy, corporate knowledge, market intelligence and information tools so that they are not “reinventing the wheel.”

The technology platforms for future CRE Strategic Planning Tools currently exist. Enterprise Resource Planning (ERP) systems have long addressed many of the business integration issues in corporations.  However they are not widely used for CRE functions primarily because these systems are complex, expensive and not designed to meet CRE needs or integrated with other CRE applications. 

Many of the traditional computer-aided facilities management (CAFM) systems are now being offered as Application Service Providers (ASP’s), with the next generation of system integration capability. In the ASP model, the application software is hosted by the vendor. Customers access the software through the Internet by paying a usage fee.  These Internet-based tools have the advantage of being able to provide shorter deployment time and predictable on-going costs.  Development expenses are reduced because all users share them. CRE organizations also benefit from having a centrally managed database, controlled access to data for analysis and reporting, business process standardization and a common infrastructure for accessing data. 

Several challenges remain which will result in the further refinement of the ASP model.  These challenges include:

• the complexity of integrating Internet-based tools with the user’s legacy systems,
• being able to consistently provide a fully functioning technical platform and high quality customer service,
• information security issues regarding the safeguarding of confidential corporate data and
• ownership/access issues if an ASP goes out of business. 

CRE executives can use new technology solutions to accelerate decision making, improve portfolio performance, and increase efficiency. Therefore, the CRE executives’ input is vital to shaping these models to more closely meet their organizations’ needs.  For example, by linking process tools with e-marketplaces, there can be true collaboration between CRE professionals and property owners. This would create value-added data across the delivery chain and deep, efficient process-enabling capability.

External environment –  new market realities

An organization’s space demand is defined by future real estate requirements identified by business units. Ideally, this demand information would be linked into a domain for matching it with available supply in electronic marketplaces.  As simple as it sounds, this is not easy to accomplish due, primarily, to the way the commercial real estate industry is structured.  Today’s commercial brokerage community is highly fragmented. The top five firms account for only 12% of total leasing commissions in the $2.5 billion U.S.  Market share drops off sharply after this with the top ten leasing a mere 15% of the total.  Sales commissions tell a similar story: the top five U.S. brokerage firms command 11% of sales and the top ten, 14%.  Landlords also account for only small fragments of the market. The largest commercial real estate owner, Equity Office Properties Trust, has 4% of the U.S. market.  Other industry players are even more fragmented.  They include comprehensive space providers, architectural and interior designers, construction managers, real estate developers, facility managers and procurement firms. multi-tenant office stock. 

These industry players are defining business-to-business [B2B] tools for the commercial real estate industry. Here are two types of Internet-based B2B capabilities.

• Occupancy marketplaces match owners’ and property managers’ available supply with corporate real estate departments’ current demand. The transparency and liquidity of e-markets provides building owners and managers access to additional communication channels to reach high quality tenants.  CRE organizations (the buyers) are exposed to more deal alternatives.

• Virtual trading environments enable web-based negotiations and transactions.  CRE’s, owners and agents can set up an interactive, collaborative conference with calendar and financial-analysis tools. There is the capacity to readily share much more information (including sound and video) to support faster, better decision-making. Once a final leasing decision is made, these systems can generate a detailed lease abstract, reducing transaction cycle-time to a fraction of that traditionally required.

These tools enable a better match of supply with demand and increased efficiency in the leasing process. They provide the potential for the balance of power in lease negotiations to tilt toward the CRE organization.  For example, when renewing an existing lease, a CRE executive can make a better deal by benchmarking it against the current market situation.

These on-line capabilities are also transforming the traditional roles of property managers, brokers, and developers as intermediaries in the buyer/seller transaction.  In an effort to re-establish their position in the emerging marketplace, fierce competitors CB Richard Ellis, Jones Lang LaSalle and Trammell Crow, three dominant real estate service providers who collectively manage 1.2 billion square feet of properties, joined forces as equal partners with Insignia Financial Group to form Project Octane.  The intent of Project Octane is to streamline the transaction process by providing an e-marketplace.  It is meant to be a communication and process management vehicle for corporate property owners, landlords and brokers to collaborate and complete commercial real estate deals. 

<>Project Constellation goes a step further. In the ongoing convergence of real estate and technology, eleven of the largest U.S. commercial real-estate companies (including the Project Octane partners) joined forces to form not only an electronic marketplace, but also an entity that will find, fund, and nurture real estate-related e-commerce business opportunities.  

