As corporations face the challenges of the 21st Century, a hot trend from the 1990s is expected to continue to play a significant role in their real estate operations. Real estate outsourcing, which has become the mantra of many national and international firms that have sought to improve their bottom line by concentrating on their core businesses, is expected to grow significantly in the years ahead. Outsourcing remains an attractive alternative to many firms and a source of significant business to real estate companies.
"I see no sign of the outsourcing trend stopping, or even slowing, in any way," says Rick Rome of the Washington, D.C., office of CRESA Partners. "In fact, I see more interest in outsourcing in U.S. and European corporations. It's going to become more and more important because there is an emphasis on corporations focusing on their core competencies.
"Real estate for most corporations is not a core competency," he continues. "It doesn't make sense for users of real estate to spend a large amount of time managing their real estate."
Nowadays, Real estate outsourcing is not occurring simply because a company is downsizing, as many firms did during the 1990s. It is now a requirement of numerous companies that are growing rapidly, explains Jacque Ducharme, senior executive vice president in theoffice of Julien J. Studley Inc.
"We're seeing different types of companies getting involved with outsourcing, with different demands and needs," says Ducharme. "They are more growth-driven companies that are growing so quickly that they need space for their employees almost overnight."
Not only that, but the nation's real estate service providers, hungry for new business, are using a vast arsenal of tools to attract new outsource customers, generate increased business from current clients and position themselves for the new millennium.
"New companies continue to enter the outsourcing arena for the first time," says Barney Upton, executive managing director in the San Francisco office of New York-based Cushman & Wakefield. "We are finding that once these companies outsource some of their activities, they continue to outsource more. New business is coming from existing clients who have outsourced some services already and are then expanding the scope of what they are outsourcing, as well as from companies who are seeking to align their operations and return to their core businesses."
Broad scope attracts clients Northbrook, Ill.-based Grubb & Ellis Co., for example, was selected by The Boeing Realty Co., a subsidiary of the Seattle-based aerospace giant, as a preferred commercial real estate service provider for Boeing's property group - roughly 124 million sq. ft. Grubb & Ellis will serve as one of three service providers for Boeing.
The new business was awarded to Grubb & Ellis last fall following G&E's successful handling of a 28-acre land sale in Torrance, Calif., and a 75-acre land sale in Duluth, Ga. Boeing seeks to reduce its portfolio to 122 million sq. ft. this year, officials say.
Grubb & Ellis' corporate services group provides large corporate clients access to the company's multi-disciplinary resources through a single point of contact, says Steven D. Scruggs, president of Grubb & Ellis' corporate services group. Operating as a strategic partner, the corporate services group works with clients to help execute real estate asset objectives.
Grubb & Ellis' success is not an anomaly. Plano, Texas-based Electronic Data Systems Corp. (EDS) recently selected Chicago-based Jones Lang LaSalle (JLL) as its exclusive provider of tenant representation, leasing and lease administration services for the company's 12 million sq. ft. U.S. and Latin American portfolios.
As a leader in the information technology services industry, officials say EDS chose JLL due to the firm's ability to provide EDS with Internet access to key information about its occupied portfolios. JLL'sDatabase enables clients to store, retrieve and analyze customized core property information online.
Richard McBlaine, CEO of global consulting at JLL and the lead relationship manager for EDS, said Jones Lang LaSalle's enhanced services, strategic approach and significantly improved regional coverage were keys to the selection.
Such a global reach has become important in the outsourcing field, adds Rome, with the Internet becoming an ever-expanding communications and management tool. "From the point of view of the Internet, our firm is making the lease management system and transaction-tracking system accessible through our Websites," says Rome. "This allows clients to keep in touch and knowledgeable about the process that we are undertaking for any project on an as-needed basis."
Rome points out that CRESA represents Hoffman-La Roche, the Swiss pharmaceutical company, which has multiple locations throughout the world. "To access lease management, a person at Hoffman-La Roche can go to the Website, click on the client area, and see the status of any leases," he says. "That lease administration capability saves time.
"One of our selling points is that CRESA members are at the forefront of making our information available through the Internet, with the proper security," Rome continues. "If Client A has a requirement in Cleveland, we would set up a folder on our Website for that particular client that would include market profiles, spread sheet analysis, possibly a letter of intent, architectural renderings, and more - all posted on the Web."
Jamie Williams, president of Washington, D.C.-based CarrAmerica Development Inc., notes that his company is reporting an increase in its build-to-suit business where CarrAmerica is interested in being a landlord and the client is not. The company recently collaborated on a 600,000 sq. ft. build-to-suit project infor Nokia, the Swedish electronics giant, and officials say they plan on continuing the relationship.
"We also have had companies come to us not only to provide office space for them, but to provide space on a customized basis - a slightly more tailored building," says Williams. "Many of their staffs are not equipped to provide this level of service. It becomes a capability issue, when companies are looking at what they wish to spend in terms of overhead to maintain facilities. Since design andare not a recurring event, they look to outsource for special needs, and we augment their corporate real estate group."
