People or Money: What’s Driving Corporate Real Estate Strategies?
June 14, 2023 3 Minute Read
The last two and half years have seen a marked shift in the corporate real estate decision landscape. CRE leaders are grappling with a growing range of complex and competing priorities which include user experience, space reduction, cost management, sustainability and changing organisational structures
While some of this has been forced by external events, there is a growing recognition that real estate is not just a cost to be managed, but an enabler of broader business transformation. The upshot is the need to make complex decisions at pace and often with imperfect planning assumptions. But, while occupiers’ agenda may be unusually complex at present, it has always reflected a range of influences.
So what, specifically, has changed?
Cost management takes centre stage
The balance between cost and talent objectives has shifted in recent months to a point where cost is deemed the more important of the two – the reverse having been the case for the past two years. The two lines had been converging for some time (See Figure 1) but it is only in recent months that they have actually crossed. Interestingly, only a quarter of companies have a real estate cost reduction target in place, but it seems likely that this will increase.
Figure 1: Cost has overtaken talent in Real Estate decision making
Source: CBRE Research
At one level it is not hard to see why. Natural gas prices in Q1 2023 were still more than three times higher than their early-2020 level despite recent falls; headline inflation in Europe was nudging 8.5% and European interest rates were three percentage points higher than they had been last July, adding to debt servicing costs.
Most of these are likely to be temporary factors, and some occupiers may even have the ability to pass these increases on to their end-customers. But they have certainly given companies pause for thought. In the same survey, the proportion of companies actually implementing or executing portfolio and workplace strategies dropped from 68% to 49% in H2 2022; while the proportion considering or formulating plans rose from 32% to 51%.
It should be noted that the talent position and the state of labour markets remains a concern, and may itself be contributing to the preoccupation with costs. Euro area unemployment was at a 20-year low of 6.5% in April 2023, contributing to labour cost growth of 5.7%, still below inflation but sharply higher than the 2.5% growth the previous year. And the Euro area job vacancy rate – effectively unfilled vacancies – was at its highest level (3.1%) for over a decade at the end of 2022. Clearly the talent-cost trade-off is not a zero-sum game.
Identifying a Path Forward
Portfolio strategies are complex and multi-dimensional, with many influences and, usually, difficult balances. So, it is important to identify these and minimise unintended outcomes. Setting hard cost reduction targets, for instance, may be a perfectly sensible aim but is almost never achievable without consequences somewhere else.
A portfolio review that we conducted for a major life sciences company highlights some of these points. The company wanted to support and accelerate the workplace transformation journey they had started in 2019. We put in place an integrated strategic advisory function responsible for managing 4.2m sq m of real estate and workplace data, developing portfolio and workplace strategies, workplace concept design and change management across 278 sites in 96 countries.
The integrated multi-disciplinary team, including Technology and People and Operations, reflected the fact the initiative had multiple aims across workplace strategy and design, not just cost containment. These included:
- Managing fluctuations in the level of space demand
- Employees coming to the office and having different needs in relation to space
- Magnetising the office by offering employees an experience that surpasses what they get at home
The mix of outcomes reflects this balanced approach. The recommendation to execute a supply-led global portfolio strategy will drive a potential footprint reduction of 45-50% with recurring real estate savings of $34-40 million per annum, accelerating organisational change by three years. But this wasn’t the only result: the project also introduced a new country level location strategy for key markets, reviewing the commute and future hiring impacts of this footprint rationalisation. It also delivered flexible working environments for over 20,000 employees. So while cost reduction was the core objective, the process was also alive to other consequences and potential benefits: employee satisfaction scores improved, as did processes for skills identification.
A sole focus on real estate cost reduction can often have unintended consequences in other areas such as employee experience which, in an environment where employees can choose where they work, can lead to lower footfall in the office. A broad, holistic approach to portfolio strategy offers the best chance of ensuring that these are conscious and positive consequences, rather than unintentional ones.
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