Cre3 corporate real estate benchmarking white paper

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October, 2010October, 2010October, 2010October, 2010

Corporate

Real Estate

Benchmarking

White Paper

The following document is the result of a survey conducted from September 15-30, 2010 on the CRE3 Consulting website (www.CRE3.net).

CRE3 invited 771 corporate real estate and facility management professionals to take part and participants were informed that the completed survey will be the basis of this white paper and may become a benchmarking tool used to compare information with peers about:

• Total Cost of Occupancy/FTE and the Top Occupancy Cost Categories

• How information systems are being used to support CRE Strategy

• How others are preparing for the changes to the lease accounting standards

• The top five data requests coming from senior management

• How others are moving their portfolio toward sustainability

The results validate the notion of a convergence occurring in the corporate real estate industry. The dictionary defines ‘convergence’ as, “the process of coming together or the state of having come together toward a common point.”

For CRE professionals the convergence is bringing together:

• The intensifying focus real estate will receive from the C-Suite as a result of the FAS13 changes coming into effect in January, 2012 that will capitalize future rent obligations bringing millions/billions of dollars onto the balance sheet;

• The increasing need for organizations to reduce real estate related operating expenses thru lower occupancy costs; and,

• The desire among corporate leaders to achieve environmental sustainability through LEEDS certified design principles, effective energy management and building efficiency.

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Executive Summary

CRE3 Consulting - Corporate Real Estate Benchmarking White Paper

Each of these elements on their own offers unique challenges but, the combination of them is creating a sense of urgency CRE departments will be forced to embrace or they will lose opportunities to contribute meaningful value to the organizations they support.

Survey Participants Statistics

The following is a profile of the corporate real estate executives who participated in this study benchmarking survey:

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Portfolio Owned v

Owned 68%

Leased 32%

Property Types

Office 100%

Warehouse/Distribution 57%

Data Center 42%

R&D 42%

Retail 39%

Manufacturing 35%

Vacant Land 28%

Other 8%

Geography of Portfolio

North America 100%

Europe 57%

Asia 43%

South America 35%

Other 9%


Total Size of Portfolio in Square Footage

0 - 1,000,000 17%

1,000,001 - 5,000,000 20%

10,000,001 - 25,000,000 10%

25,000,001 - 75,000,000 22%

5,000,001 - 10,000,000 15%

75000000+ 14%

Over the past 10 years corporate real estate departments have undergone an evolution along with the facilities and maintenance departments. Traditionally, the CRE executive reported to the Chief Financial Officer and the Facilities Staff reported to the Human Resource Department.

With today’s resource constraints brought on by the challenging economic times and the changing view companies are now taking in managing their real estate portfolio, the CRE/facilities organizational structure has changed. More and more, the facilities and real estate departments are merging into one department typically led by the Senior Real Estate Director who still reports to the CFO but, now has management responsibilities of all premises including facility services, maintenance and operations. The names of some of the newly named departments include Corporate Services and Workplace Services indicating their management extends beyond just real estate and facilities.

In many corporate organizations, the real estate and facilities department is counted on to provide office, manufacturing, distribution, R&D, retail and other space types to support their organization's operational needs. The facilities need to be clean, appealing to the employees, be operated cost efficiently and project the appropriate image of the company.

In most organizations the real estate portfolio of owned and leased assets sit on the balance sheet as the second or third most valuable or expensive single asset depending on whether they're leased or owned. This places the real estate and facilities department in the envious position of managing a critical asset and one that can truly impact, positively and negatively, the financial performance of their organization.

Because of this simple truth, the CRE professional deserves a very prominent seat at the table charting major decisions involving the financial and future direction of the company. By operating the portfolio in the most efficient manner possible, at the lowest of realistic total cost of occupancy and the least possible environmentally impact, the CRE can

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Corporate Real Estate Department Composition


have more profound impact on the overall organization than just about every other department.

But, when the CRE professional gets to the table they better bring along solid actionable business intelligence about occupancy costs, space utilization/optimization, facility benchmarks, environmental impact and financial terms which may allow for dispositions or acquisitions to grow or contract in support of the direction of the company.

