Archive for September, 2010
|Is Outsourcing Facilities Management a Solution for my Business?
Wednesday, September 29th, 2010
By Jim Ricker
Outsourcing of various services has been around for decades—payroll, cafeteria operations, custodial, copy services, and guard services to name a few. In the late 1980s, outsourcing of real estate was added to the list— Transaction Management, Project Management, Lease Administration, and Facilities Management.
Entering its third decade, Facilities Management (FM) outsourcing has proven its value to corporations and institutions; often resulting in cost reductions of 10% or more, improved services, and better information for client decision-making. Of course, there are also examples of failure when the clients’ expectations were not met, and contracts were thus canceled.
So, is outsourcing the right solution for you and your firm?
To be successful, FM outsourcing depends upon several factors, with the absence of any one often leading to failure:
- Client commitment from the executive offices
- Clearly stated goals that are achievable
- Performance-based contracts with rewards and penalties
- Single points of contact for both client and service provider
- Constant communication – informal and formal
- Flexibility as scope of work and economic climate changes occur
- Technology applications that provide relevant information for decision-making
Even assuming that you are confident that all of the above factors can be met, is a successful outsourcing of your FM services a foregone conclusion? Not necessarily, if you have:
- A unique culture that is extremely difficult to replicate and would thus take a service provider several years to fit in and become productive,
- Successfully reduced operating expenses by subcontracting high volume, low cost services such as custodial and low volume, high cost services such as elevator maintenance,
- Reorganized to eliminate redundancy and poor performance,
- Implemented a performance-based review system for the employees,
- Consolidated services to take advantage of bulk purchasing, and
- Instituted a training program to maintain and enhance staff knowledge.
The decision to outsource is not a simple one. It requires a commitment at all levels within the organization and a tolerance for the disruption caused by a transition to a service provider. If your benchmarking efforts indicate that your costs are competitive, your customers are happy, and you have a well-trained, highly-motivated staff, then you might only outsource those services (custodial, elevators, pest control, etc.) that can be performed better and more cost-effectively by others.
Tags: corporate real estate, cost savings, FM, real estate outsourcing
Posted in Facilities Management | Comments Off
Workforce Optimization
Wednesday, September 22nd, 2010
By Tim Myllykangas and Mitch Jacoby
In our previous post, we noted that a growing list of companies both large and small are looking at their workforce as a way to reduce costs. These companies are going beyond their real estate costs, and are considering a much larger expense: labor. Although real estate costs are typically the second largest P&L expense, the annual cost of labor is usually 6-10 times greater than the cost of real estate. Consequently, a workforce optimization analysis can in many cases lead to significant savings…and typically a new real estate project, even for companies with flat or negative growth.
The typical client project team consists of representatives from Finance, HR, Operations, and Real Estate. Once a workforce optimization analysis is performed, where factors such as labor quality, availability, and costs are examined to identify more favorable markets for the client’s job descriptions, a business case can be made to consolidate, expand, and/or relocate the real estate footprint. The bonus for clients in these projects is normally not just reduced labor costs, but that they have a labor pool with higher underemployment, leading to lower turnover and a more loyal workforce. Additionally, clients can receive state or local incentives which in some cases can be significant.
So, which companies are doing this? Business giants like Hewlett-Packard (HP) are consolidating their national footprint in places such as Conway, AR; Rio Rancho, NM; and Dubuque, IA. These locations are small towns for sure and many would say too small, but the companies’ successes to date are clear proof of the benefits of finding the more favorable markets for a client’s labor needs.
According to HP, it selected Conway, AR as the location for 1,300 new sales and support jobs, as well as technical positions as part of its national consolidation strategy. These types of jobs are not the low-paying, entry-level jobs requiring little education that most people typically think of when companies move to small towns like Conway. These positions require college degrees and reportedly pay starting salaries in the $30,000-$50,000+ range.
Not every project works in a smaller city, but the benefits that are achieved for those that do include improved workforce quality, lower labor costs, cheaper real estate, and often meaningful incentives from the local community and state.
Are you considering a move to a smaller market to reduce labor costs?
Tags: cost savings, Site Selection
Posted in Workforce & Location Planning | Comments Off
Future Real Estate Transactions May Impact Lease Economics
Wednesday, September 15th, 2010
By Jim Leslie
As the Financial Accounting Standards Board (FASB) changes in lease accounting rules continues to gain momentum for adoption within the next few years, corporations should now begin setting strategy for future occupancy expenses. These new rules requiring all lease obligations to be capitalized and shown on the balance sheet of the tenant (eliminating FAS 13 calculations for determining operating lease treatment) may change the attitude companies have towards owning versus leasing. The critical component will become the underlying cost of capital for the landlord/owner as compared to the cost of capital for the tenant. This may require developers and landlords to become more sophisticated in the underlying financing to provide capital to their buildings. While this change may seem overwhelming to many, it is similar to the international accounting rules that have been in effect for years. American CFOs may want to look to their colleagues in those markets to get some baseline knowledge on how deals are structured and gain some initial thoughts on efficient structures for their own balance sheets and operations.
