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The New Model for Commercial Real Estate
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Business New Haven
9/18/2000
By: BNH
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Michael A. Bell is director of research for the Stamford-based Gartner Group, one of the world's leading research advisory firms for the information-technology industry. On September 15 he was a panelist at a forum entitled Clicks, Bricks & Mortar: Impact of Information Technology & e-Business on Commercial Real Estate, at the Stamford Marriott.
Bell's topic was “Corporate Real Estate in the Connected Economy: Trends, Tools & Best Practices.” BNH spoke with Bell the week before the event about how technology is changing the way people work.
How are companies thinking about infrastructure these days and redeploying people and resources?
There are three key issues: What are the major drivers changing the workforce, and the workplace? What new services and Web-based capabilities are changing the workplace and the workplace industry? And, how the corporate real-estate function is changing to meet these new challenges. We're seeing some interesting new organizational formats beginning to emerge that combine traditional real-estate facility organizations with the IT organizations, offering a single face to the user organizations.
What are the principal drivers of these changes?
Chiefly globalization - and the Internet.
How is the New Economy changing the way people actually work?
Work is now becoming much more collaborative, much more team-based. Work is [increasingly] done on the fly, [requiring] more mobility. There's a whole trend regarding employability vs. long-term employment, so you're seeing a much more transient workforce.
How is the workplace changing to reflect workforce changes?
The workplaces themselves have to be much more collaborative and social - fewer private offices, more team rooms, 'huddle' rooms. Flexibility is a major theme - flexible interiors and furnishings. There's a whole slew of what are referred to as 'alternative workplace solutions' - although these are becoming more mainstream - such as 'hoteling' and 'hot-desking,' shared offices, telecommuting.
'Hot-desking'?
It's the notion of either a workstation or office that you can just grab when you need it, and it's all connected and you can forward your phone calls and plug in your computer. A shared office is one that's assigned to two or more employees. 'Hoteling' is where you reserve a particular office for the day or the week through an Internet application or concierge-type service. Telecommuting of course is working primarily at home and dropping into the office on an as-needed basis.
What services are being devised to support these new modes of working?
There are a whole slew of new hybrid services combining traditional services with Web-based tools. [These range from] private lease management to connectivity services to e-listing services to Web-enabled transaction management, telework services, infrastructure services, and a new application called workplace-hosting services. There's a group of companies now that literally provide you offices-on-demand both for space and telecommunications support.
How is the corporate real-estate function changing to meet these new challenges?
We see a new, two-dimensional service model emerging. One [dimension] is workplace services, broadly defined, where an employee can move more to a one-stop shop and have not only their office and facility needs supported, but also their telecommunications and datacom, laptop and data applications all [provided] through one single service entity. Companies like Nortel, for example, are beginning to move to a Web-based application where you can go the workplace-service page and order whatever you need - a change of your office, office supplies, travel - every possible employee need is available through the Nortel page. Behind that, of course, is an organization that brings not only the traditional administrative support but also the telecom, datacom, helpdesk and so forth.
The other half of that service model is what we call portfolio services, which manages the traditional day-to-day leasing, property management, acquisition, disposition, lease administration, financing, etc. Some companies are adding the management of IT assets to that mission statement, so they're managing all the real-estate assets and IT assets as a single responsibility.
What's driving that?
Companies are now noticing that there are real organizational synergies between these two corporate functions, and are beginning to organize around these similarities. IT project management and corporate real-estate project management are almost indistinguishable when you look at the key activities and responsibilities of project-management - they entail large dollar amounts, coordinated skills, etc., etc. So companies are beginning to achieve efficiencies and economies by organizing around these major office moves that incorporate both the IT and facilities aspects.
What is an example?
Two companies that I speak about in this presentation are Sun Microsystems, which has a workplace-resources organization that combines the various IT and facility groups into a unified workplace group. I also speak about Proctor & Gamble.
A classic Old Economy company.
Even they have a workplace-services group. Both companies are moving to a much more virtual model; they've declared everyone a 'virtual employee,' and therefore reconfigured their workplace much more around shared offices, telecommuting, hot-desking, etc.
Is the long-term trend that companies will provide employees network access and services - but not actual physical space?
