National Real Estate Investor
September 1, 2002
tough economic environment is putting pressure on corporate
real estate managers to be far more creative in cutting
costs — whether that means divesting space, relocating
facilities or pursuing outsourcing services —
while remaining flexible enough to take advantage of
an eventual upturn.
Boeing Corp., for example. Searching for a way to boost
its bottom line, the Chicago-based company is taking
a long, hard look at its 115 million sq. ft. portfolio
of office, industrial and warehouse space.
turmoil among its primary airline customers and fierce
competition from its European rival Airbus have battered
the long-time leader in the aeronautics industry. Revenues
for Boeing's commercial airplane group are projected
to drop more than $1.6 billion, from $35 billion in
2001 to less than $33.4 billion this year. Net income
for the second quarter fell from $840 million in 2001
to $779 million this year. It comes as no surprise that
nearly 30,000 Boeing employees nationwide have felt
the layoff axe since last October.
shrinking budget, coupled
with a new emphasis on its $23 billion military and
space unit, has meant shifting priorities for Boeing.
The firm has consolidated operations and even shuttered
manufacturing plants to make way for new projects in
different locations. These changes have produced loads
of unneeded space that the company is hoping to shed
through its real estate division, and in the process
free up cash that can be directed toward its core businesses.
Like Boeing, many corporations want to be able to raise
or lower their space requirements to match their shifting
business strategies — no easy feat. “Real
estate is a fixed asset, and business is far from fixed,”
says Matthew Cullen, chairman of CoreNet Global, an
Atlanta-based association for corporate real estate
executives. “So you need to do everything you
can to build flexibility and yet have a portfolio that
is responsive to the business environment.”
Boeing's case, officials have worked with local communities
to redevelop its properties and make them more attractive
to potential buyers, in some cases converting them to
new uses. The commercial airplane and defense giant
is in the process of preparing more than 2,000 acres
for sale. The company recently sold a 5-acre parcel
in Kent, Wash., to Sprint for a switching hub, according
to Phil Cyburt, president of Boeing Realty. In nearby
Auburn, supermarket company Safeway is looking at Boeing's
surplus warehouse space for a distribution center.
has been in many of these infill sites for anywhere
from 40 to 60 years,” explains Cyburt. “So
the legacy that you leave and the branding element with
Boeing is important. A lot of times we are still the
largest employer in that city. So even though we're
selling a substantial amount of real estate to another
party, we still are a big player in that city.”
firm has been successful in moving surplus real estate
by giving buyers and developers what they want. “Understanding
your market segment and how you're trying to move through
a big portfolio is really key,” says Cyburt.
it comes time to divest, companies usually turn to their
corporate real estate departments, which estimate how
much money a company can make by selling its properties.
This may sound great, says Michael Klein, executive
vice president with New York-based Insignia/ESG Inc.,
but the pressure is high to live up to the estimates.
time goes by, real estate executives may find that market
conditions have not improved as much as expected. Space
has to be sold, but it's not possible to sell or sublease
for the originally estimated price. “Now I've
got the challenge of getting rid of that space and being
able to satisfy the numbers I gave the CFO,” says
Perils Of Space
For companies seeking a new corporate home, there are
a host of new considerations due not only to the weak
economy, but also the Sept. 11 terrorist attacks. Suddenly,
security is a much bigger concern than ever before,
and occupying an upper floor in a landmark building
doesn't seem like such a good idea.
emphasis also is being placed on disaster recovery in
the event that a similar terrorist attack occurs. Companies
are not only developing plans for alternative locations,
but also showing greater interest in spreading employees
among several buildings in suburban or secondary locations.
were talking about decentralization even before Sept.
11,” says Mike Cissell, managing director of corporate
services for New York-based Cushman & Wakefield
Inc. For example, Silicon Valley's high concentration
of technology firms caused investors to question the
validity of holding 80% of their real estate assets
in one geographic area.
other executives insist that the synergy achieved by
the close proximity of workers justifies the risk of
having most employees in one location. “Some companies
have talked about downtown ‘office campuses,’”
says Klein. The idea is to locate workers in different
facilities within a central business district. “So
they may spread out within a downtown area within two
or three buildings.”
addition to spreading out, some companies are avoiding
flashy corporate headquarters located in high-profile
trophy buildings. In Richfield, Minn., Best Buy Co.
Inc. is putting the finishing touches on its new corporate
headquarters. More than 1.6 million sq. ft. will be
contained in four separate buildings joined to a 7,500-car
parking garage. Each 5- to 8-story building has a large
footprint. Despite being grouped in separate buildings,
employees are still within a short walk of each other
if face-to-face meetings are required.
To Be Had
For those with money to spend, there has never been
a better time to deal. Office rents have declined anywhere
from 5% to 25% throughout the Northwest region, according
to John Folberg, president and CEO of the Northwest
region for Minnetonka, Minn.-based office and industrial
developer Opus Group. And in a once-overheated area
like San Francisco, some rents have been cut in half.