In addition, the proposed accounting rules will have an impact on loan covenants currently in place, which will need to be renegotiated or waived. Traditional calculations for valuations of companies will change as the reporting of occupancy costs may cause a different result for EBITDA or Free Cash Flow. Many of these defined terms in loan agreements will trigger a default under the new rules.
While some corporate real estate professionals have begun thinking about the impact this will have on their future transactions, it does not appear many landlords have given it much attention. Change brings a lot of confusion and uncertainty, but it will also create some new opportunities that were not available under the old accounting rules. Now is the time to be forward thinking and lead your company into the new era. The professionals that can thoughtfully consider the ramifications of the new accounting rules and the impact it will have on the financing market will certainly be highly regarded by their peers and supervisors.
Have you been thinking about the proposed FASB changes and how they will impact your business?
Tags: corporate real estate, EBITDA, FASB, Free Cash Flow, lease accounting
Posted in Capital Markets | Comments Off
Office Market Recovery is Beyond 2014
Wednesday, September 8th, 2010
By Ann Hansen and Jim Vos
Across the nation, office markets are languishing in excess space. In the Twin Cities, for example, 22.8% of all space is available for lease either directly from the owners or through subleases and that shadow space could push the true vacancy rate closer to 30%. In much of the rest of the country, there is a similar story. It is our belief that number may be significantly underestimated, because what is not reflected in these statistics is how the shift of many companies to a flexible workplace environment will greatly impact the office market recovery.
Two primary factors will influence the reversal of the negative absorption trend that has dominated the market for the past two years: employment levels and dedicated office workspace. Historically, office market occupancy is a function of employment; more people working means more space occupied. We fill buildings when we create jobs.
Unfortunately for landlords, the traditional formula of 250 SF/person is no longer applicable; therefore, it will take even more jobs and more time to get back to what landlords and lenders might consider a healthy vacancy rate of 10%. The recession has not only taught many companies how to survive with leaner staffs but also pushed innovation in other areas as well. In this era of doing more with less, we’ve witnessed a truly functional new platform of flexible workplace environments that are dramatically changing the old rules about how space is used. Where previously many talked a good game about telecommuting, flex scheduling, and remote work options, some companies have, by necessity, put those concepts into practice and have found they make economic sense and produce happier employees. And perhaps most compelling, this shift to a flexible workplace has reduced space requirements by between 25-40%. A flexible workplace means different things to different people, but the core concept – leveraging technology to enable employees to work smarter and produce better results – remains the same. More than simply telecommuting, the move to a flexible work environment means a radical shift in not only when and where work gets done, but how.
For many businesses, a good number of employees spend significant amounts of time with their clients or walking the production floor. Do these employees really need a dedicated office space? If your managers spend the majority of their time in conversation with other employees managing workflow, should they reside in an open workstation in a central location, rather than a private office two floors away? Companies are starting to ask these tough questions and are modeling solutions that meet both the needs of the employee and the needs of the organization.
We sampled our own office usage in Minneapolis and found that our staff used their private office space or workstation less than 40% of the time. We are with clients, on vacation, meeting off-site, or working from home or a coffee shop. While it is convenient to have a dedicated private space, it is worth putting a price on your excess capacity and considering an alternative solution that could produce the same effect and results. Companies that have done so have found the benefits far outweigh the negatives.
The long-term impact of this shift will clearly be a net reduction in total space required, even as employment numbers improve. It may also result in a skewed demand from employers seeking the most flexible buildings with the best amenities and the latest technology. In most of the United States over the next 2 years, we anticipate a “flight to quality” which may actually increase rents in the preferred buildings. Market wide statistics will become less relevant as unique properties or particularly cooperative landlords become most desirable. Already evident in today’s office market, there are wide variations between buildings and landlords, due in many cases to their financing structures or cash positions. We describe the office market as being “lumpy” – with great fluctuations between seeming comparable buildings. One landlord’s concession does not guarantee another’s cooperation, and that can get frustrating for tenants.
Well before a lease comes due, smart companies will be taking a hard look at how they use their space and studying the options for a more flexible workplace. Managing the total SF leased will save far more than the managing the rent costs per SF. Job creation is still the key to economic recovery, but for all practical purposes, the substantial amount of excess office space will remain an issue for much longer than anticipated.
Have you adopted a more flexible work environment in an effort to shed unneeded space during the recession?
Tags: corporate real estate, excess space, flexible workplace, unemployment
Posted in Transaction Management | Comments Off
Do Sustainable Real Estate Practices Cost More? Part II
Friday, September 3rd, 2010
By Mike Tobin
In Part I, I began my discussion of whether or not sustainable real estate practices are more expensive. Many individuals say that the cost of coordination and documentation to LEED or other programs pushes the price of sustainable real estate practices to a 10% premium. This is an exaggeration that can be broken up into three facets—one of which I discussed in Part I (Program Fees) and the other two which I will discuss now (Professional Fees and Prerequisite Costs).