The departmental composition of those who participated in the survey included:

With the smaller staff in CRE departments are forced to become generalists in a number of critical areas. In addition, they must rely on information systems to deliver more information in order to support the business.

Going forward, CRE departments will be well advised to develop a multi-disciplined project team of professionals from CRE/facilities, finance/accounting, operations, outsourced FM providers, IT and procurement; conduct work sessions to document critical CRE tasks (acquisition/disposition, lease administration, work orders, moves/adds/changes, space management of occupancy/vacancy, maintenance, and departmental dependencies); and, refine the workflows to gain greater efficiencies, data input adoption and improve internal customer satisfaction.

Roles/Responsibilities

Real Estate 92%

Facilities 73%

Maintenance/Operations 28%

Finance 12%

Other 9%

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Corporate Real Estate Department Business Processes

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The business processes cited by participants in our study include:

CRE executives are being challenged by senior management like never before to reduce occupancy costs and contribute to bottom line savings. While the CRE department budget is being cut to fund initiatives, technology and additional staff it is burdening them to, ‘do much more with much less.’

One alternative is to out-source non-core competencies to full service real estate firms and integrated facility management firms to leverage their expertise and derive significant value. The benefits of this approach could be:

• Collaborate/leverage an advanced level of expertise, innovation and industry “best practices”

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Outsourced Providers

Lease Administration 97%

Portfolio Management 89%

Facility Management 77%

Space Management 71%

Reservations/Hoteling 33%

Maintenance 29%

Work Order Management 26%

Construction Project Management 23%

Other 7%

Business Processes

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• Create a single point of contact and continuous service vs. project to project basis

• Align critical occupancy cost category reduction strategies with service offerings

• Access bundled services beyond traditional brokerage and property/facility management

• Benchmark occupancy costs, space utilization and environmental sustainability among peers

• Enhance internal employee satisfaction by standardizing operations and processes

• Utilize vendor technologies

• Apply performance-based, percentage of cost reduction fee arrangements

Companies are out-sourcing brokerage, portfolio management, lease administration, facility management, traditional soft services (cleaning, waste management, landscaping, business support, reception, and mail room), hard services (preventive/reactive maintenance, non-stop control room and small repairs) and taking advantage of evolving expertise in energy conservation (Reduce Energy Costs and Consumption/Waste).

When they engage global providers, the payoff can result in truly integrated service offerings such as:

• Map Service Offerings to Occupancy Cost Categories

• Benchmarking Facility/Portfolio Operating Cost Performance

• Workplace, Building and Portfolio Efficiency

• Energy Management/Procurement

• Environmental Sustainability “best practices”

• Green Building Design, LEED Certification and Construction PMO

• Carbon Footprint Management

• Space and Move Management

• Work Order Processing/Call Center

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It should be noted that some of the savings-based outsourcing agreements that were pervasive 4-5 years ago are now coming due to renewal and some relationships are being reevaluated due to a desire to in-source some of the functions but, in general the benefits remain.

Those who participated in the study indicated their use of the following outsourced providers:

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Brokerage

CB Richard Ellis 28%

Jones Lang LaSalle 24%

Grubb & Ellis 16%

Cushman and Wakefield 12%

Other 9%

Colliers International 8%

Property/Facility Management

Johnson Controls 21%

EMCOR 17%

CB Richard Ellis 12%

Jones Lang LaSalle 12%

Self Manage 10%

Grubb & Ellis 9%

Cushman and Wakefield 8%

Sodexo 7%

Other 4%

Colliers International 2%

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In 2012, the International Accounting Standards and the Financial Accounting Boards will, “utilize a completely new model for lease accounting under which lessee’s rights and obligations under all leases, existing and new, would be capitalized on the balance sheet” according to a recently published white paper entitled, “The overhaul of lease accounting: Catalyst for change in corporate real estate” authored by PricewaterhouseCoopers.

