What size is the right size?
February 15th, 2012
By Rob Wheeler, Vice President
When considering warehousing, what size is the right size?
One of the questions I’m continually asked by customers and colleagues alike is: what are the trends in warehousing as it relates to network design? That is, are things trending toward fewer larger warehouses in a distribution network or toward having small regional warehouses? My answer to this question is….it depends.
To understand how networks are designed you need to understand the business of the company that’s designing it. The major expense of any supply chain network is always transportation, but next in line is inventory. So, how expensive each piece of inventory is will drive how the network is designed. The general rule is, the more warehouses you have the more inventory you will carry.
Here are a couple of examples to illustrate this fact.
Example 1 - A maintenance, repair, and operating distributor carries thousands of different products, mostly of low value. Their go-to-market strategy is that they will have the product you need in stock, and it will be delivered next day. Because it is a very inventory-intensive business model, spreading that inventory out over a broadly arrayed distribution network makes sense. Their model is to get the product from vendors and warehouses close to the customer so that they can deliver it next day with minimal cost. In fact, the company’s distribution network was designed by a parcel delivery service to cover the maximum amount of the population via overnight ground service.
Example 2 – A medical device company has very high-value products. Each piece of product can be worth thousands of dollars. Their key driver is to reduce inventory as much as possible while maintaining service. Because of the value of the product, reducing to a single centrally located warehouse makes sense. The reduction in inventory will offset the expense of shipping the product via overnight air. In this customer’s case, they located almost all of their product across the runway from an air parcel carrier’s main sort hub. This allowed them to eliminate as much inventory as possible by allowing them to extend the shipping window during the day as much as possible.
Both examples above have caveats attached. In Example 1 the company has a master distribution center that carries slow moving or high value goods, helping them eliminate this inventory from the regional warehouses. In Example 2 the company utilizes third party warehouses on both the east and west coast to hold limited inventory in case of emergency.
The bottom line is that there is a right solution for every company. But that solution depends on a number of factors. The Industrial Services team at Cresa can help you work through the different scenarios to find the right solution for your business.
Tags: corporate real estate, industrial, warehouse
Posted in Supply Chain | No Comments »
5 things every corporation should do to prepare for the upcoming lease accounting changes
January 25th, 2012
By Brant Bryan, Principal
In the near future the FASB and the IASB will jointly issue new guidelines for lease accounting. These new standards are substantially different from the current standards and will affect every corporation that issues public financial statements.
In the new standards all leases will be reflected as both an asset and a liability, thus “inflating” the size of corporate balance sheets. During the lease term, the asset and the liability will be expensed, but in different patterns than under current standards.
The new standards will likely become effective in about 2 years. What should corporations be doing now to prepare for this sea-change of lease accounting?
1) Update your lease database. The new accounting standards will require corporations to assign a value to every lease transaction. The value will be based on more information than most corporations now include in their lease database.
2) When entering into new leases evaluate them using both the current lease accounting implications and the new standards. All leases will be included in the new standards. There will be no “grandfathering”. Therefore, you need to know what impact each lease will have on your financial statements in both 2012 and in future years.
3) Examine the effect of lease length on your financial statements. Longer term leases will normally cause a greater increase in the size of the lease asset and liability. How will increased balance sheet size impact your performance ratios and metrics? Begin to establish a philosophy of what your company wants.
4) Talk with bankers, real estate consultants and rating agencies about how the changes will impact your credit capacity, rating and borrowing cost. Leased assets will be a separate category on the balance sheet and effectively is a source of financing for lessees. Most companies believe it should be “business as usual”, but understand what it means for you and your borrowing costs.
5) Look again at the options in your leases and how you structure those options. More than ever, lease options will be important. Some rent streams may shift onto or off of your balance sheet, depending on your objectives and the facts and circumstances. Also, the new standards may cause you to prefer your options to be structured differently than you have done so previously.
Tags: corporate real estate, FASB, IASB, lease accounting, lease structuring
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Tenant’s Guide, North American Markets
January 18th, 2012
Overview
As we begin a new year, U.S. and Canadian businesses will once again face a very challenging economic landscape with the twin worries of a still tepid economy here in North America, and the unknown effects of the ongoing European debt crisis. Global growth has already been scaled back as recession like conditions had become evident in a number of European countries at the tail end of 2011. This will almost certainly delay business leaders from pushing forward with any expansion plans until more is known about the breadth and depth of a European recession and any possible bank failures or credit difficulties.
