Redefining the Corporate Real Estate Function as a Revenue Generator
Redefining the Corporate Real Estate Function as a Revenue Generator
Things fall apart. The value and classification of real estate do not hold, so a class-A building will become a class-B building over time. Similarly, the corporate real estate (CRE) function can inform business strategy and deliver greater value by adapting to new market conditions and technology.
Traditionally, the CRE function has been viewed as a cost center, with a primary focus on the procurement and management of workplace facilities at minimal cost, with a secondary focus on improving the productivity of the workforce with fewer resources. Planning is reactive to changes in space requirements. A portfolio-wide view may uncover significant operational efficiencies and cost savings, but the benefits are limited to the organization’s bottom line.
The nature of work today is fundamentally different than it was when the CRE function was first formalized in the early 1990s. Propelled by advances in technology, workers are more agile in terms of how they work and more flexible in where they can work. Digital innovations have shrunk physical equipment or replaced it altogether. Remote access and the ubiquity of mobile devices has more people working from home or on the road. Emerging technologies like artificial intelligence, machine learning and robotic process automation are altering how work is performed—and the type and number of employees required to do it.
Workforce transformation has, inevitably, led to workplace transformation—changes in the way we use physical office space. Many organizations now have a backlog of unused or underutilized space, resulting not only in excess occupancy costs but untapped value. Imagine, for example, converting that unused office into an innovation room designed for creative collaboration—or renting it out to your favorite freelancer.
At the same time, the technology in the workplace has become “smarter” and more predictive too. Sensors can optimize energy use or monitor various aspects of a facility and alert an engineer in advance about necessary maintenance, which avoids the more complex and urgent repair work that results from waiting for a breakdown. Measures of productivity and how those are evaluated have advanced as well.
External influences, such as recent changes to lease accounting standards (Accounting Standards Codification Topic 842, aka ASC 842) and various market forces, also have a significant impact.
The use of space, the relation to the workplace and the conception of what work means will only become more integrated with technology going forward. As the way we work, where we work and even why we work evolves, the CRE function must evolve with it.
“Real Estate" Redefined as Workplace Strategy
The term “real estate” itself has become more complex. The notion of real estate as brick-and-mortar facilities and the cost of those facilities for an organization now forms only one aspect of the CRE function. This involves much broader considerations than simply securing, procuring and disposing of real estate, and managing the day-to-day experience of the workplace.
The bigger return on investment in real estate now comes from improving employee retention and engagement, because this has such a significant impact on productivity. Work is
now conceived of as something you do, rather than just a place you go to. Therefore, the real estate function needs to facilitate that work and improve the workplace experience for employees as a mutually beneficial strategy. As a result, it places a much greater focus on people, in terms of workplace design, strategy and operations.
This evolution has also changed the reporting structure. Rather than mainly liaising with the finance department, CRE increasingly interfaces with human resources to understand the real estate needs of the evolving organization. The priorities for site selection have changed too, as fostering work-life balance and promoting employee wellness presents a vital concern. So, CRE can provide more value by focusing on how to attract key talent, retain skilled employees and increase workforce engagement.
These considerations have driven worldwide changes in CRE strategy. According to the 2019 EMEA Occupier Survey from global real estate advisor CBRE, corporate real estate leaders ranked employee engagement (68%) and talent attraction and development (65%) ahead of reducing costs as the most important factors for strategy. The head of corporate real estate will still handle transactions and other financial work in line with previous practice, because reducing costs will always be a priority for businesses. But overall, the CRE function has expanded in scope.
For example, providing flexible options for employees to choose from different types of workspaces, depending on the type of work that needs to be accomplished, can facilitate greater engagement and productivity. Access to a wider range of amenities—such as quiet zones and focus rooms, outdoor workspaces, phone rooms or nooks, nap pods, exercise facilities or discounted gym memberships, and a cafeteria or work cafe (especially one with free snacks and tea and coffee available)—provides a boost as well.