The new lease accounting standard will:

• Eliminate off-balance sheet accounting – assets currently leased under operating leases will be brought onto the balance sheet

• Replace straight-line rent expense with interest expense

• Recognize and carry leases at an amortized cost based on the present value of payment to be made over the term of the lease

• Include optional renewal periods that are more likely than not expected to be exercised and include contingent amounts for percentage rent or CPI increases

• Impact lease renewal and contingent rents by being continually reassessed, and the related estimates trued up as facts and circumstances change

• Require significant systems and process changes at adoption date and maintenance on an ongoing basis

• Not permit pre-existing leases to be grandfathered

The implications will place real estate front and center in the CFO/Controller’s cross hair when the cost and value of these leases are realized. It is likely that many functions now being managed in the RE/FM Department will be assumed by the Finance Department. And, rightfully so given the amount of risk exposure a large leased portfolio has to an organization. The new standard will have a greater impact on retailers and banks that rely heavily on leased facilities to support their operations but it will affect all leased facilities.

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Lease Accounting Standards

CRE departments should assemble financial information and lease abstracts, get information systems in order and document controls, procedures & processes. They should reexamine everything and anticipate how they might alter their corporate real estate strategy to address the tax considerations, operational, economic, regulatory, intercompany, governance, budgetary and financing issues.

Document Title

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97% participants in our study were taking steps toward compliance that included:

"Every relevant staff member is being trained by our accounting firm's top experts on this topic. The first webinar was just last week."

"We are looking at all leases, new locations and renewals, and keeping the term as short as possible while eliminating re-newal/extension option language (except for locations where lease term must be aligned with a particular program term)."

"The director of our financial department is developing our process for implementing the standards when they are final-ized and effective."

"Our company has traditionally modeled projects that are leased on a capitalized basis. However, our lease portfolio is a small percentage of entire portfolio so no dramatic actions are needed other than ensuring reporting of obligations exter-nally."

"We are already FASB compliant for current financial reporting mandates. The Real Estate department is partnering with tax, accounting, and financial reporting departments to be ready for capital leasing accounting requirements. We are also partner-ing with our RE software provider."

"We are looking at all operating leases and tenant improvement allowances and making sure we understand the impact to our organization."

"Holding seminars for various groups."

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Critical to effectively managing corporate real estate portfolios are the information systems including a company’s financial systems and the many disparate point solutions managing leases, work orders, maintenance, space and energy.

Many of the Integrated Workplace Management Systems (IWMS) that have emerged over the last decade are effective in capturing location information and automating repetitive workflows but do little with the financials found deep within the profit and loss, balance sheet and cash flow statements. The problem is compounded when a company has an international portfolio without standardization across countries and their Business Units are solely responsible to capture consistent data.

In most organizations there is a fundamental “gap” in meeting senior management’s need to access a summary level source of actionable business intelligence ‘dashboards’ that measure the financial performance of their owned assets and leased facilities.

Help is on the way. There is an emerging technology to fill the gap utilizing “cloud computing” where organizations will aggregate information across the portfolio from existing, siloed systems and measure occupancy costs from their IWMS, work order, lease, space, energy management systems and data warehouses while accessing data from their financials about debt service, depreciation, operational income and tangentially related facility expenses.

Organizations will be able to compile their real estate financial performance, conduct critical analyses and develop strategic initiatives to reduce costs without the need for the deployment of new information systems. The benefit to organizations will be:

• Reliable, comprehensive information across the enterprise

• Cost effective expense compared to the value of the information gained

• Ability to predict the outlay of capital and reduce occupancy costs

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Information Systems to Support Corporate Real Estate Strategy

Document Title

• Provide critical information to shareholders, investors and regulators about the financial performance of one third of their total operational costs

The challenge is on how they will fill their “CRE information gap.” Many are in search of the ‘holy grail’ solution in collecting information within their organization to collect comprehensive financial performance information in order to calculate true total cost of occupancy that will fundamentally change the way they manage their company’s CRE holdings.

