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In a world that increasingly demands “measurable performance” of real estate teams, what are the most appropriate metrics against which we should all be judged?
For members of the real estate team to contribute in a meaningful way to the bottom line, they must be able to gauge the true value of real estate decisions. The success of an Olympic track star is based on crossing the finish line first; but what if neither the coach nor the runner knew where that line was? How would the athlete set a pace, or know if the race is a sprint or a marathon?
Real estate is increasingly seen as another component of the financial landscape; the extreme volatility in the global financial markets now has direct and deep impact on all major real estate decisions. As credit markets tighten, lending to the real estate world becomes less available; as the credit-worthiness of even highly rated prospective tenants is brought into question, the uncertainty of otherwise low-risk real estate decisions rises. In that environment, it is all the more important to make the best real estate decisions.
Real estate expenditures can be divided into six general categories, beginning with the original acquisition, progressing through design or renovation, and finishing with measures to provide benefits during occupancy and operation. Each of these categories can be evaluated according to at least four common criteria. (See “Gauging the Long-Term Impact of Real Estate Decisions” below.) This evaluation process can help corporate real estate executives clearly define their goals and articulate them to the entire team — including architects, vendors, contractors, engineers and other consultants. Real estate represents a major investment, and it is critically important that all members of the team understand both the short- and long-term ramifications of choices made during planning, design and construction.
The place to start is the asset acquisition/development phase. In the standard due diligence process, the financial metrics are easily determined, but other factors, if relevant, also need to be identified by the real estate executive and shared with the rest of the team. If image is important, are there extraordinary costs associated with meeting image expectations? Do either internal or external politics play a vital role? Are there unacceptable risks from permitting, environmental, or financial circumstances that the consultants need to understand? Are there external factors in the global marketplace like volatile energy prices or rapidly changing financing hurdles that would sway decisions one way or another?
Thanks to technology, the design process can be interactive: The financial modeling effort can involve not only the architect but the owner, engineer, users and other design project team members as well — creating a truly collaborative environment for the real estate decision-making process. Working closely together to design in almost real time has many advantages, including a shorter turnaround time and the ability to create a virtual model in 3-D. Ideally, the team would have simultaneous illustrations of the standard measures of quality, schedule and cost established in a linked format so that the impact that one has on the other two is evident.
Probably the hardest components to measure are risks, of which there are, of course, infinite varieties. Nonetheless, the team should help to identify, prioritize, and evaluate the potential pitfalls. Not only is it critical that the team clearly grasps the owner’s level of risk tolerance for possible problems (cost overrun vs. schedule, for example) but each of the team members should understand what the other members’ concerns might be to help them anticipate and proactively try to avoid them. Legal counsel in particular needs to be a part of this effort, as the regulatory and contract issues are unique to every project and client.
For the development, renovation or repositioning of a building, it is essential to analyze comparable properties, trends, demographics and resources to develop realistic returns on investment. Architects, engineers, brokers and contractors should also understand the standard of expectation — for things like size of spaces, quality of materials and amenities — in the region and industry. These factors are vital to decisions on when to build, buy or lease, as well as to choices about how to upgrade existing properties.
If a property is a candidate for capital improvement, what are the priorities for spending that money? Is infrastructure more valuable than cosmetics? Or is a sub-standard image the greatest deficit? Only if the real estate executive and the rest of the team are in sync on their understanding of the real estate context can they create the right proposals.
One set of contemporary queries that must be answered is whether or not there are cultural considerations, especially in a diverse and global marketplace. Historically, real estate has been designed and developed to be responsive to local needs and traditions. As ownership is increasingly
physically disconnected from the asset itself, owners should pay attention to local expectations. The norm in one country or community may not be what is normal in another.
Some real estate decisions are straightforward, and can be made with fairly simple calculations. For example, accepting the payback on the upgrade of mechanical equipment that is within corporate guidelines for capital investment might not be complicated for a company that takes a long-term view of its finances. On the other hand, it may be an insurmountable challenge in an organization where cash flow is a primary driver. The lesson: For success, don’t ignore the organization’s financial pressure points.