The good news for tenants in the market for space this year is that leasing markets in North America will remain fairly benign with still significant discounted rents and an abundance of for lease space in all but a small number of submarkets. Canadian markets are certainly further along the real estate cycle, but for North America as a whole, leasing markets are at best treading water and are unlikely to tighten in any significant way in 2012 and quite possibly 2013.
Barring the unexpected, business conditions in North America should be marginally better in 2012 than in 2011, but for many industries the economic landscape will seem as daunting as it has for the past three years. The worldwide trend towards lowering debt (a process referred to as deleveraging) by governments and individuals alike will be a contracting force impacting many countries. This is sure to act as a significant drag on economic growth, both here in North America and countries around the world. This will not escape the notice of business leaders and real estate decision makers and will again stifle leasing markets. Varied sources of instability are also making businesses more nervous about making long term commitments. While Cresa doesn’t have the inside edge on what surprises might be coming our way, what we can say with almost complete certainty is business leaders will again be confronted by a large array of “shocks to the system” whether they be domestic or foreign. As a result, most businesses are expected to stay largely cautious as they continue to be challenged by a very uncertain and volatile economic landscape. Add in the prolonged uncertainty and further erosion of confidence in the U.S. political system and it is not unreasonable to foresee a further delay in expansion and hiring that would ignite leasing markets and put a floor on lease rates. Decision makers will continue to err on the side of caution until there is a significant increase in job growth, most likely well into 2013.
Business Drivers
For business leaders the fragile nature of the U.S. economy will continue to be paramount. A reasonably strong finish to 2011 should lead to a relatively good start for 2012, but with consumers largely tapped out and governments at all levels making spending cuts it is highly unlikely the U.S. economy will grow by more than 2.0 percent – just marginally better than 2011. Themes that dominated in 2011 are again expected to be front and center in 2012. Relatively anemic job growth, high oil prices, deleveraging and a still shaky housing market are all expected to be stiff headwinds for much of the year. Monthly job gains are expected to mirror 2011 with approximately 150,000 workers added to payrolls per month leaving the unemployment rate stuck between 8.0 to 9.0 percent. Industries adding jobs include technology, social media, energy, healthcare, and education. One key source of weakness, however, will be finance which has shown little growth over the past few years and is unlikely to do so in 2012.
To read the complete North American Market overview, please visit our Tenant’s Guide page. There you will also find guides for individual markets, from Albany, NY to Washington, DC.
Posted in Tenant's Guides | Comments Off
ROI for Workforce & Location Planning Projects
January 11th, 2012
By Tim Myllykangas, Principal
I was recently honored to have presented a workshop at the 2011 CFO Rising West Conference and Expo, which focused on “The Top 10 Strategic Challenges for the CFO.” Our workshop—Stay or Go?: Corporate Location Planning”—was well-received, with those in attendance interested in the variables that drive corporate location. As expected, they wanted to learn about the savings that can be realized when workforce and other performance benchmarks of an existing portfolio are measured and aligned with the business.
To reiterate what Workforce & Location Planning (W&LP) is all about, it is the first step in the corporate real estate cycle since it starts with a clean-slate perspective—i.e., it looks at the broader picture beyond the current real estate portfolio. Addressing what the C-Suite is most interested in, it focuses on ideal corporate locations based on workforce recruitment, retention, labor market saturation, competition, turnover, and salary levels.
But how can we demonstrate the value proposition, or return on investment, regarding W&LP and incentive fees? Actually, it is easy to do so.
Money-Saving Measures
In general, workforce and location planning specialists save companies money because:
-Labor cost reductions of 20%-40% per year are regularly achieved and easily measured.
-Labor cost reductions are typically 6-12 times that of real estate cost reductions.
-Labor performance indicators typically increase by 15%–25%.
-Turnover typically declines by 25%–35%, eliminating significant re-training costs.
-Incentives from municipalities generate savings through grants, abatements, discounts, etc.