Participants in our study cited the use of:

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Platform or Point Solutions

Internal, Proprietary System 82%

Argus 78%

Maximo 68%

Lease Harbor 38%

TRIRIGA 34%

ARCHIBUS 23%

ManagePath 17%

Accruent 14%

Manhattan Centerstone 14%

FAMIS 11%

PLANON 4%

"No System in Place" 3%

FM Interact 3%

Siterra 2%

Enableon 1%

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The “thirst for data” within many corporations is placing demands on CRE information systems like never before. It requires a massive aggregation of information from RE/FM point solutions, IWMS systems, company’s ERP system, energy utilization and materials management systems and the “one-off, excel spreadsheets” or legacy access databases that too many people currently rely on. Compounding the challenge of tapping into these potential sources is whether CRE professionals have consistent data across the portfolio on properties they self manage and those they don’t.

The key for the CRE team will be to access, source and deploy a solution or solutions that calculate the components that comprise total costs of occupancy and measure the financial performance of all owned and leased facilities.

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Information Requests from Senior Management and Reporting

Corporate General Ledger/ERP

SAP 43%

ORACLE 35%

PeopleSoft 12%

Proprietary System 7%

Other 2%

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As importantly, these solutions will help them answer the “Top Five” questions that are being asked by senior management of the participants in our study include:

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1. What is our “Total Cost of Occupancy” Per Square Foot?

Employee Per Square Foot

Electricity Cost Per Square Foot

Data Processing/IT Cost Per Site

Cost Per Site

Cost Per Full Time Equivalent

Market Comps by Location

2. What are our Future Rent Obligations?

3. What is our Space Utilization?

Shadow Space

Total Occupancy Per Net Sales

Occupancy Rate

Churn by Location

Square Foot Allocations

4. Can you produce Dashboards and Real Time Information?

Project Tracking

Market Comps by Location

Financial Modeling

Budget Forecasting

5. What are we doing to move our portfolio toward environ-mental sustainability?

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Survey participants were asked, “How do you utilize information systems to respond to data requests and develop, implement and manage your corporate real estate strategy?”

Their responses included:

In response to these requests, the steps to collect/report the information may include:

• Create a multi-disciplined team of professionals (RE, FM, Accounting, IT, Operations, outsourced service providers, etc.) to fan out across the enterprise to assemble the data

• Work backwards from the reports being demanded by senior management to populate the detail under the column headings

• Determine where the occupancy cost information is currently being held and figure out how you can access it

• Develop the key performance indicators required to make strategic decisions – “you can’t manage what you can’t measure”

• Prepare reporting mechanisms for the data senior management hasn’t asked for but will need to get an accurate picture of facility operating costs

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“There is an increasing intensity for monthly and quarterly re-porting periods.”

“Systems are used to measure costs and progress made on cost reduction initiatives”

“We manage the size of the office portfolio to maintain as close as possible a 90% occupied rate”

“These data points are a function of information exporting into custom spreadsheet reports. We use these key indictors to measure performance success of cost savings strategies.”

“Our risk management would be crippled without effective sys-tems. We do not know how we managed our portfolio without them before. Our goal is to have everything at our finger tips.”

Document Title

• Develop a plan to get clean, reliable and consistent data across the entire portfolio (don’t underestimate how hard this one will be)

• Focus energy on displaying the synthesized data – what will the dashboards look like

• Make an honest assessment of current systems and get the necessary budget to fund a comprehensive information system or integrated solution that will deliver the metrics to develop and implement a CRE cost reduction strategy

• Get a clear understanding of the reporting demands you needed to comply with the changes to the lease accounting standards

• Establish a rigid and attainable timeline to complete the process

Our industry has never been challenged as much for information than now. The ‘back of napkins’ and ‘shoebox records’ won’t work anymore. Management will demand a higher level of sophisticated reporting that we’ve never seen. The time for action is NOW…Are you ready?

One of the biggest issues in reducing operation expenses is determining a company’s “Total Cost of Occupancy.” Equally as challenging is locating the information within the enterprise.

