International service providers who have global real estate responsibilities for a growing number of multinational corporations are driving a major shift in how companies manage their properties. No longer are global portfolios merely stagnant physical assets on the other side of the world. Instead, property is information: standardized, centralized, controllable and immediately accessible whether it originates from Baton Rouge or Bangkok. The intense focus on efficiency is enabling companies to make intelligent and swift decisions regarding real estate costs.
Service providers are igniting this shift in thinking by providing multinational corporations with professionals located around the world to manage portfolios and oversee property transactions. But service providers also are using technology to establish standard processes that transcend borders.
“One of the challenges in dealing with an international portfolio is that all of the countries present unique cultures, languages, customs and laws,” says Gail Crowder, senior vice president for Grubb & Ellis in Atlanta. “But companies want service providers to implement and utilize a process that achieves consistent results and savings across the board.”
Take the case of Hartford, Conn.-based United Technologies Corp., which lists a worldwide owned- and leased-property portfolio of some 100 million sq. ft. for its divisions such as Pratt & Whitney aircraft engines, Otis elevators and Carrier air conditioners. For years the company allowed individual business units in approximately 5,000 locations to pursue their own real estate strategies. But such de-centralization fostered inefficiency: If a business unit in London needed space, typically it would hire a broker to find it, unaware that a different United Technologies business unit nearby may have available space.
United Technologies executives began to alter their approach to managing their real estate three years ago. But rather than staff a real estate department with employees around the world, it charged its four-person real estate division in the U.S. with outsourcing the company's real estate leasing, sales and acquisition duties.
In late 2002, United Technologies hired Grubb & Ellis/Knight Frank Global Services to oversee its 20 million sq. ft. portfolio in Europe. It benefited from the decision only months later in Paris. That's where a United Technologies company faced a doubling of rent when its 20,000 sq. ft. headquarters lease came up for renewal.
To find acceptable alternative sites, Grubb & Ellis/Knight Frank officials plotted where employees of the company lived in Paris, and studied the proximity and commuting times to different areas of the city. Eventually, United Technologies chose another location and saved some $625,000 over the life of the lease.
Beyond identifying suitable locations, Grubb & Ellis/Knight Frank's research also convinced United Technologies executives to eliminate another option they were considering: moving the company in with a different United Technologies business unit also operating in Paris. “Our philosophy is to find locations that optimize business strategies and that are cost-efficient,” says Ronald Patterson, global real estate manager for United Technologies. “The study was very detailed and helped us define where we could and couldn't go.”
Wringing Out Expenses
To date, the decision to move the company and the resulting savings is only part of the success that United Technologies has achieved by outsourcing its real estate responsibilities. In all, United Technologies has saved some $75 million in real estate costs. Roughly $50 million of that savings occurred in 2001 and 2002 after the company hired Stamford, Conn.-based United System Integrators Corp. to oversee its 55 million sq. ft. portfolio in North America.
At about the same time United Technologies hired Grubb & Ellis/Knight Frank to handle its real estate in Europe in late 2002, the firm awarded oversight of its roughly 25 million sq. ft. portfolio in Asia and South America to a partnership composed of Jones Lang LaSalle and United Systems Integrators. United Technologies saved nearly $25 million more in 2003, which included cost reductions in its overseas portfolio.
In addition to providing leasing, sales and acquisition services, United Technologies service providers are cataloguing information about the company's portfolio in a database, which will help United Technologies better manage its properties and centralize real estate decisions. As of mid-January, the database was about 80% complete. “It's impossible to manage a real estate portfolio if you don't know what you have,” Patterson says. “You can't measure it, and you don't know what your costs are.”
Growing Appetite for Outsourcing
The trend to outsource real estate duties has generally been growing since 1992, though it has accelerated since 1999, according to an Ernst & Young 2002 survey entitled “Corporate Real Estate Outsourcing: 10 Years Later.” Ernst & Young surveyed real estate professionals from the biggest 400 corporations in the world that generally have large international portfolios.
For companies such as Jones Lang LaSalle in, which provides real estate services for clients with a total of 735 million sq. ft. around the world, the international market offers some growth potential. Though Jones Lang LaSalle's owner and occupier services division struggled in 2002 because the worldwide recession stymied transactions, the firm reported growth in the first three quarters of 2003 — the latest available financial information as of mid-January.
