The Bottom Line and the Changing Role of Corporate Real Estate
Traditionally real estate holdings of a publicly traded corporation are not scrutinized for their impact on a company’s bottom line or short-term returns. However, in today’s market they are playing an increasingly significant role in stockholder/investor decisions.
I am referring not only to real estate assets, but also to rental costs for office space. Compared to personnel costs, rent may not appear to significantly influence the financial statements, but consider that a medium-sized company will likely spend close to one million dollars on rent and associated costs per year; and a large corporation may spend hundreds of millions - definitely effecting the bottom-line.
How can investors and CFO’s ascertain the value and cost effectiveness of real estate holdings? To answer this, Dow Jones and other financial institutions are collaborating on a real estate property database and designing a financial model to assess real estate’s impact on the price of a stock.
For a corporation’s real estate department this will translate to an intense examination of the value brought to each transaction. The corporate real estate director will need to maximize the efficiency of decisions and demonstrate savings from involvement in each transaction. Therefore, the real estate executive’s job evolves into a tougher, more comprehensive role. The director must become a strong strategic planner, involving Human Resources, Legal and Finance in all major decisions. These executives will need access to data pertaining to current and projected employee count, cost and square foot allocations, budgets, and anticipated growth. In addition, they must stay current on expirations, expansions, contractions, and escalations on all properties, be able to determine community data on availabilities, growth corridors, avenues for communications, tax districts, political climates, and environmental issues.
To remain current and avoid information overload, outside real estate advisors will continue to be heavily utilized. These consultants share and compliment many of the skills of an in-house real estate department, and provide advice and research on individual markets to better position the company in negotiations. This out-tasking can be a significant advantage to the corporation because it eliminates the micro-management of every transaction. Most Fortune 500 companies have reduced the real estate department by utilizing outside consultant/brokerage firms, a recent example is Westinghouse.
The continued trend toward real estate outsourcing not only impacts the corporate real estate department, but forces change within the brokerage/consultant community. It results in an increased information-based relationship, with the advisors becoming an intricate part of the planning and implementation process.
At present, automation, familiarity and expertise keep a stand-alone real estate department viable. But over time, the outside brokerage/consultant and the corporate real estate department will take on similar qualities and closely compliment one another. With the onset of improved computer literacy, data will become interchangeable, and all levels of expertise will increase allowing for little disruption if the real estate department is melded together with consultants.
Mark Larsen is president of Larsen Commercial Real Estate Services in Reston. Phone: 703/ 716-1000
E-mail: mlarsen@larsencommercial. com