A recent Ernst & Young survey of global CFOs found that 80 percent of companies wanted to cut costs in 2003, yet 37 percent received no management information on their real estate portfolio and 55 percent had no defined real estate strategy in place. That’s a curious position to take toward an item that is typically the second largest cost (after labor) on almost any company’s balance sheet. For those CFOs ready to get serious about their real estate, one of the unexpected boosts that may help in 2003 is lower occupancy cost. Just ask tenants in San Francisco, where $30 per square foot rents are now the norm, down from the mid $80 range last year. Even tenants locked into long term leases at far higher rents may have opportunities to reduce occupancy costs significantly through lease renegotiation with their landlord or other strategies. But the potential for cost savings goes far beyond renegotiating leases. Adopting innovative energy purchasing strategies, outsourcing real estate functions and better managing real estate service providers; more closely managing construction of facilities and a host of other strategies also deliver major savings.
Now More Than Ever, Corporations Need a Real Estate Strategy
We’ve talked about it for years but we think corporate America is finally hearing us: a business cannot be successful without an effective real estate strategy that is integrated into the overall business plan. In 2003, corporations will find this more important than ever. In the last few years, corporations have collected real estate like commemorative state quarters. Now, many are holding long-term leases they can’t get out of or own buildings they can’t sell. From hospitals to hotels and factories to Ford dealerships, the critical issue for every business is maximizing access to capital. There is inherent value in real estate and ways of extracting value while maintaining some control over the real estate itself – note Sotheby’s December 2002 sale and leaseback of its New York headquarters and similar plans reportedly being pursued by the owner of London’s Harrods department store.
Two Thirds of Corporate Construction Projects Will Fail in 2003
One of the major areas of risk for companies today is in the construction and delivery of new facilities such as factories and plants. Another major risk: embarking on a massive capital project program in the teeth of an economic downturn. Knowing when and how to shut down construction is as important as when to start. With roughly 70 percent of projects likely to either suffer huge cost overruns or fail to meet construction deadlines because of inadequate project management oversight in the year ahead, companies face the potential loss of billions of dollars if they don’t take control of their development pipeline now.
Acute Capital Care Needed in Healthcare Sector
Hospital construction is on the rise in the U.S. but healthcare systems aren’t earning sufficient capital from their core businesses to keep the lights on and many have maxed out their credit so the search for new sources of capital is critical, as are new ways of financing real estate. Key trends to watch: joint ventures between doctors and hospitals to build new facilities; a dramatic increase in transactions involving the sale of real estate; and a concerted effort by hospitals to reduce the cost of occupying and owning real estate.
Retail FIFO: Fast In, Fast Out
More retailers will fail this year because of their single-minded focus on opening new stores. The “build and grow, build and grow” philosophy of most retail businesses is flawed since it barely takes into account when, where and how stores should be closed. Thus, while new stores may well drive earnings, older stores that are allowed to operate beyond their time are too often a drag on earnings. A good strategic plan balances the need for growth with timely culling of outdated, underperforming store formats. The good news for retailers is technology can help in identifying locations to open and close, making the life cycle of stores more efficient and cost effective.
This information was supplied by Ernst & Young (www.ey.com) and excerpted from the companies’ Annual State of the Real Estate, Hospitality, and Construction Industries 2003 Report.