How to get ahead in business Rome notes that the outsourcing business has become competitive, and CRESA networks with the corporate real estate community, being active in the International Development Research Council (IDRC) and NACORE, the National Association of Corporate Real Estate Executives.
"We find that meeting corporate real estate executives at educational or networking functions is one of the best ways to stimulate new opportunities," he explains. "We certainly follow up with direct mail and phone calls to arrange personal meetings. There's no secret to it; it's being available and trying to excel at new opportunities."
Other companies say they receive numerous inquiries about outsourcing thanks to their reputation. Because a company such as Cushman & Wakefield covers the entire value chain of real estate activity - everything from planning and transactions to execution to project and facilities management - the firm is often asked to present an outsourcing proposal to new clients, Upton says.
In addition, Cushman & Wakefield is continually improving its outsourcing offerings. The company now offers an integrated program that provides lease administration, project and transaction tracking, space management and a call center capability all in one integrated database. Each component exists in other areas in the industry, Upton adds, "but nowhere else is there all four components together in one integrated database in one place."
"It allows corporate users to have all the data they need to manage their portfolio and has all the components that are necessary to efficiently manage a broadly scattered portfolio," he says.
Will outsourcing continue to be an important part of real estate in the new millennium? Many in the real estate industry answer with an emphatic "yes." But there will be some changes.
Real estate providers are becoming more realistic about the outsourcing trend. "There was a great naive stampede in the beginning by some companies to have everything done by a real estate company," says Ducharme. "The velocity has decreased somewhat from those companies. Now it's a bit more strategic rather than 'let's cut costs to bare minimum."'
Says Williams of CarrAmerica: "Outsourcing is going to continue to be a major part of the business, particularly with the fast-paced, high-growth companies, as these companies focus on their primary business. They are going to look to other firms who can help support them so that it doesn't distract from what they do best."
Reinventing the wheel? At the same time Corporate America is expanding, the product lifecycle of building facilities is becoming shorter. "We're seeing a demand for more flexibility because product lifecycles are much shorter now than a few years ago," says Williams. "Today customers have an idea that is conceived, designed and marketed within a very short period of time. That requires facilities to be adapted quickly to accommodate that product lifecycle, which puts additional pressure on real estate operations."
Also contributing to the outsourcing trend, he says, is the fact that high-growth companies typically have much higher yield expectations on their investments than real estate companies. "Their cost of capital is higher, and they'd rather invest money in their primary businesses and let real estate companies who traditionally look at lower returns handle the real estate," Williams adds.
Today's outsourcing clients serve many markets, and they are turning to full-service real estate providers who have a strong national services group. "A significant portion of our customer base is customers who serve across many markets, who need to be in constant touch with both existing customers and potential customers," says Williams. "We are a national company that has a local presence in many markets, with each office led by a managing director whose responsibility is to get out and tailor our products to meet the needs of specific market places."
The needs of the market for many outsourcing clients are also changing. Studley's Ducharme notes that clients such as Microsoft and Cisco Systems are looking at outsourcing for a completely different reason than many other firms. "Both are in a dynamic business, both are growth-oriented and both are in the tech field," he continues. "Both are looking for information on real estate prior to going into a market. They know where opportunities are around the country, so that if they have a hiring decision, they want to be able to input real estate costs into their cost matrix and decide where is the best place to locate new employees."
Joe Learner, an executive vice president also in the Chicago office of Studley, notes that many new Internet-related companies are becoming outsourcing clients. They are growing so fast, he adds, that the firm "sometimes gets calls to find space [for high-tech clients] the next day.
"Dot-com companies don't want to be in real estate," Learner continues. "They want someone who can deliver it, soup to nuts, and be up and running by the first of the month."
Thus dot-coms are natural candidates for outsourcing, he adds. "They are new firms that don't have a lot of layers of infrastructure," he says. "But they are going through a fair amount of growing pains."
Ducharme adds that in addition to new startups, many well-known larger companies are also forming their own dot-com organizations or businesses, such as the Chicago Tribune, which took 65,000 sq. ft. of space in Chicago for its Classified Ventures offshoot.
Companies such as Studley actively court the new Internet and e-commerce ventures, Learner adds, through a lot of inter-reaction, particularly networking with dot-com associations. "We also talk to venture capital companies about who is getting funding, who needs space and the like," he says. "You have to be careful. There are so many garage-type operations, it's hard to tell who's going to succeed and who's not.
"You may have 5,000 start ups, and of that, 2,000 or 3,000 are going to fail," he continues.
A number of firms also increase their outsourcing business through referrals - and by increasing their workload from current customers.
Rome notes his organization is composed of entrepreneurs who started their own businesses and have focused on corporate services. "They don't represent landlords and developers who are marketing their space to others, and it is a huge benefit," he says. "In Corporate America today, it's important to avoid conflicts of interest."