It is not yet clear whether these collaborations will succeed as profitable ventures.  There is also no evidence that benefits will accrue to CRE organizations.  While e-markets are highly attractive solutions, challenges remain.  These challenges include integration with current processes, strategic relationships, and legacy systems.  The early proliferation of e-market providers has been seriously affected by the current economic downturn and a shake-out has begun to occur.

New Tools

A classic “five-year” master plan has little place in today’s fast-pace business environment. What is needed is a set of broad planning solutions that provide a “fit” with the corporate strategic direction and can be tailored as future needs become apparent.  The real estate strategic plan must be as responsive as corporations are agile.

To meet these challenges and to dramatically improve their effectiveness, CRE executives should be on the leading edge in the adoption of new operating and organizational models. They must apply modeling and decision-making methods to available internal and external information to develop value-adding solutions. There are several categories of methods and tools currently available.

Scenario Planning methodology helps organizations anticipate and prepare for changing market conditions. 

• A set of scenarios encompasses a full range of possible future conditions.
• Real estate strategies are stress tested in these scenarios.
• Robust solutions are then identified that work in any (or most) of these conditions.

Portfolio management tools support high-level strategic planning decisions. 

• Database applications organize corporate real estate, employee and financial information.
• Computer-aided design and facilities management (CADD and CAFM) systems are in common use for space management, asset tracking, and reporting.
• Automated reporting on lease expirations, vacancy rates, densities and metrics by market uncovers potential opportunities for savings.
• Portfolio performance analysis provides “best-in-class” benchmarking.
• Financial analysis models assess the impact on occupancy expense of planning options.
• Evaluating economic efficiency of real estate assets with various financing options such as own versus lease, sale-leaseback, etc. 

Demand analysis tools match headcount projections with portfolio capacity.

• Workspace demand forecasting capability captures input from relationship managers or business units.
• Worldwide GIS mapping applications plot facilities, employee home addresses and demographic data for identifying new business locations.

Transaction management tools reduce time to market.

• Requests for proposals (RFP’s) can be generated automatically.
• Specific property search criteria can be captured and communicated.
• Property information to evaluate real estate options can be accessed. 
• Real estate transactions can be supported interactively.

Lease/contract management tools track and manage assets.

• Lease data linked to properties, business units, and budgets is recorded.
• Critical dates, lease abstract clauses, payments, and reports are monitored.

Project management tools enhance and evaluate project performance.

• Customize project templates assign tasks and track progress among team members distributed across the company and around the world.
• Collaboration spaces allow sharing of information, support-threaded discussions and posting of documents.
• Real-time CRE access to construction documents in design and development enable more timely client input. 

Today, robust portfolio management, leasing, and project management applications are available. However, few tools on the market support CRE needs for accelerated decision-making in the real estate lifecycle. The next challenge is to develop a line of comprehensive strategic planning tools for CRE executives that not only allows them view and analyze integrated data, but offers a wide array of decision-support, scenario planning, and simulation capabilities.

CRE Collaboration

Because each CRE organization believes their needs to be unique, they have not been able to leverage their potential within the commercial real estate industry. CRE organizations cannot have an effective impact by making isolated decisions.  They need to work with their peers in other corporations to unlock value trapped by the intermediaries currently in control. When CRE organizations recognize their common needs and start to work together, they can leverage their strategic position. Through collaboration, they can aggregate their influence for shared benefit by directly impacting industry practices, processes, and solutions.

An example of how CRE organizations can collaborate occurred when three corporate investors, Bank of America, IBM and Prudential Insurance Company, took a minority stake in NetStruxr, a San Francisco-based e-business and e-procurement company that addresses the entire CRE supply chain.   Deepening their relationship, the CRE organizations of these companies then announced in October 2001 that they would form and participate in the industry’s first Corporate Real Estate Exchange (CREX) Consortium.  Each company joining CREX will be asked to post all reasonably-sized available space.  NetStruxr’s system will track activity and provide appropriate reports to all CREX members.  While there is no up-front cost to CREX members, NetStruxr charges a 0.05% success fee (50 basis points on the total rental value of a deal), payable by the landlord or sublandlord when a transaction is completed. While the first wave of participating companies will be limited to thirty corporate partners, CREX is expected to grow to as many as 125 to 150 partners.