Over that time, Jones Lang LaSalle's owner and occupier services experienced a 12.6% rise in revenue to $545.6 million compared with the first three quarters of 2002. In fact, Europe and Asia generated the lion's share of that increase, with revenue growth of 7% and 13%, respectively. “Overseas, the demand is significantly increasing as corporations try to focus on their core businesses and align responsibility for real estate on a global basis,” says Bill Thummel, a managing director for Jones Lang LaSalle.
The Ernst & Young survey echoes that sentiment. In fact, corporations cited cutting costs and increasing shareholder value — which is related to slashing expenses — as the two main reasons they've hired real estate service providers. And corporations that outsource their real estate needs are generally cutting facilities-related costs by up to 15%, according to the survey. The survey also found that service providers can generate $1 to $1.25 per sq. ft. in immediate savings simply by integrating their network of building suppliers and taking advantage of economies of scale.
Moreover, handing off property duties to service providers that have dumped millions of dollars into real estate technology and personnel means companies can avoid making similar investments. Competition also is driving real estate outsourcing: The more companies that hire outside real estate firms to take over myriad tasks, the more their competitors are under pressure to do the same or risk losing an edge, says Thomas Bogle, a partner with the Real Estate Advisory Practice of Ernst & Young in Atlanta.
“If you're a multinational firm and haven't outsourced, chances are that you have all of your real estate information on multiple platforms and all your costs are buried down in your organization,” says Bogle, who conducted the survey and authored a corresponding white paper on its findings. “In that case, you can't compare the costs of your facilities in Canada to the costs of your facilities in Thailand, let alone to a benchmark within the industry.”
One of the more recent notable outsourcing deals took place in June 2003 when Cincinnati-based Procter & Gamble awarded Jones Lang LaSalle a contract to oversee its 13.8 million sq. ft. global real estate portfolio for five years and administer $700 million in expenses. Among other responsibilities, the real estate contract calls for Jones Lang LaSalle to oversee facilities and project management.
As part of the deal, Jones Lang LaSalle is absorbing some 600 workers in Procter & Gamble's real estate department. As of mid-January, the transition was almost complete. Early indications are that Procter & Gamble will save between 5% and 10% on its real estate annually, according to William Reeves, director of corporate real estate and facilities management for Procter & Gamble.
About half of Procter & Gamble's portfolio is overseas in Europe, Russia, Asia and the Middle East, among other countries, he says, which puts a premium on finding a company with an expansive reach. Major service providers like Jones Lang LaSalle stand to benefit because they already have a presence in other countries — either by organic growth or by acquiring or aligning with real estate firms in other countries.
“You're working across different languages, different cultures and different laws,” Reeves says, “and we were looking for a service provider that recognized all of those differences and were able to execute our global strategies within the local markets.”
Indeed, according to Ernst & Young's survey, 84% of the respondents indicated that a provider's geographic coverage was “very important” in the age of global service companies.
The contract between Jones Lang LaSalle and Procter & Gamble also includes strategic planning services. The practice will wed Jones Lang LaSalle's planning experts with Procter & Gamble's real estate department to help map out an occupancy plan that maximizes the use of space, anticipates future needs and identifies disposal opportunities, says Jones Lang LaSalle's Thummel, who handles the account.
Cushman & Wakefield has been providing such occupancy planning services to Hewlett Packard of Palo Alto, Calif., for a couple of years. Currently, however, the computer maker's strategy centers on dumping excess space that resulted from its $18 billion merger with Compaq in May 2002. Cushman & Wakefield has disposed of more than 2 million sq. ft. of office and manufacturing space over the last three years.
But Cushman & Wakefield isn't finished yet. Hewlett Packard, which owns or leases 72 million sq. ft. around the world, as recently as last fall was considering 660 different consolidation moves amid more disposals. In addition, the company is aiming to reduce administrative facilities by 19%, and last fall it put up for sale three office buildings totaling 582,000 sq. ft. in Mountain View and Palo Alto, Calif., for $112 million.
“One of the ways Hewlett Packard is going to make that merger work is from a dramatic reduction in its cost structure, and the single largest cost reduction line item is real estate,” says Derrick Mashore, executive managing director of Cushman & Wakefield in New York, which manages 200 corporate accounts globally. “Clearly, global companies in this environment are focused on having the right kind of real estate that they need to grow versus what they need to dispose of in arguably one of the toughest environments we've seen in a few years.”
Joe Gose is a Kansas City-based writer.