-W&LP specialists measure sector saturation (the competition for and degree of utilization of the workforce) in the company’s current location(s) as well as in alternative locations. Sector saturation is the most important, yet least understood, factor in determining optimal locations. Since saturation data does not reside in any database or web site, it requires real-time primary research.
-Underemployment data is one of the top three workforce analysis factors, but this also does not reside in any database or web site. And most cities do not calculate it due to its complexity. Identifying which city has higher underemployment is actually more critical than identifying one that has a higher population or sector presence, and this will identify the city with lower labor costs, lower turnover and higher labor quality. Unemployment, a common data point used by companies, is not only an inaccurate measure of workforce availability but in some cases is an inverse indicator of work ethic. High unemployment, while thought to be a positive factor, often signals a lower work ethic, while low unemployment often signals a strong work ethic with the local workforce less willing to file for unemployment insurance and more likely to take a job that is below their skill level. And this is reflected in higher underemployment.
As a typical example of W&LP in action, consider our experience in identifying optimal labor markets for a 300-employee customer service center. The process resulted in higher labor quality and lower turnover, and over the five-year term of the lease, labor savings equaled $16 million, real estate savings was $3,200,000, and incentives added $500,000.
Labor Costs, Incentives, and Real Estate Cost
What if we were to extrapolate typical, minimum and average savings for a 500-employee, 60,000-square-foot facility? Consider the following projections:
Here are two ways to concisely summarize the numbers presented to the left:
-$1/SF/yr rent savings on 50,000 SF = $250,000 (5-year term)
-$1/hr labor savings on 250 jobs = $2,500,000 (5-year term, 50K SF)
Or…
-10% rent savings on 50,000 SF = $500,000 (5-year term, $20/SF rent)
-10% labor savings on 250 jobs = $6,250,000 (5-year term, $50K average salary, 50K SF)
Savings will vary according to individual circumstances, but the preceding examples give you an idea of what can be expected. It confirms that a properly planned workforce relocation, consolidation, and/or expansion can drive substantial savings in real estate and incentives, but the most significant savings is derived from reduced labor costs. As cost containment continues to be the mantra in the C-Suite, it makes sense to see how Workforce & Location Planning can improve the bottom line.
Tags: corporate real estate, cost savings, Site Selection
Posted in Workforce & Location Planning | Comments Off
Where did I put that lease? Finding your best real estate strategy
January 4th, 2012
By Ralph Benzakein, Vice President
Here’s the scenario: You just realized that your lease will be expiring in a few months and you start to think about what that will mean. For the most part, your current space works for you. You might need more open space or a couple of additional offices; the carpet is starting to show some wear; the walls have been marked up a bit. But, it’s close to home and you have a comfort level there (the car practically drives itself to the office). You also remember the nightmare of moving and the disruption to your business.
So…now what? You didn’t get into business to have to worry about this stuff, but now you need to. You decide there is plenty of time to address this and go about doing “more important” things.
At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office. You call one or two of them and discover that although there is a sign in front of the building, there isn’t necessarily any space that would suite your operation, but the broker representing the building would be happy to show you other buildings. It then occurs to you that those signs never really come down and that they are really just a lead generation system for the broker.
More time goes by and brokers are calling you every other day to pitch you new space or tell you how much free rent they can get you. Nobody has taken the time to evaluate what your business needs are and how they can be aligned with your real estate needs.
It all becomes a little overwhelming and with about 30 days left on your lease, you contact you current landlord and “ask” him if you can renew your lease. He says, “Sure, I’ll send you a renewal letter, just sign it and you’ll be good for the next five years.”
Wow, talk about the path of least resistance. You think to yourself, done deal. You read the lease renewal, notice the part about continued escalations (seems reasonable), sign it, and it goes back in the drawer for another four and a half years.
You, my friend, are a landlord’s dream come true!
You may have saved some time, but it came at a very high price. Here are just a few of the items that a tenant rep would have negotiated for you:
- Lower rent (those continued escalations in the renewal have committed you to rent that is well above the market)
- Rent abatement (free rent)
- Refurbishment allowance (new carpets, paint, move partition walls, etc.)
- New base year for real estate taxes
- Reduce or enlarge space, per your needs
- Lower escalations
Your rationale that your landlord would not want a broker involved is accurate. I’ve just shown you why. It’s not because he doesn’t want to pay a broker’s fee, though he probably doesn’t. It’s because many of the countless clauses you are not equipped to negotiate are his profit centers.
