The most efficient organizations often do the least to operate their business real estate. Instead, they team with firms offering the full range of facilities functions and services. Such partnerships succeed if both parties agree on two conditions. First, the organization must be willing to share some control over its properties. Successful precedents in other central functions, such as IT, may pave the way for this arrangement. Second, the real estate firm must agree not to focus solely on transactions but to work toward long-term goals such as strategic advantage, occupancy-cost reduction, and employee satisfaction.
Service partnerships.
An industry of service providers has emerged in recent years, led by global, billion-dollar firms such as CB Richard Ellis, Colliers, and Jones Lang LaSalle. These providers manage the entire value chain, from short-term leases to multiyear development projects, making it possible for companies to outsource most or all of their property management. They have made great headway in professionalizing real estate services. Their brokers, traditionally paid on commission, have morphed into salaried ?relationship executives? who are awarded bonuses not only for closings but also for client satisfaction.
Organizations benefit from the firms? expertise, focus, and efficiencies, and from their willingness to provide certain essential services at low or no cost. The service firms, which used to be whipsawed by episodic revenues and boom-bust cycles, benefit from the more predictable fees they receive through multiyear contracts.
Lease partnerships.
In some instances, a leasing relationship between landlord and tenant can evolve into a partnership. Landlords invest substantial time and money in finding tenants, and tenants effectively underwrite their landlords? financing. Given that interdependence, smart landlords aspire to teamwork with their tenants, and smart tenants seek landlords with a long-term interest in their success. In a ? performance lease ,? for example, a retailer?s rent is based partly on its revenues. This arrangement presses the landlord to create an environment for customers and employees that promotes the retailer?s success.
Development partnerships.
A business that wants to create value from its real estate generally partners with a developer, who repositions the land and buildings through ?entitlements? (such as zoning and building permits), a localized regulatory process that can take years and cost millions for large projects. When those entitlements have been obtained, the value of the land is some multiple of its cost, but this additional value is usually locked up while the site is under development. As infrastructure is added, both financial and market risks may decrease, as long as the project is aligned with demand. Through this process, the developer?s cash flow is the key to its survival. The business partner must be patient and vigilant in order to preserve the project?s economics during this costly and time-consuming process. Once assets are leased, their value depends on the user?s commitments and the real estate capital and leasing markets.
Canary Wharf, the massive urban center in east London, exemplifies how businesses can benefit from partners? expertise. Creating this project depended on a shrewd, visionary developer, substantial public infrastructure, the engagement of key service providers, and early commitments by iconic companies. Although major tenants were attracted by the opportunity to consolidate geographically dispersed business units, the developer went further, proposing buildings that would increase the efficiencies of collocated units, provide layout flexibility and room for growth, and offer generous terms in return for long-term commitments. The developer?s skills and thoroughness were critical in persuading companies to relocate; indeed, the Canary Wharf team often understood the companies? needs as well as the companies themselves did.
Caveat: Beware the ?insider? deal.
Companies that develop their own real estate rarely achieve results comparable to those of independent entrepreneurs and professionals. In part, that?s because real estate development is not a core competence for most companies. In addition, internal real estate groups are subject to organizational pressures that outsiders can escape. One way to ensure sound real estate decisions is to prohibit the company?s finance arm?even one that is a successful business function?from underwriting its own corporate facilities. This keeps business units from requesting uneconomical price breaks from the corporate real estate function, and corporate real estate from pressuring business units to take space they don?t need.