This goes far beyond the traditional CRE model of determining how many offices and conference rooms can fit inside a certain square footage. Saving a few dollars per square foot doesn’t provide an advantage if you can’t engage the workers you have or hire the workers you need.
You also need to have technology that can support these changes. This requires the ability to collate disparate information and provide insights in a meaningful way. For example, an organization could have varying data from the building automation system and integrated workplace management system, as well as other information from HR and finance. Structuring this data to deliver actionable insights helps determine what type of space is needed, where it needs to be and how much is needed.
Some of the evolving decisions around site selection are industry specific. For example, many manufacturers previously wanted to be in low-cost locations, such as small towns. Now, with the turn to Industry 4.0 that involves more robotics and automation, the workforce needs have changed dramatically. Many manufacturers are examining whether to locate closer to larger cities to find the right engineering skills. Some also want their plants and their people to be closer to their customers. But in many cases, the traditional focus on cost still applies as well.
Beyond this, a new question is developing: Do certain types of business even need space at all? With the rise of remote work and proliferating options for co-working spaces, centralized workspace needs are reduced. So, determining the workplace requirements for a business has become a much more complicated process.
Increasingly, companies are also seeking input from the CRE department when reviewing and making decisions about digital transformation. CRE plays a role in the integration strategy for a merger or acquisition as well, in terms of how to unify different cultures that have a separate set of real estate assets and varying levels of digital maturity. Determining what the experience of the office needs to be for the organization to succeed has many more complexities than previously.
The focus of CRE has shifted to a more holistic approach centered on workplace strategy. Considering this, the term “CRE function” itself should be redefined or even renamed entirely to highlight its expanded capabilities for increasing profits and driving growth. Changing the terminology would help clarify that CRE has moved beyond cost minimization to include revenue enhancement, and it contributes more significantly to overall business strategy. By widely recognizing this change, businesses can provide more organizational support to CRE executives in their strategic functions.
Emerging CRE Challenges
Engaged employees are productive employees. Many CFOs want to know how employees perceive their workplace, in terms of whether it provides the right capabilities, features and location to make them feel maximized and engaged.
According to BDO’s 2020 CFO Outlook Survey, 14% of organizations say their biggest business priority for the year ahead is recruiting and retaining top talent, second only to investing in technology or infrastructure (30%). Moreover, an equal percentage of CFOs report that their primary workforce challenge for 2020 will be attracting new talent, retaining key talent, or training and development (17% for each). Improving engagement addresses each of these top- of-mind concerns.
There are generational considerations to examine as well. As Generation Z joins the workforce alongside Millennials, Generation X, and Baby Boomers, many workplaces could have four different generations under the same roof for the first time in history (or even five generations if a workplace includes Traditionalists/The Silent Generation). This presents a challenge in addressing competing sets of needs and expectations for each. As the CRE function increasingly seeks to improve worker engagement, there are divergent priorities to satisfy as well.
There are standard metrics for efficiency and effectiveness, but not for measuring employee engagement relative to the workspace, which has increasingly become a key criterion for site selection and portfolio optimization. The primary method of assessing engagement is through survey questions. That’s a qualitative assessment rather than quantitative, and it may not yield an entirely accurate picture due to various factors involved in survey design and administration.
However, available data shows that American companies have substantial room to improve engagement. According to a 2018 Gallup survey, just 34% of U.S. workers said they felt engaged at work. That’s less than half the 70% engagement reported by the world’s top organizations. And while overall employee engagement has risen modestly since 2010, 13% still said they felt actively disengaged. Even modest improvements in this area would have a significant impact for businesses.
The means for measuring the overall value of real estate assets need to adapt to these engagement issues as well. Traditional real estate metrics, such as a percentage of revenue or occupancy cost per foot, remain useful, but they need to be supplemented with additional metrics that provide details about the new considerations. As one example, the retail space has developed methods to track and monitor shopper engagement using facial recognition and AI. But similar developments have not yet been made for the workplace, which presents its own unique challenges that are distinct from retail.