[renters] are finding more flexibility in certain areas
— more tenant improvements, incentives and lower
rates,” he says. “As far as terms, people
are trying to hold them down a little bit, although
I do hear of terms up to seven years on some sublease
space. That's pretty long in a down market.”
more companies are seeking to divest property, sale
prices have remained relatively strong — much
more so than in leasing, says Fred Schuler, managing
principal for the Midwest corporate services division
of Dallas-based The Staubach Co. “This is mainly
because of low interest rates and also because real
estate looks really attractive in the context of the
economic cycle in stocks,” he contends.
property may look attractive, companies must also consider
factors that may impact business operations, such as
energy — or the potential lack of it. Last year,
California businesses were faced with a crisis of rolling
blackouts, escalating prices and general uncertainty
about whether the lights would come on each day.
experience in California was a terrible one,”
says James Adams, a corporate real estate attorney with
Detroit-based law firm Dykema Gossett. “It has
people worried all over the country. Obviously the states
that have abundant power sources will play that card
when they're trying to encourage industry to come into
grids may also prove vulnerable to terrorist attacks,
proving disastrous for companies that have chosen to
locate in an area without backup power generation capability,
or access to more than one power station.
Drive To Outsource
For many companies, outsourcing non-core functions allows
them to build a national presence without becoming distracted
from their core businesses. Take, for example, Edward
Jones Investments, which brought St. Louis-based Colliers
Turley Martin Tucker on board to help it reach some
1,000 locations already open, the St. Louis-based investment
firm wanted to expand to 10,000 locations in less than
a decade. However, the investment firm realized that
the actual physical opening and management of the offices
was best left to outsiders. “They wanted someone
who understands the real estate business and can work
through office openings as fast as they can put a human
out there for the office,” explains Brandon Mann,
senior vice president and principal at The Partner Program
sponsored by Colliers Turley.
Edward Jones proceeded to open 100 to 125 new locations
each month, Colliers Turley's job was to handle all
the details of opening the offices — such as securing
locations, negotiating leases, buying furniture and
posting signs. The result was a complete turnkey product.
make sure the signs are installed outside and we are
the single point of contact for that entire process,”
says Mann, who added that Edward Jones now has 9,000
locations, with plans of continued growth.
the idea of outsourcing services is certainly not new,
providers of outsourced services say their clients are
seeking providers that can coordinate many outsourcing
FacilityPro, for example, started out as a provider
of maintenance, repair and operations supplies to businesses.
The firm has since broadened its offerings to include
supply chain management and business process management.
One of the firm's large multifamily clients requested
that FacilityPro take over the outsourcing of its waste
removal and landscaping to avoid the hassles of soliciting
bids and then dealing with different companies at each
knew they had too many suppliers serving their company,”
says Larry Hall, FacilityPro president and CEO. “They
asked us to take that category of spending — in
this case, waste removal — and take it through
our process of strategic sourcing. That will ultimately
reduce the total overall cost of waste disposal for
issues also are fueling the continuing movement to outsource
non-core functions, including human resources, purchasing,
facility management, real estate transaction services
and lease administration.
real estate organization needs to be flexible, and in
order to do that, you need to have access to the best
and brightest people, whether they're inside or outside
(your organization),” says Cullen. “You
need to recognize that the workflow inside the organization
is going to have its ebbs and flows. So I don't know
that you can find many groups anymore that say ‘we
turn to outsourcing in the hopes of driving down costs,
allowing outsiders to perform tasks that are outside
their realm of expertise. “You want to get to
someone who can offer you world-class services,”
says Ellen Evans, vice president with the facility management
division of Milwaukee-based Johnson Controls.
now, limited resources and the cloudy economic forecast
are making the day-to-day tasks of corporate decision-
harder than ever. Nevertheless, asserts Evans, best-in-class
processes provide a number of benefits — including
more efficient business operations.
Southerland is a Marietta, Ga.-based writer.
Legal consultant helps Pfizer craft expansion plan
to benefit residents, company.
Although Corporate America is divesting excess space
en masse in response to the beleaguered economy, the
pharmaceutical giant Pfizer is actually growing its
portfolio. When the New York-based company acquired
the highly regarded PGRD Labs in Ann Arbor, Mich., nearly
five years ago, the 1.8 million sq. ft. facility boasted
one of the most productive medical R&D units in
the country — but it lacked the real estate to
April 2001, limited space required one-third of Pfizer's
workers to be housed off the main campus. The PGRD labs
had become islands surrounded on each side by city neighborhoods
and the University of Michigan.
get the land it needed, Pfizer's options were to move
out of town to a new location or persuade the university
to sell land — something the fast-growing institution
had rarely done. And even if the university was willing
to sell land, Pfizer still had to negotiate with the
city and the state for rezoning, business incentives
and tax abatements.
locals were concerned about the effects of expansion
on traffic volume and the merits of the proposed tax
abatements. “Ann Arbor has a history of not giving
tax abatements,” admits Mayor John Heiftje, who
negotiated the deal. “We've only given two in
the entire history of the city.”
Pfizer, working with Detroit-based law firm Dykema Gossett,
crafted a $27 million deal for the purchase of 54 acres
from the university, contingent on zoning and tax approvals.
Over the next few months, the Pfizer team talked with
local businesses and community groups that had a stake
in Pfizer staying put.
recognized that if this was a zero-sum game, it was
going to be very difficult to achieve the success we
deeply wanted,” says Stewart Mandell, an attorney
with Dykema Gossett.
considerable debate, the city council approved a 12-year,
50% tax abatement on real property and a six-year, 50%
abatement on personal property for investments made
by Pfizer over the next six years, up to a total of
city's consent enabled the company to seek business
incentives from the Michigan Economic Development Corp.
With Pfizer's promise to create 600 new jobs at the
site, the agency provided tax abatements worth more
than $50 million over a 20-year period.
March, the company closed on the university land deal.
As a single campus, the site now can grow to more than
4 million sq. ft. “We saw a lot of benefits for
Ann Arbor,” says Heiftje. “Pfizer has really
been a good corporate partner.”
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