Lean & Mean
By Randy Southerland
National Real Estate Investor
September 1, 2002

he 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.

Take 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.

Recent 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.

A 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.

Corporate Flexibility
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.”

In 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.

“Boeing 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.”

The 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.

When 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.

As 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 Klein.

The 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.

Greater 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.

“Companies 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.

However, 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.”

In 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.

Deals 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.

“They [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.”

While 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.

While 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.

“The 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 their area.”

Power 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.

The 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 high-growth goals.

With 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.

As 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.

“We 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.

While the idea of outsourcing services is certainly not new, providers of outsourced services say their clients are seeking providers that can coordinate many outsourcing needs.

Atlanta-based 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 location.

“They 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 that company.”

Operational 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.

“Your 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 don't outsource.’”

Companies 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.

For 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.

Randy Southerland is a Marietta, Ga.-based writer.

A Winning Solution
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 expand.

By 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.

To 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.

Many 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.”

So 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.

“We 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.

After 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 $800 million.

The 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.

In 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.”
Randy Southerland

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