There's a trend to shift more and more to a mobility model, and reinvest real-estate investment into group spaces. Companies like Cisco [Systems] and Sun have designated upwards of 20 to 25 percent of their space to be 'collaborative' space. That's a real trend to move further away from individually assigned space and more toward team space.
Is that just for the short term? As teleconferencing becomes more common and accepted, won't the need to be in the same room diminish?
No, we really see a workplace to be in continuing demand, because people are social. People need to have face time with their colleagues and customers. So we don't see a long-term disappearance of workplaces per se. We see them changing. We do see space per person going down.
So 'place' still matters?
Place is more important than ever before in this new model. We refer to physical places as the ultimate portal on the Web. Many of the dot.coms suffered dearly over the last two Christmas seasons because they failed to have the physical infrastructure - the stores, the offices, the distribution facilities - to service their retail clients. So you see many of these dot.coms now joining forces with real retailers - Toys 'R' Us and Amazon.com getting together, for example. 'Clicks and bricks' is really the winning combination. As a practical matter, if companies are global, they need local places to compete for local customers, suppliers and employees.
In non-retail commercial real estate, isn't location less important than ever?
Well, here's the paradox: We see young high-tech professionals really moving into locations because of lifestyle. One of the hottest real-estate markets in the U.S. is New York - the region they call 'Silicon Alley' - and it's been growing like crazy, in part because that's where the tech-savvy Gen X people want to be. You see a similar phenomenon in San Francisco, a district called 'Multimedia Gulch.' Phenomenal growth; real-estate people just can't keep up with demand. So, place is important - particularly in the IT industry where labor is so scarce and companies have to follow the labor, if you will. Cisco is developing a huge campus in Boston for 5,000 new employees. We have the hottest commercial real-estate market of the last ten years, driven in large part by this new economy.
As technology-driven change accelerates, do you foresee greater 'churn' of commercial space creating increasing price volatility?
The answer is yes, there is going to be more volatility in the real-estate market. Cycle times will be collapsed. The big promise of the Web is that it is going to make the leasing and renting process much more efficient, and that will stimulate turnover and more rapid churn. Will that result in pricing fluctuations? Hard to say; it depends on the market. Intuitively, I suspect it will.
On the other hand, it's going to create greater efficiency in pricing; pricing will become much more transparent. Tenants will be able more quickly to see price comparisons through these applications like LoopNet and CoStar and other market-data utilities.
Will these make brokers obsolete?
One of the myths of all this is that it will 'dis-intermediate' the real-estate broker. Exactly the opposite is going to happen. The intermediary is emerging as even more important in this new model. They're going to be different: They're not just going to be information-purveyors; they will be more consultative - and add value in the process. Our research suggests that the intermediary in commercial real estate and the workplace industry is going to emerge as a much more important player.
How will that person add value now that he or she has been supplanted by the Web as the information source?
They have to shift from being a purveyor of information to a provider of knowledge and insight. Let's remember: A commercial real-estate transaction is one of the largest transactions a company makes. And typically it happens in a very local market with issues that are not readily apparent. The real-estate consultant/advisor/broker who can use the Web to process information and convert it into strategic insight to help clients make smart decisions is going to be well compensated for that value proposition. Thus you see companies like Cushman & Wakefield that have shrunk their staff - and doubled their revenues. That says that their individual brokers have become much more consultative, much more value-added, more efficient - and much more productive.
High-end retail - let's say, Filene's in a mall - is traditionally a high-cost, low-margin business. In theory, online competitors don't need to erode that high a proportion of their revenue stream before a 'tipping point' is reached and the department store price and cost structures no longer make sense. Does that mean smaller stores and shrinking malls?
The exact opposite has been the case. Retailers have figured out that if they amplify their channel with a Web capability, they knock the daylights out of their purely online retails, because they can provide a much more powerful value proposition to retail customers. For example, Circuit City. Circuit City's value proposition to the customer is this: You can shop on the Web; you can compare our products to everyone else's products; you can order on the Web and either pick it up at the store or we'll send it to you directly; and you can return it to the store for service or replacement. Amazon.com can't do that, and Amazon has a very difficult time competing with Circuit City on consumer electronics for that very reason.
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