There are also information challenges, such as access to new workplace metrics and the underlying data that informs those metrics. It’s important to have a complete understanding of all necessary inputs that contribute to the metrics, such as employee satisfaction, turnover rate, recruiting conversion, time to fill and external trend monitoring. Much of that data is currently housed in different places throughout the business, and it either isn’t fed back to the CRE function or isn’t shared in a usable format.
The Expanded Scope of the CRE Function
Impact of Lease Accounting Changes (ASC842)
The new lease accounting changes (ASC 842) have impacted how organizations make decisions and elevated lease flexibility as a priority. Because the financial obligation of a lease is now included on balance sheets, more businesses are seeking shorter-term leases, since it’s very difficult to predict your workforce and real estate needs beyond two years. Rather than a 10-year lease, or a seven-year lease with three one-year renewals, it’s preferable to have more flexible options, and landlords are feeling that pressure.
ASC 842 has also forced many companies to implement a more detailed reporting system, which opens more opportunities to use that reporting strategically. For example, a company could use technology to automate their operating expense reconciliations for all retail locations. When this can be done with machine learning across thousands of locations, it provides more granular detail at the level of each individual location, no matter how small. It also significantly reduces the overall costs and time required for an operating expense review. Certain tools can now do that task better, cheaper and faster, while also providing companies with more accurate information.
Because of the requirements and different data necessitated by ASC 842, there is potential to harness that new information for other areas, but that hasn’t happened widely. Private companies do not need to comply with ASC 842 yet, and it’s been a forced change for public companies to invest in and follow new processes for transacting and reporting. To this point, the focus has been more on rushing to get compliant with the new standards, so there has not been significant innovation around that change.
The CRE Function Reimagined
From a technology perspective, corporate real estate maturity dovetails with updated skill sets and more robust tools. The facilities function has improved greatly, both through new technology and increased efficiency of equipment (e.g., a steam boiler that requires less maintenance than a gas boiler).
From a real estate management perspective, those tools have evolved as well. Instead of siloed management tools, you can have integrated management tools and centralized dashboards to share data within the organization. There are already certain predictive AI capabilities to support that, such as using predictive modeling of revenue and workforce growth that can inform the strategy for facilities upgrades and portfolio expansion. However, the advancement of those management tools has not reached the same level as other back office functions like HR, finance and IT, so investment in such tools has not been as significant.
With a holistic approach to workplace strategy, CRE has evolved from a silo focused on costs reduction to serve as a revenue generator for the entire business. While we are still early in the CRE function’s transformation, the next few years will bring significant changes in response to shifting workforce needs and technological advancement.
CRE Function Maturity Continuum
Overall, there is no cookie-cutter solution for CRE, because every company is unique with a different perspective and set of priorities. You need an understanding of where you are to know where you’re going and how you’re going to get there. The changes around workplace environment and agile workforces don’t apply to all organizations, and they have varying impacts for each.
Moreover, to make a change or leverage a new technology successfully, you must be ready for that change, and it needs to have a positive benefit for the organization as a whole. As the technologies of automation, AI and machine learning continue to develop, their applications for existing processes and the related advantages they can deliver will evolve as well.
To remain competitive and prepare for the future, you first need to acknowledge what you’re currently doing well, identify the gaps and determine what you’re trying to achieve. Establishing a baseline will create starting points to measure against. Then you can set objectives with reasonable targets and realistic timelines for proper change management. That paves the way for real estate facilities that can increase worker engagement and productivity at a manageable cost.
Redefining CRE as workplace strategy highlights the integral role it plays in the success of a business. By informing current and future strategies for site selection, portfolio optimization and hiring, the heads of corporate real estate can help the organization increase employee engagement and generate more revenue to drive profitable growth. The change is coming, and early adoption will position a business at the forefront.
Before making an investment, there are many complexities in assessing opportunities and determining the scale of a planned transformation. BDO can help qualify these as a business case and detail what it means for long-term business success. Learn more about BDO's Advisory Portfolio Strategy.