There are some cost-saving upgrades that are less obvious. Refurbishing furniture is one example: The immediate economy of recycling older furniture to meet current functional and aesthetic expectations may not be completely evident. New furniture is efficiently manufactured and heavily discounted, and often the cost to remove and reinstall old furniture is substantial. While the cost savings may be minimal, environmental factors — reducing the consumption of resources, including fuel for transportation, and the amount of material dumped in a landfill, plus the opportunity to qualify for LEED points on some projects — can make the effort worthwhile. Most designers do not advocate compromising productivity or functionality to find a use for old furniture, but there are many companies that can locally modify older products or parts of older systems to fulfill all the identified needs.
Some cost/benefit analyses are more complex. The costs may not be large or the payback may not be clearly quantifiable, but nonetheless some decisions might simply be well-suited to the company’s mission or sense of corporate responsibility: the choice to build sustainable or LEED-certified space, for instance, or simply to try to reduce the carbon footprint. Another example is when certain strategies have public relations value, or serve the interests of a larger demographic in ways that reflect well on the owner as a corporate citizen. Most companies understand their role as neighbors and cultural leaders. Real estate executives must share those values with their team members so that they can advocate accordingly.
The real estate team should understand the ability and resources of the owner to manage ongoing operating costs. A technical review of the systems should incorporate recommendations that are reflected in the project budget and evaluated according to the same criteria as other line items. What is the risk of not prioritizing these costs? Is the potential downtime or business disruption worth hazarding? Do the engineers understand the owner’s level of willingness or reluctance to be faced with unanticipated costs and problems? What is the owner’s budgeting process for operating expenses relative to capital costs? Are there tax or cost of money implications to spending versus delaying outlay?
Perhaps the most difficult factor to quantify has the largest potential return on investment: the effect a workspace has on employee morale and motivation. Much discussion has centered on the difference between the three generations currently in the workforce: the Baby Boomers, Generation X and Generation Y. Much of the workspace currently in inventory was built for the Baby Boomers. Gen X employees have the reputation of being more demanding and more mobile. They are known to see their jobs as more of a series of individual projects. They are harder to retain, more susceptible to being affected by their environment and more aware of their professional alternatives. They are more demanding of an environmentally responsible, or green, office.
Another factor is pivotal to the evaluation of workspace design direction: What kind of atmosphere do a company’s peers provide their employees? Companies focused on attracting and retaining the best employees pay close attention to what their staff might be attracted to elsewhere. While the type of office space is not the primary driver behind an employee’s decision about where to work, the subtle (and not-so-subtle) messages about how management wants its employees to work, interact, collaborate, socialize, and generally be inspired to excel, is easily perceived through the workspace. The two extremes of the spectrum perhaps illustrate the point most clearly: one kind of employee is most productive in a busy, open, dynamic workspace; while others prefer a quiet, calm, enclosed atmosphere. The design and finances of any project should be suitable for the intended employee profile.
Recently, a bright young corporate employee explained how much he disliked his job. He felt discouraged and demoralized by the fact that he worked, in relative isolation in a cubicle with high walls, limited access to natural light, amongst a sea of similar anonymous workstations. This individual’s creative potential was being sapped by his environment. His productivity undoubtedly suffered. Many studies have shown that the cost of office real estate is less than 10 percent of the cost of salary and benefits of employees. While those studies have struggled to quantify the direct relationship between the cost of facilities upgrades and increased employee productivity, it nonetheless stands to reason that leveraging a less than 10:1 payback is still a good investment.
Ideally, the team that any real estate executive assembles brings all the right tools to help make him or her be as successful as possible. Only with a clear awareness of the metrics by which their efforts are measured can the team be successful. Those metrics may vary from company to company, or from project to project, but if they are clearly outlined from the beginning, and the project performance against those measures is monitored to on an ongoing basis, the right real estate decisions can be made.
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Marc Margulies (firstname.lastname@example.org), AIA, is a principal with Boston-based Margulies Perruzzi Architects, formerly Margulies & Associates, a 20-year-old design firm specializing in corporate, professional services, real estate, health care, and research and development fields.