The Impact of Real Estate on Corporate Assets and Financial Performance

November 19, 2010

Who says corporate real estate doesn’t deserve more care, attention and a strategic management approach?

For some time now you may have heard CRE consultants and service/technology providers refer to corporate real estate as the “2nd or 3rd largest asset on a company’s balance sheet” to justify the need for value-add advisory services, energy efficiency initiatives or investment in technology.

But, until now, have you ever really looked at the details? The facts will alarm you and quite likely challenge you to take a closer look at your own assets to see how they might be managed more effectively.

Below is a chart highlighting the real estate value of 11 companies in the “Fortune 500” (#1 – #10 and #500 as a comparison) listing them based on the percentage of net assets (less depreciation and operating expense) of their ‘Property Plant and Equipment’ (PP&E) on total assets. The source information was gathered through an informal review of the balance sheets of these company’s 10-K SEC filings for 2009.

FORTUNE 500 – Ranking Based on Percentage of Net Property Plant and Equipment Assets
Fortune 500 Ranking*   All Figures Stated in Millions+        
Rank* Company       Property, Plant and Equipment (PP&E)
Revenue+ Profit+ TL Assets+ % of Total Net PP&E+ MSF
3 Chevron $163,527 $10,483 $164,621 58.60% $96,468  
1 Wal-Mart Stores $408,214 $14,335 $170,706 58.31% $99,544 959.67
6 ConocoPhillips $139,515 $4,858 $152,588 57.48% $87,708  
2 Exxon Mobil $284,650 $19,280 $228,052 53.21% $121,346  
7 AT&T $123,018 $12,535 $268,752 37.24% $100,093  
500 Blockbuster $4,162 -$558 $1,538 16.19% $249 20.05
8 Ford Motor $118,308 $2,717 $197,890 12.43% $24,596  
10 Hewlett-Packard $114,552 $7,660 $114,799 9.81% $11,262 77.00
4 General Electric $156,779 $11,025 $781,818 8.85% $69,212  
5 Bank of America $150,450 $6,276 $2,223,299 0.70% $15,500 125.60
9 J.P. Morgan Chase $115,632 $11,728 $2,031,989 0.55% $11,118 80.60

While real estate does not formally appear in the financial statements as its own line item, it is included in the PP&E section which refers to fixed assets, also known as non-current assets (financial institutions refer to PP&E as Premises). These are items of value which the organization has bought and will use for an extended period of time. PP&E fixed assets normally include: land and buildings; motor vehicles; furniture; office equipment; computers; fixtures/fittings; and plant machinery and often receive favorable tax treatment (depreciation allowance) over short-term assets.

Our hypothesis is that a company can create a significant impact to its financial performance and enhance total assets when they:

  • Reduce operating expenses through lower occupancy cost initiatives;
  • Decrease the size of the CRE portfolio through collocation, space efficiency, use of alternative workplace strategies and dispose of non-core assets; and,
  • Gain greater energy efficiency of facilities through effective sustainability initiatives.

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Solutions to Manage an International Corporate Real Estate Portfolio

November 11, 2010

 

The challenges in managing an international corporate real estate portfolio is much more difficult than to mitigate disparities of multiple languages, currencies and measurements.

 

In the past, few companies had international teams to develop effective strategies, create standards and employ consistent work processes across all property types and all business units.

 

Organizations with locations worldwide would often have corporate real estate resources available but, more often would rely on the foreign business units themselves to negotiate and coordinate CRE decisions. Very often professionals given the authority to make decisions were sales directors, logistics managers, human resource coordinators or the business leaders themselves.

 

Many of these professionals did not possess the requisite real estate expertise as they already had a full-time role on which their career advancements would be judged so real estate and facilities was not given the priority it deserved. Sometimes the tactical decisions were made without strategy and proved inefficient at best, costly at worst.

 

Expanding manufacturing companies entering new markets and navigating transitional economies often had to evaluate joint ventures, consortiums or establish their own facilities. Securing office space and lease vs. buy decisions were driven by cost, flexibility and corporate policy.

