Year 2020: Corporate Workplaces, Property Portfolios Undergoing Radical Shifts – CoStar Group

Within the next eight years, companies expect to deploy sophisticated data platforms and revamp facilities to support a new generation of tech-savvy employees who will make full use of the virtual office and other alternative workplace strategies. These and other business imperatives are already beginning to reshape how companies and their service providers think about their real estate footprints and strategies.

That was among the key findings from a yearlong survey of corporate real estate executives conducted by CoreNet Global called “Corporate Real Estate 2020: The Future of Corporate Real Estate and the Workplace.” CoreNet and its partners explored eight segments of the corporate real estate industry, ranging from the future of executive leadership to corporate location strategies, space needs and portfolio optimization to building sustainability, how property services will be delivered or outsourced, and role of technology in transforming the workplace.

The research teams discussed some of the key finding of the 2020 vision at CoreNet’s San Diego Summit this week, attended by nearly 2,000 corporate property professionals, brokers and other service providers, and economic development officials whose goals, strategies and business plans are directly tied to how real estate decisions are made in the corporate executive suite.

A major goal of the study is to gain insight on how companies will manage their vast real estate holdings in the future, which rank second only to personnel in operating costs for most organizations.

“Over the last couple of years, there has been a dawning of awareness at the enterprise C-suite level and corporate real estate level that we need to move beyond the mentality of cost containment and cost cutting in our businesses, because the real estate portfolio is the physical platform that supports the ongoing work of the enterprise and the creation of shareholder value,” said Russ Howell, managing director of Jones Lang LaSalle and chair of the portfolio optimization workgroup.

“Executives are beginning to demand a higher strategic partnering level from their providers and a higher contribution of value than simply order taking and cost cutting. As an advisor, I’m now seeing that there needs to be a focus on creating value and enhancing productivity and boosting the top line, and part of that is the notion of using the real estate portfolio to create operating leverage,” Howell added. “For example, it’s totally fine if [real estate] costs go up by 10%, if that drives revenue by 15%.”

Improving Demand Forecasts

One of the key weaknesses revealed during the inquiry is that most company real estate departments lack consistent models, processes and communication between business units to accurately forecast employee head count levels and their workspace requirements.

“Any business demand forecast I’ve ever worked with has been wrong by the time they open the doors of the new facility, either there’s too much space or too little space,” Howell said.

As demand forecasting improves through the use of technology and data mining, and decision making expands to include consideration of external factors like geopolitical and macroeconomic trend and transportation issues, and how they affect business growth and employee counts, real estate leaders will be able to build flexibility into their portfolios to hedge against changing conditions.

Meanwhile, competition for top talent will drive companies to support employees more widely via the ‘virtual office’ and other alternative workforce strategies. According to projections, up to half of all workers in developed economies and 25% in developing areas will use teleworking and other modes of employee distribution, bringing more clarity to physical space needs, driving down costs and reducing the enterprise’s carbon footprint.

“I knew the footprint for offices would be shrinking, but not by that much. It’s going to take a bite out of developers’ portfolios,” said Mary Jane Olhasso, economic development administrator for San Bernardino County, CA, the nation’s largest municipality. “Urban planners need to sit down and think about how much office space we should actually be planning for in our communities.”

While there likely will be increasing opportunities to retool the large block of existing inventory to meet the new office requirements of corporate users over the next few decades, Howell sees diminished demand for large scale new development, apart from build-suits for specialized uses that have to be a certain location or where the inventory isn’t there, he said.

Those interviewed by CoreNet consistently returned to the theme of dramatic change in the corporate real estate industry over the next few years. With the advent of globally integrated commercial property services providers and outsourcing of transaction service and property management, “my personal view is that corporate real estate as we know it won’t exist in 2020,” said respondent Garry Pellett, head of real estate for the Bank of New Zealand.

That said, the top site selection factors — labor pool, government policies toward business, market proximity, transportation and infrastructure — remain the same, even as corporate real estate functions have grown more complex and global than ever before, said Olhasso.

“The shapers of location decisions for an office headquarters are completely different than for a distribution facility,” she said.

Technology, Global Reach Key for CRE Firms

Smart phones and iPads greatly outnumbered bulkier cameras and laptop computers, providing ample evidence at the San Diego conference of the fledgling move of corporate IT functions and data storage to cloud computing, as well as the rise of “bring your own technology” that is resulting in the decentralization of many corporate workspaces.

Along with those high-tech tools that will shape the workplace of the future, those firms that provide brokerage and other real estate services to companies will need a global reach and a complete set of integrated services to meet the sophisticated requirements of corporate property departments.

“More demands being are placed on the corporate real estate executive to bring value, and that’s a very complex job, and to bring value on a global platform is infinitely more complex,” Howell said. “Those providers that can bring state-of-the-art tools, processes and experience across industries and across clients are the providers that will be most heavily relied upon by corporates to succeed in that mission.”

“The strategy will always reside within the enterprise, but a lot of the tactical execution will continue to be pushed down to the provider. But service providers have to get a lot better at focusing resources and supporting the strategic deliberations of the enterprise. ”

How will the mobile workplace affect corporate real estate in 2020?

The level of virtual working will differ, and industries and companies which require a high need for collaboration will still need provide appropriate spaces, Howell said. However, many companies will adjust desking ratios by increasing the number of employees per available workspace, a trend that will shrink the office footprint of the future, Howell said.

Regarding distribution centers and the movement of goods, pressure from energy costs will continue to drive up costs even if new supply is developed, raising the “distance cost” of goods even as the distance cost of information remains at or near zero.

“You will see re-shoring of manufacturing as heavy goods become more expensive to transport. There may be continued outsourcing of services like accounting and legal. But hard assets are going to come back on shore and intellectual property will continue.”

In the face of longer supply chains and the resulting higher cost of energy and transportation and hoping to move closer to their customer base, the U.S. and other developed countries such as Germany will re-emerge as manufacturing powerhouses, said Dennis Donovan, principal with WDG Consulting, a corporate site selection advisor since the 1970s. To narrow the supply chain cost gap, some companies will choose to expand on U.S. soil rather than overseas while others will “re-shore” operations back to the U.S. from other countries.

“Going offshore over the next 10 years will be more a reflection of the desire for market penetration than it will be for cost reduction,” Donovan said during a session called “Location Strategy and the Role of Place.”

“In office, there will continue to be pressure on corporate real estate units to reduce footprint size and occupancy costs, but our research shows this cannot be done at the expense of recruiting or retaining world-class workers,” Donovan said. “Offices that are flexible, social, collaborative, green, well located for the millenials and Gen Y — we’re actually seeing companies in high tech and R&D moving back into the urban environment.”