Not long ago, a senior real estate executive from a large U.S. corporation flew to Sao Paulo, Brazil, to look over some office space he had rented the week before. During the flight, the executive struck up a conversation with the man in the next seat and found that he also was headed to Sao Paulo to look at office space.
As the conversation continued, the pair discovered they each were evaluating the same office building. Not only that, they had both rented the very same space. How could this happen?
Bruce Ficke, president of corporate property services for Jones Lang LaSalle, Chicago, has heard stories like this before from many of the 40 countries in which his group operates. "In the states, a landlord hires a firm to lease a building and control the process," Ficke said. "In some international markets, however, no one company represents the landlord. It’s an open listing, and the process can get out of control, with different brokers working independently on deals for the same space." How can a company make sure it has really leased space in such a system?
"Good question," Ficke chuckled. "The best way to make sure the space is yours is to occupy it."
Open brokerage listings are but one of many cultural differences companies looking for international space must contend with.
Take the apparently simple task of measuring space. In the United States, landlords measure space according to standards set by the Building Office Managers Association (BOMA). The BOMA rentable square feet standard, for example, measures space to the glass line of a building. But landlords in international cities won’t necessarily measure their space in the same way. Some might measure to the outside of the building facade or to the end of a concrete ledge outside the window, thus charging for space that cannot be used.
"Some international markets quote rates on a monthly basis," Ficke said. "Others quote annual rates. Some use square feet. Others use square meters."
Lease terms differ around the globe as well. According to Ficke, conventional office leases in the United Kingdom provide for 25-year terms, compared to five-year terms in the United States. In a market such as London, where space is at a premium, Ficke doubts that landlords have any incentive to agree to a shorter term during negotiations. Jones Lang LaSalle deals with this issue by subleasing space for its clients.
Different parts of the world offer different environmental challenges. Ficke has seen inconsistencies in power delivery, air conditioning, office equipment and other environmental standards that generally go unquestioned in the United States.
"When managing the build-out of space for financial services clients in international locations, we often have to install emergency generators due to irregular power delivery or power quality issues," Ficke said.
Also, Labor issues can affect a company’s decision to locate in one country or another. "In some countries, it’s difficult to terminate employees," Ficke said. "In addition, benefit issues can cause labor costs to skyrocket. In some European countries, the government prescribes benefit loads as high as 70% to 80% of salaries, compared to about 30% in the United States."
Limited access to labor, materials and parts in some countries can require extra effort on the part of expanding companies. Ficke cited an example of a Jones Lang LaSalle auto manufacturing client that developed a new manufacturing plant in South America. Ficke’s group helped the company acquire not just the land to house the plant but also major tracks of land surrounding the main site. The manufacturer then installed modern infrastructure and sold the surrounding parcels to its major suppliers. The result was a state-of-the-art auto manufacturing facility assured of just-in-time delivery of parts by familiar suppliers.
At some point in the future, managers of such international manufacturing plants may face expensive disposition issues that can arise in connection with international locations. "Jones Lang LaSalle has a U.S.-based industrial group that specializes in selling old factories," Ficke said. "But the business base in other countries may not accommodate selling such installations. In that case, a manufacturer constructing a factory may have to amortize development and other costs beyond the estimated useful life of the plant, which may drive costs up to a point where the international location no longer makes sense."