The Professional Fees are the fees associated with hiring a consultant to provide the additional service of coordinating the submittal to the sustainable program. These fees have a high degree of variance across the country based on the experience of the project team, the certification program, the complexity of the project, etc. Typically, the lower costs come from consultants who have significant experience with the certification process and are not padding their fees for unknown risk.
Example #1: $2M renovation of a 30,000 SF office. Additional fee for architect to coordinate the LEED certification submittal equals $0 as it is included in the architect’s competitive fee. That is 0% of the project cost.
Example #2: $20M build-to-suit of a 100,000 SF office building. Additional fee for architect to coordinate the LEED certification submittal equals $30,000. That is .15% of the project cost.
The Prerequisite Costs include services that are required in order to meet the requirements of the sustainable program. It is important to note that these costs may or may not already be included in the base project costs (another way of saying that these may not be viewed as additional costs as they are a valued component of the base design). Some common prerequisites are energy modeling and building commissioning. These costs vary depending on the scope and complexity of the project.
Example #1: $2M renovation of a 30,000 SF office. Additional fee for consultant to perform required energy analysis and building commissioning equals $10,000 and $30,000, respectively. That is 2% of the project cost.
Example #2: $20M build-to-suit of a 100,000 SF office building. Additional fee for consultant to perform required energy analysis and building commissioning equals $20,000 and $60,000, respectively. That is .4% of the project cost.
If you add all these costs up for the two examples you have the following approximation of fees for achieving a certified sustainable project:
Example #1: 2.16% of project costs
Example #2: 0.58% of project costs
Before anyone goes and starts using these examples to wave in the air about the new cost of pursuing a sustainable real estate practice, note the following errors in logic that make them suspect (there probably are more):
-These examples are for project pursuing a sustainable certification program. This is different from pursuing sustainable real estate practices that may not include a certification program.
-There are many different sustainable certification programs out there with varied certification fees.
-Professional fees vary significantly depending on sustainable program, experience, competitive bidding, market, building type, etc.
-Prerequisite costs vary as some sustainable programs do not have any requirements.
-Prerequisite costs may not be considered additional costs. The owner may consider an energy model or building commissioning good practice to include in their baseline.
The truth is that one cannot generalize the cost of incorporating sustainable real estate practices. The fact is that sustainable real estate practices DO NOT necessarily cost more. The key is to understand what the baseline is for the comparison.
And with this truth, fact and key, you are FREE to practice sustainable real estate. Are you planning on implementing a sustainable real estate strategy?
Tags: LEED, sustainable
Posted in Sustainability | Comments Off
Do Sustainable Real Estate Practices Cost More? Part I
Wednesday, September 1st, 2010
By Mike Tobin
There is a myth that sustainable real estate practices are more expensive, and it needs to be put to rest. The myth is causing more harm than good in the market and it is time to shed light on the truth.
So, are sustainable real estate practices more expensive? In order to answer this, one is forced to first determine what we are measuring up against. When you hear someone say, “A sustainable building costs 10% more,” please ask them what they are comparing that to. Some of the typical responses are:
a) A typical building of similar size and function.
This does not hold water as there is no common definition of a typical building. There are millions of buildings in the United States alone that have been constructed and operated over the course of centuries. The Davis Langdon company, among others, has performed multiple studies to properly define a typical set of buildings to make an accurate and statistically relevant comparison for LEED certified buildings. Their study (and others) have found that there is no statistical evidence to support that LEED certified projects cost more than similar buildings not certified.
b) A code compliant building of similar size and function.
This also does not hold water as every building constructed must be code compliant. Even if they meant to compare it to a building built to code minimum, it is safe to say that there are very few buildings built today to the exact code minimums. It would be ridiculous for someone to compare their building to something that they would never build in the first place.
c) The cost alone of coordination and documentation to LEED or other programs pushes the price to a 10% premium.
This is an extreme exaggeration. The fact is that the cost to certify a building to many of the sustainable building programs is minimal. There are three facets to this cost exaggeration though that needs explanation: Program Fees, Professional Fees, and Prerequisite Costs.
The Program Fees are the fees associated with the registering and submitting a project to the sustainable building program. These are typically much less than 1% of project costs.
Example #1: $2M renovation of a 30,000 SF office. Cost to register and submit the project to the LEED program equals $3,150. That is 0.16% of the project cost.
Example #2: $20M build-to-suit of a 100,000 SF office building. Cost to register and submit the project to the LEED program equals $5,400. That is 0.027% of the project cost.
Stay tuned for Part II on Friday where I will discuss Professional Fees and Prerequisite Costs.
Tags: LEED, sustainable
Posted in Sustainability | Comments Off