Participants were asked which of the primary occupancy cost categories they tracked that included:

1. Property Occupation – Net rent, taxes, acquisition costs and debt service

2. Adaptation and Equipment - Fit out, improvements and capital investments

3. Building Operation - Energy/utilities, maintenance, repair, moves, churn, security, and cleaning

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Occupancy Cost Reduction

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4. Business Support - Reception, catering, vending, internal/external distribution and mail room

5. Management – Service charges, fees for real estate, facilities, property and project management

In addition, survey participants were asked, “Under the current challenging economic times there is increasing need for organizations to reduce real estate related operating expenses thru lower occupancy costs. What steps or initiatives do you have in place to reduce occupancy costs?”

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“Maximize our space utilization and densification”

“Utilize energy management systems for energy reduction”

“Out source maintenance to third party providers”

“Reverse metering our utilities and wheel it to other locations”

“Exercise early renewals at the bottom of market rents”

“Adjust acceptable level of utilization to determine which spaces we can consolidate into facilities that have more attractive rent rates or owned facilities that are more efficient to operate and opt not to renew the lease or sell the surplus asset.”

“Reduce the overall need for space by implementing alternative workplace strategies of ‘hot desking’, hoteling, creating ‘touchdown areas,’ and more efficient room booking”

“Utilize information systems to develop optimum Cost/SF met-rics and identify those facilities that could be subject to cost re-duction, consolidation, or disposition based on a financial per-formance benchmark”

“Address operational efficiency of our owned facilities and thereby reduce energy consumption”

“Decrease the utilization of expensive facilities with space man-agement to show vacant and under performing facilities”

“Rationalize our portfolio and consolidate staff/facilities to dis-pose of non-core assets”

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The initiatives survey participants provided are just a few approaches you could take to justify the reduction in your overall occupancy costs of office, manufacturing, distribution/warehouse, and retail locations.

The most effective way is to identify leased or owned properties that can be eliminated entirely and therefore become among the “most cost effective facilities in your portfolio is the one you no longer own/lease.”

In developing a sustainability strategy plan for your portfolio the blue print starts with determining the overall sustainability goals of the organization and identify initiatives are already in place to address sustainability.

A contributing factor to company’s overall corporate social responsibility strategy is for the CRE professional would be to bring the real estate perspective by:

• Evaluating the financial and environmental impact of capital investment decisions focused on resource consumption and carbon efficiency

• Outsourcing non-core services to 'green, cleantech' providers

• Streamlining and 'greening' departmental workflows

• Automating corrective and preventive maintenance schedules and alerts to maintain facilities at peak resource and energy efficiency

• Establishing carbon disclosure reports and creating sustainability scorecards

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Sustainability

The most critical element is developing an accurate benchmark as your company’s “total cost of occupancy.” The average Cost/Full Time Equivalent metric of our surveyed partici-pants was $6,459.

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• Exploring the feasibility and benefits of alternative and renewable energy sources (solar, wind, geothermal, hydroelectric, Co-generation, etc.)

By achieving greater efficiency of business workflows and facility operations, carving out occupancy costs and implementing environmental sustainability measures not only makes good business sense but, it’s the right thing to do for the environment.

Our survey participants were asked, “There is a growing desire among corporate leaders to achieve environmental sustainability through LEEDS certified design principles, effective energy management and building efficiency. What steps are you taking to move your portfolio closer to sustainability?”

Their responses included:

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“Move forward sustainability initiatives that support the busi-ness objectives. Energy Management Systems employed at all locations. Recycling efforts deployed. Re-lamping of facilities to reduce energy employed. Focus more on Energy Star than LEED.”

“Preparation of a plan for upper management to approve com-mittee in place to form teams for each unit leaders appointed to enforce initiative budget transformation over a realistic time frame”

“Increased recycling including composting food waste and collection of over 20 types of recycled products (plastic, bat-teries, binders, etc) Additional renewable energy pro-jects...solar arrays on rooftops and one wind project Carbon tracking across the entire company”

“Green to Gold treasure hunts, up grade lighting, building temp adjustment earlier in day, increased recycling initiatives”

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The survey participants provided some great insight about how they are managed their corporate real estate portfolios and offered some benchmarking information many organizations could use for comparison.

