Friday, May 15, 2009

Current Large Company Real Estate Strategies

Nobody knows what’s going on like the men and women in the trenches. As an active agent, I’m living the events and trends today that the papers will report on next month or next quarter. While my experiences are real and valid, I can never be sure if they’re being shared across the market/industry or if they’re specific to my current business dealings. It’s good to have a chance to hear the perspectives of others in the space.

That’s why I was pleased yesterday to join a small group for a panel session comprised of senior real estate leaders from AT&T, Wachovia, and Ernst & Young (E&Y), plus the head of the Corporate Services division from a national firm that manages a significant amount of space for others. Here are a few of the highlights from that meeting:

Long versus short term thinking
Where it’s strategically sound, lock yourself in for favorable long-term deals that capture today’s pricing. But ONLY do so where it’s strategically sound. Business volatility still has many organizations hesitating to commit to long terms, which seems sound if you agree with the philosophy I share with my kids: “when in doubt… don’t do something you can’t reverse.”

Quote of the week and my new mantra: A recession is a terrible thing to waste!

Lease versus Buy
Leasing is favored over owning. I understood Wachovia to say that their space is 50% owned, 50% leased, with a heavy preference for leasing going forward. AT&T is 70% owned and 30% leased, but only because of their network-related assets. They own their central offices and data centers and try to lease as much as possible elsewhere. E&Y is 90% leased, with the outstanding 10% being a single asset that they’ll gladly sell to a qualified buyer!

Square Feet per Person
SF per person is shrinking. A few years ago, the norm was 250-300 SF per person. Two years ago it was 225 SF. Today, many companies want to get down to 150 SF per person. In support of these assertions, E&Y offered that they were at 270 SF per person in the 90’s. Today they’re at 160. Their target is 120 SF per person.

How do they achieve these reductions in SF per person? In short, through innovation and technology. Innovation here means thinking more. Find the best way to use what you have and execute… even if cultures have to change. Technology means that because worker becoming unchained from the desk, companies need only provide employees with what they need to match their work style. No more, no less.

Innovation
• At E&Y, they “hotel.”
• At Wachovia, they seek to take advantage of unused space that may exist at a branch (2nd floor, for example)… or they’ll build extra office SF into a branch for some “corporate” functionality.
• At AT&T, the entire organization is now adopting BellSouth’s approach to build-outs, in which they put a few offices in the core of the building and then surround the core with large quantities of cubes. It’s worth noting here that AT&T also reinvests some of the monies they spend into nicer common areas and nicer cube systems.
• They book conference rooms electronically and track usage to determine how much space is really neede. E&Y has been able to reduce from all 8-person to mostly 6-person conference rooms as a result.

Technology
• Blackberry and connected architectures are the key technologies enabling reduced footprints. Work is no longer a place, it’s what one does. Wherever possible, employees are given laptops by default so that they can work from anywhere at any time. At Wachovia (and others), an authorized employee can walk into ANY company location and plug into the network and be up and running (voice, data, printers, etc.) transparently.

Sustainability (aka Green Initiatives)
Sustainability was likened to ADA compliance, which evolved from trendy in the 80’s to a requirement for consideration today. Today, LEED or Energy Star ratings are a positive differentiator for a property. The expectation is that over time (the next 10 years?), such ratings will be another thing one must have to compete.

AT&T’s annual power bill is $1.3B for a little less than 300 million square feet worldwide. They’re interesting in anything that will reduce their power bill so long as it has a 2 year payback period. At Wachovia, all new buildings must have a SEER rating of at least 13.

Financials
This is now a two way road. Landlords have always checked tenants’ financials. Tenants must now get the financials on the landlord as well, to be sure they’re solvent. Tenants must also insure that the subordination, non-disturbance, and tenant fund guarantee clauses are solid.

Lease Rates
The consensus of all parties (myself included) is that we’ve not yet hit the bottom on rent rates. We’re close, but not there yet. My personal commentary on this point is that it’s never advisable to try and time the market perfectly. Once you know you’re near the bottom, do what you need to do and rejoice in knowing that you got a great deal. You can only know that the bottom has been hit when things begin to go up... it'll be too late then. Once owners become confident that the bottom is past, the great deals will go away.

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