 

Some of the inherent challenges include:

  • unpredictable time for permitting and approvals – different countries have differing levels of approval processes
  • bureaucratic inconsistencies – difficult to identify officials responsible in administering laws governing the operation and ownership of facilities
  • government/legal uncertainty – interpretation and inconsistency of laws/legislation and lack of coordination between authorities
  • animosity toward foreign investment – varying levels of acceptance of civil servants to welcome foreign companies to operate within their country
  • unsatisfactory transportation and telecommunications infrastructure – critical to the success of getting materials to/from market and transferring data are acceptable modes of transport, internet and telephony
  • differences with property rights and real estate law – privatization of land, reform and ownership present unique challenges that require substantial internal/external counsel to determine rights and privileges

Today, managing global portfolios is made easier based on several factors:

 

Sarbanes-Oxley ComplianceWith the passage of the Sarbanes-Oxley Act in 2002, US-based public corporations and the companies that support them are now held to a higher standard of accountability. Compliance requires that automated or manual CRE procedures must be documented and consistently repeatable across multiple business units to reduce the number of different business processes being monitored. An information system provide a secure environment to document every transaction and process producing more reliable information and improves the accuracy of the audit trail.

 

Information Systems – Enterprise-wide information systems help CRE professionals become more productive and knowledge-based decision support more effective. Systems can manage transaction risks, facilitate work requests and perform property services due to more complete and accurate information. A team of professionals located in one country with counterparts located around the globe can utilize a common information platform enabling enterprises to operate more efficiently, responsively and profitably. Systems enable roll up reporting to aggregate occupancy cost information, calculate future rent obligations and manage environmental sustainability initiatives.

 

Use of Outsourced Professionals – The emergence of truly international service providers allow global companies to align with real estate service providers who can provide brokerage, tenant representation, and construction/project management to develop and execute strategy and establish global management agreements. While compensation models pose another set of challenges, the benefits of accessing a global network with local market knowledge are irreplaceable.

 

The good news is that the ability to overcome challenges to managing large, complex portfolios are made much easier with a combination of compliance, technology and people.

  

What solutions have you found to be effective in managing a global corporate real estate portfolio?


Corporate Real Estate’s Role as an “Engine of Growth” in Community Development

November 5, 2010

In doing some research for a recently published post about the midterm election’s impact on the economy and corporate real estate, I came across some fascinating information about the evolving life needs and desires of today’s workforce.

Given the hopeful assumption the economy is showing signs of recovery (based on recent indicators of consecutive months of profitability, stock market gains and increases in consumer spending) it may mean that companies will begin hiring new employees.

In order to be competitive to retain and recruit top talent, companies would be wise to respond to the new dynamics employees are interested to find in the organizations in which they work. Office environments that incorporate highly productive work spaces located in close proximity to amenities that cater to the quality of life of the individual. Amenities such as healthy eating choices, recreational wellness centers/health clubs, residential developments, and convenient retail offerings all located within walk-able proximity vs. car-dependent locations.

In this way, corporate tenants in office parks and urban developments can take on the role as ‘anchor retailers in a mall’ where they could seed mixed use, ‘towne centre style’ developments. These collections of newly developed corporate office buildings or renovated urban settings could generate lifestyle-related development critical to attracting highly desirable employees. Expanding companies can offer communities the impetus to trigger growth and development while creating workplaces on trend with the “office of the future.”

This type of development would create the traditional ‘win-win-win’ scenarios of: a win for the company in creating employee-friendly environments to retain/attract top talent where productivity is fostered; a win for the employee who can satisfy their desire for live/work/play areas in close proximity with one another; and, wins for communities starving for the revenue that comes from stimulating new development or revitalizing existing areas.

The key to making this type of development and ‘engine of growth’ a success is the collaboration of all relevant stakeholders. The lack of investment capital to fund projects for a commercial developer that can bring together all of the components may not exist just yet but, through private/public collaboration of office developers, retailers, commercial developers, and public officials (to provide monies for the infrastructure and assistance to qualified companies) the private sector companies could play an pivotal role to trigger self sustaining economic and community growth.

Progressive CRE professionals could serve as their company’s representative in ‘towne centre’ development and leverage the amenities being created by other entities. One example might be a company who wants to develop a health club for their employees may reach out to existing providers who might be interested in locating a facility in near proximity to their location.

The axiom in economic development is that every private sector manufacturing, technology or services related job can create 4-5 additional jobs in the retail/restaurant industry. This would mean that collaborative developments could become the platform for meaningful growth and vitality in urban districts and communities.

But, it starts with a company who has the vision and desire to take its place in a community and be the ‘engine of growth.’

What are your thoughts about how corporate real estate’s role in stimulating economic growth?