Benchmarking is a critical step toward achieving departmental objectives of achieving a desired future state but once you’ve benchmarked your portfolio, the CRE department will need to put together a strategic plan.

Through facilitated sessions with internal constituents and outside consultants the process will help to develop a plan that will get the organization to “crawl, walk and then run.”

Along with a consultant CRE departments will co-develop a strategic and tactical solution unique to the organization might utilize a process driven approach that will challenge the internal team to:

THINK: What is the real estate portfolio’s current and desired future state?

BUILD: What are the specific initiatives to be implemented across the real estate/facilities department(s) and portfolio that bring about the desired efficiency, economic and environmental sustainability results?

OPERATE: How/who will implement the plan, what will become the KPIs to measure progress and define success, and how will the momentum be maintained until the desired future state is reached?

Some steps you might consider to help you get started could be:

• Assign a member of your team to research the accounting standards being developed in the new FAS13 guidelines and anticipate the balance sheet impact of future rent obligations

• Make a comprehensive assessment of the information systems you’ll need to provide real time reporting and the actionable business intelligence you’ll use to support strategic decision making

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Conclusion

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• Develop a concise listing and source of the data of your top ten occupancy cost categories (rent, utilities, taxes, insurance, churn, maintenance/cleaning, TI, management fees, etc.), create/benchmark key performance indicators, set goals for cost reduction improvements and implement initiatives to achieve them

• Research available case studies on the impact of LEED certification has on building efficiency and make inquiries within your organization about how the CRE department can participate in overall corporate social responsibility initiatives

• Schedule a meeting with your organization’s CFO/Controller to layout your strategy to overcome the impact and leverage the benefits of the CRE convergence

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Document Title

CRE3 Consulting provides solutions for corporate and commercial real estate organizations to address the Efficiency, Economics and Environmental Sustainability of their portfolio of leased and owned facilities.

The firm assists organizations in developing the “blue print” of a strategic plan designed to implement portfolio-wide initiatives that increase operational efficiency, reduce occupancy costs, and contribute to overall social responsibility initiatives.

CRE3 promotes the bottom-line business benefits of sustainability and leverages industry “best practice” strategies to address: business process improvement/ transformation; portfolio optimization/rationalization; space occupancy/utilization; alternative workplace strategies; operational efficiency; ‘green’ and LEED certified design; ‘smart’ building systems; energy demand/consumption; renewable energy; and utilize/deploy technology/information systems.

CRE3 was founded to support corporate and commercial real estate professionals ability to respond to the C-Suite’s demand to answer the questions: “what is our total cost of occupancy?; how can we reduce it?; and how can our real estate assets be managed strategically so that the portfolio can serve our organization’s operational needs and contribute to our company’s desire to achieve environmental stewardship?”

By effectively managing the size and cost of the portfolio, which accounts for the second or third greatest cost of most organizations, real estate executives can impact their organizations’ bottom-line and profitability while contributing to corporate social responsibility initiatives important to many companies today.

CRE3 applies a process driven methodology to help organizations’ define their desired future state and create a “crawl, walk, run” approach to achieve results.

For more information, visit us at www.CRE3.net

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About CRE3 Consulting

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APPENDIX

CRE3 Consulting

42 South Kingman Street

Lakeville Massachusetts 02347

Phone 617-529-1970

www.CRE3.net

CRE3’s Thought Leadership can be found at the “CRE3 Forum” (www.CRE3.wordpress.com)

© 2010 CRE3 Consulting - All Rights Reserved - The survey results contained in this white pa-per have been exclusively researched and written by CRE3 Consulting. The information may not be modified, copied, distributed, transmitted, displayed, reproduced, published, licensed, transferred, or sold, without the prior written permission of CRE3 Consulting.

For information, send an e-mail [email protected].