And by the way, some landlords are more than willing to pay a broker’s fee, even on the renewal. Some even insist on it to ensure that the broker is not motivated to move the tenant out of their current space.
Bottom line: give yourself plenty of time to determine the best real estate strategy for your business. That usually means at least one year, if not more, depending on the size of your space.
Tags: corporate real estate, cost savings, landlord, lease, tenant
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The Project Manager’s Role as Client Educator/Mentor
December 29th, 2011
By Phillip Infelise, Chairman
In this 15th edition (have we really been tuning in for two years now?) I want to discuss a critical and expanding role of the Project Manager that is rarely articulated – that of Educator and Mentor to our clients (and other project team members) while steering them through the project processes.
In many cases the client is engaging an outside Project Manager very simply because there is no internal expertise or practical experience to execute such a project. Consequently, we are relied upon to articulate, explain, educate, mentor and provide additional perspective to the client throughout the process. In a very circuitous way our intent is to elevate the game of our principal client contact to the point that they could manage any subsequent projects without our day-to-day assistance (but may still rely upon us for item-specific expertise). Yes, I know that can mean educating ourselves out of future work, but that is our way of “doing the right thing.” Examples of this result abound among our clients new and old.
It is always important to start the education process off on the right foot, and we can do so by assuring that everyone around the project table speaks in a common vernacular. To that end, we make our Project Management Lexicon available to all of our clients, prospects, and team members. The Lexicon covers more than 20 pages of industry definitions and acronyms, some conventional and some rather eclectic or irreverent—even including fun additions from our clients themselves. Believe me, it is an interesting read.
We may also have an expanding role in educating our project team members and collaborators about our client’s specific needs and wants: how they want to operate, their style of decision making and, yes, even their specific vocabulary. Every client has unique internal processes and politics (whether they know it or not or admit it or not) and we need to tune the Project Team into those nuances if we are going to have a successful project team dynamic. One large client, for whom we are currently developing a build-to-suit headquarters, has such a specific brand of internal communication and team-wide approach that we have developed a Client Lexicon to distribute to project team members so that they everyone knows what we are talking about.
Opportunities for education and mentoring abound throughout the course of a normal project. We make a point of trying to understand what the client knows and doesn’t know from day one, so that we can adapt our style of communication to meet their needs. Likewise some of the documentation is presented very differently, depending on the client’s prior experiences. Certainly, during Project Team meetings, we make it a point to sit next to our client contact, so that we can answer questions and discuss options whenever serious issues are presented to them. Often it is trying to explain a very technical issue in non-technical terms. Or simply letting them know what something costs before they commit to loving it as a solution.
Walking the space together at various stages of development is also an opportunity to educate: not only about how the construction is progressing, but also about facilities management issues and approaches that are more understandable when looking at the raw, unfinished space. Another fun education is to provide the client with insight into the “games our vendors play” and how to control those games to work in our project’s favor.
Many clients have no idea what trauma they may be facing during the relocation phase of the project. We often educate the entire staff on what to expect during the relocation and how to cope with the issues that will arise during general staff orientations and specific move captain training.
The expanding role of the Project Manager as educator/mentor brings a new welcome dynamic to our perspective. This is simply because we too, as enlightened, new day Project Managers, are in the business of always educating ourselves and applying new learning and approaches to our client’s benefit.
In our next edition, stay tuned for a discussion about resolving internal project team conflicts and issues.
Tags: corporate real estate, educator, PM, project manager, vendor
Posted in Project Management | Comments Off
The Industrial Relocation Checklist
December 21st, 2011
By Sean Hoehn, Managing Principal, Industrial
Relocating your industrial facilities can be a challenging task and requires careful planning. It is important that equipment does not get damaged during the move, that the relocation is completed on time to limit disruption to operations, and that it is completed within budget.
It is important to research companies that specialize in the transportation of racking and machinery well in advance of the relocation. Be sure to choose a reputable mover, and do not base your decision on pricing alone; the latter can end up costing you more in the end. Try to find a moving company that can provide you turnkey services; it is more manageable, and less stressful, to deal with one project manager as opposed to dealing with several companies with different contacts for different services.
