Business Cycles and Corporate Shocks:Building a Robust Portfolio

Virginia Gibson

LandSecuritiesTrillium FellowDepartment of Real Estate and Planning

The University of Reading Business School

Current Challenges

A recent survey of UK corporate real estate managers showed that nearly two thirds of

respondents were carrying surplus floor space and

in almost a quarter of cases this accounted for between 10% and 30% of

their overall floor space (FraserCRE 2003).

New Structures Emerge – Outsourcing

-BPR

Mid 80’s EmergingE-Business

Early 90s

New WorkingPractices/ AlternativeWorkplace Strategies

Corporate CycleGlobal

Repositioning

Reductions & Tightening of Operations

Repositioning

BroaderRetrenchment

Early 2000’s

Technology Downturn

Product/Service Lifecycle

New Product or Service Concept

IntroducedIdea Gains Support &

Acceptance

IDEA Joins Main

Stream

Competitors Create Knockoffs

Competition Grows

Original Replaced By

Next generation

15-25 yrs60’s

80’s 7-10 yrs

Product/Service Lifecycle In A Networked Global World

New Product or Service Concept

IntroducedIdea Gains Support &

Acceptance

IDEA Joins Main

Stream

Competitors Create

Knockoffs

Original Replaced By

Next generation

2000+ 3 months- 3 yrs

Responding to Business Change

Time: Months/ Quarters/ Years????

Sales?

Revenue?

Headcount? TheHockey Stick

Challenge

Responding to Business Change

Time: Months/ Quarters/ Years????

Sales?

Revenue?

Headcount? Determiningthe cut off

Point is Critical!

Adding Value or Mitigating Risk

What is the role of the Corporate Real Estate Manager in a volatile market situation?

Risk vs. Reward?

Risk management in CRE

• Awareness of risk exposure– Risks related to projects and the operation of

individual properties are reasonably well understood

– Balance between paying now or paying later less well understood

– More strategic CRE decisions have created financial risks that could have been mitigated

Strategic Business Risk

An unexpected event or set of conditions that significantly reduces the ability of managers to

implement their intended business strategy

Sources of Risk– Asset Impairment Risk– Operations Risk– Competitive Risk

(Simons, 1999)

Strategic Business Risk and CRE

• Asset impairment risk– Decline in value due to market macro / micro movements– Decline in value (brand) through failure to reinvest– Physical impairment -flood, fire, terrorist attacks

• Operations risk – Structural failure of an key operational facility– Legionnaires disease resulting in closure

• Competitive Risk– Competitors portfolio improves - location, design, layout– Changes planning regulations impede growth– Property costs increase eating into profits

Strategies and Risk

• Core-Periphery Portfolios• Alternative Workplace Strategies• Total Property Outsourcing

Core Portfolio(functional flexibility)

• Freehold / Long Lease• Control all aspects• Ability to change use

1st Periphery Portfolio(numerical flexibility) • Short Lease / License

• Some services expected• Ability to exit

2nd Periphery Portfolio(short-term flexibility)

• “Pay as you use”• Required at short notice• May be specialist space

Core / Periphery Portfolios

Source: Gibson and Lizieri (1999)

Alternative Workplace Strategies

Space • Cellular• Group Office• Open Plan• Combi office• Activity-based

Place • Central Office• Telework Offices

– Home office– Satellite office– Business Centre– Guest Office– Instant Office Use

• Personal office• Shared office• Non-territorial• Formal support• Informal Support

WHERE?WHAT?HOW?

Towards greater efficient and

effective use…..

Total Property Outsourcing

Corporate Real Estate Portfolio

FacilitiesManagement

AssetManagement

Ownership Funding

ONE CONTRACT

RetailOffice Warehousing

Core Space

Flexible Space

Conclusions

Can an organisation have a truly robust portfolio?

• Getting the balance of commitments right• Leveraging internal and external space to

deliver workspace solutions• Buying yourself options for the future