Prepare rough floor plans of the new site outlining where the machinery and equipment should go. Once you have a shortlist of moving companies to provide you with a final quote, have them perform site visits with you in your existing and future home and go over the rough floor plans.
Speak to your distribution or production manager regarding any possible down time and stock requirements, as you do not want your move to affect your relationships with your customers. You may want to consider over-holding machinery in your current facility for a short period and perform a staged relocation by moving certain lines at the most appropriate time.
Someone in your organization should create a timetable for coordinating services with your local providers. A common mistake when planning a relocation is forgetting a services checklist for things like draining of oil, electrical and mechanical disconnects and reconnects, or any other requirement that might apply to your operations.
Obtain budget approval from your associates and make sure they know what moving company you have chosen. Explain the plan to ensure both internal and external stakeholders are comfortable with the relocation and timetable.
Cresa and its project management team are well positioned to facilitate your relocation. Our integrated approach enables us to take you through the entire real estate process from strategy development, surveys, market opportunities, negotiations with landlords and renovations/relocations.
Tags: corporate real estate, industrial, relocation, tenant
Posted in Supply Chain | Comments Off
End of the Year Thoughts Regarding Facilities Management
December 15th, 2011
By Jim Ricker, Vice President, Corporate Services
With 2011 coming to a close, this is a good time to reflect on some key points about FM.
Facilities Management is not a commodity.
Some consultants who advise corporations and institutions about outsourcing tend to view FM as a commodity that can be purchased similarly to services such as custodial, grounds, office supplies, and the like. This is a terrible concept and should be resisted by prospective acquirers of FM services. You are entrusting the care of your real estate assets to professionals from a service organization. The right decision hinges on much more than the fee per square foot and the generation of reams of reports. You need a provider who is trustworthy, experienced, innovative, and works well under a performance based contract. Think of this work as you would that performed by your accountants and attorneys—it is that important.
Outsourcing is not a universal panacea.
It works well for some organizations—those that don’t have the internal resources, have a history of outsourcing non-core work, have a culture that accepts the concept, and have an executive management team that is totally committed to the approach. In addition, organizations that are having difficulty keeping pace with rapid growth may be candidates for outsourcing.
For those corporations and institutions that have strong internal groups, outsourcing often has no benefit and may be more expensive. For an internal FM team that effectively manages costs, hires contractors for repetitive services such as custodial and grounds and infrequent, highly skilled services such as elevator maintenance and indoor air quality testing, keeps its team trained and skillful, and provides relevant information to senior management, outsourcing offers little. In fact, there could be a regression if the culture is complex and skeptical of outsiders.
Learn the language of the customer and use it to communicate.
FM teams frequently work for another function—often Finance, Administration or Human Resources. And FM’s key customers are usually senior managers of sales, service, engineering, or manufacturing. These constituencies are typically not fluent in the language of FM. They think in terms of their own functions: time to market, inventory turns, employee turnover, employee productivity, earnings per share, occupancy as a % of sales, and the like. Learn how they think about work, and adapt how you communicate to their way of thinking. You will be much more effective and appreciated and may be viewed as more integral to the success of the company. This is a critical concept for both internal FM teams and external, fee-based providers.
Look for more key points about FM on future blog posts.
Tags: corporate real estate, FM, real estate outsourcing
Posted in Facilities Management | Comments Off
International Best Practices for Lease Administration
December 7th, 2011
By Jeff Tosello, Principal
I get asked all the time from clients: what are the best practices for capturing our international real estate portfolio? Maybe I’m just a little confused or too cynical but my immediate response is usually that there aren’t any. Even if there are, the reality of what you can do is usually more of a factor than what somebody thinks you should do.
So let’s look at what you should and can do and see if we can carve out something real and actionable rather than a hypothetical model that just sits on the planning table indefinitely.
Similar to the original data and document gathering that you did when the domestic portfolio was compiled and centralized, you’ll have to first get an idea of the total listing of properties, preferably by country. This is sort of a chicken and egg scenario because often there is no target listing of what you should be getting a copy of. This entire process relies heavily on senior level sponsorship and good relations and communication with local country managers or the on the ground personnel.
Lease translations are next and that’s almost an entire article in itself as there are many different ways to go about this and a huge disparity in costs depending on how you go about it. You’ll want to plan this out carefully before even beginning to translate.
Once locations are identified and documents are translated, you’ll need to plan what data to capture and how and how often updates will be made. Note: Whenever the other shoe drops on the FASB/IASB ruling, international leases are going to need to be included.
CresaPartners Lease Administration compiled a comprehensive International Lease Administration Integration Checklist into our modular service menu. If you need help with this and are not sure what makes the most sense for your company, feel free to contact me. We can help you build best practices that work!
Tags: corporate real estate, international, real estate portfolio
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Split Incentives Key to Energy Efficiency
November 10th, 2011
By Mike Tobin, Director of Sustainability
Every tenant wants to pay less in operating expenses, and every landlord is challenged with how to maintain or improve their property to provide competitive operating costs. When it comes to capital investments in building systems, the conversation between the two can become frosty as neither one wants to be burdened with the expense.
In order to improve the energy efficiency of our national and international building stock, it is imperative that we identify a framework for addressing split incentives in both a working and legal relationship. To that end, CresaPartners participated in a workshop hosted by BOMA and the Rocky Mountain Institute to attempt to build just such a framework. BOMA and several of the other participants approached the issue from a landlord’s or owner’s perspective, and CresaPartners brought the tenant’s perspective to balance the table during the discussions. The result of this workshop will be a guidebook that outlines the issues and creates a road map for possible win-win solutions. The goal is to release this to the market by the end of the year.
I’ll outline a few of the key items that were addressed to hopefully spur some further discussion. One discussion point is whether or not the lease or another side agreement should be used to outline split incentive agreements. One on side, the lease is the central legal document to the relationship between landlord and tenant. It is the place to outline any split incentives such as allowing the landlord to pass through to the tenant the cost to upgrade the HVAC system. On the other side, the landlord in a multi-tenant building will have many different leases or forms, and it will be very time consuming and expensive to amend each lease for the split incentive. As a result, a side agreement may conceivably be more efficient to simply focus on the split incentive while not opening up the lease.
Another issue arises out of the multi-tenant buildings—how does a landlord move forward with an energy efficiency project if not all of the tenants agree to the split incentive agreement? A simple answer is that the landlord would just have to decide whether or not it was in their best interest to maintain that asset and thus make the capital investment themselves. But the landlord can also do more to try to be a better salesman. In a lot of instances, the tenants feel as if the landlord is trying to pull something over on them. By engaging the tenants earlier in an open dialogue and providing transparency into the capital planning, energy costs, etc., then the landlord may be able to do a better job of selling the building improvements.
This discussion of improved salesmanship brings up the area of financing the improvement. A new area of financing has arisen for landlords that will provide the upfront capital in return for the cost difference due to improvement in operating efficiency. If the new system is really efficient, then the financing entity gets a nice return. If the system is inefficient, then the financing entity may lose money. The tenants do not realize the cost benefit from the more efficient system during the term of the contract, but they are guaranteed a steady cost of energy that is no more than their current rate. The challenge is that the financing entity will not provide financing if not all of the tenants are in agreement. If not all tenants are in agreement, then there may be other financing agreements that can be structured to meet those needs. By openly discussing these options, the landlord may encourage non-committed tenants to commit.
Sales also takes a certain amount of trust that is sometimes hard to find in a tenant/landlord relationship. In order to build trust, landlords can improve the transparency of the building operations by doing something like publicly proclaiming the energy star rating or the energy use per square foot of the building. There is a lot of debate in the market today about whether or not landlords should be required to give energy star ratings or other national building labels. As tenants and brokers, let’s ask every landlord for their energy star rating (and/or energy use per square foot) until it becomes abnormal not to provide that level of transparency. In that way, we establish a basic level of shared understanding about the building and can build upon that to find common ground and win-win improvement scenarios.
This is just a sampling of some of the issues that were discussed surrounding split incentives, and there are many more issues and ideas around this topic. If you have any good examples or other ideas, please feel free to write me and help us promote better building efficiency through split incentives.
Tags: BOMA, corporate real estate, energy efficiency, energy star, landlord, sustainable, tenant
Posted in Sustainability | 2 Comments »
