Archive for February, 2010
|The Importance of Real Estate in a Company’s Supply Chain
Wednesday, February 24th, 2010
By Rob Wheeler
The separate functional areas of supply chain and real estate are working together like never before. What were once seen as two different domains within an organization are now becoming connected. Companies have realized that proper supply chain planning cannot take place without real estate considerations, and proper real estate decisions cannot be made without a complete supply chain plan.
The supply chain is the backbone of an operationally centered business. Looking at the various nodes of the chain—planning, sourcing, manufacturing, sales, fulfillment, distribution, and service—it is clear how important the supply chain is to the overall success of the organization. Conversely, the right real estate decisions are key to the success of the supply chain, as real estate is the very platform on which the supply chain strategy resides.
In both supply chain and real estate planning it is important to know where a company is now and where it is headed in the future, along with the driving factors that will either help or hinder opportunities for success. As a general rule, all supply chain decisions are made to reduce costs while better servicing the customer base and positioning the company for future growth. Understanding how the real estate and supply chain strategy support the company is, in the language of my trucking friends, where the rubber meets the road.
For all of the interdependencies between the two functions, there are only select times that decision makers can consider real estate and the supply chain simultaneously: when the supply chain network is rationalized, and when a particular site is selected. When the two are not rationalized together, there can be disconnects between the supply chain plan and the market realities of implementing the plan. This puts into jeopardy the objectives an organization is trying to achieve.
Some questions that should be asked when doing supply chain rationalization and site selection are:
-Does the current state of the supply chain support my corporate strategy?
-Are there opportunities to change the network footprint?
-Number of facilities
-Roles of the facilities
-Size of the facilities
-Owned versus leased
-Are there opportunities to change the way in which the network is operated?
-Company-operated or outsource to a third party
-Who controls the real estate in this arrangement?
-Flexibility of the network
-What is the current and future state of the transportation lanes?
-Surface
-Air Cargo
-Intermodal
-Ocean
-What current and future accessibility is required?
-Interstate
-Intermodal
-Seaports
-Airports
-What is the planning horizon?
-Implementation schedule
-Short-term solution
-Long-term solution
-A combination: flexible leases
-What real estate supports the requirement?
-Can an existing building accommodate the model?
-Will a build-to-suit be required?
-Does a network change support the future direction of the organization?
-Does change add value to the organization?
-Opportunities to increase revenue
-Lower operating expenses
-Lower assets on the balance sheet
None of these decisions can be made in a vacuum. It is important to note that when considering total supply chain operating costs, in most cases real estate makes up only a small percentage. Labor, transportation, and inventory carrying costs far exceed the cost of real estate, and making a bad real estate decision can drive up these costs. But making the right real estate decision directly impacts the ability to drive efficiency within the supply chain.
Currently the industrial real estate market remains soft nationwide. Now may be the optimum time to take a white board approach to supply chain design to fully optimize the network footprint. CresaPartners recently advised a multinational consumer packaged goods company during their supply chain rationalization and implementation, saving them a significant amount of money annually. This was accomplished while avoiding unnecessary capital expenditures and also steering clear of long-term commitments that would reduce their flexibility for future changes.
If you have questions on how this was achieved, or any other questions about the real estate and supply chain relationship, feel free to contact me at rwheeler@cresapartners.com.
Posted in Supply Chain | Comments Off
A View from the Boiler Room
Wednesday, February 17th, 2010
By Jim Ricker
Probably the least glamorous of the various corporate real estate functions, Facilities Management has long been viewed as the stepsister of the sexier disciplines – such as Transaction Management, Project Management, and Site Selection. Or as one of my friends once asked, “Aren’t they the folks who empty the trash and stop the leaks?” True – but there’s more to the story.
Having been involved at some point in my career with the entire spectrum of corporate real estate services, I developed a strong appreciation for the critical role of a Facilities Management team when I managed the headquarters site for the former Digital Equipment Corporation, now part of HP. So how did that change my perspective?
The Site
Digital’s headquarters was a former woolen mill constructed on the shores of the Assabet River in Maynard, MA. Built between 1833 and 1910, the 1.1 million square feet site consisted of 23 buildings connected by bridges and tunnels. It had been painstakingly converted from manufacturing wool blankets for the Union army (and the Confederate army according to folklore) into a high-tech facility containing manufacturing lines, board shops, model shops, offices, labs, and the executive suite and boardroom. It even had its own hydro plant creating 1.5% of the site’s electricity as the water flowed from the mill pond back to the river.
The Customers
Housing about 2,500 employees, the site was home to several critical business lines, 35 vice presidents, and the executive committee. All of these constituencies had strong opinions of how the site should be run in order for them to be successful. Along with the inevitable politics of a major corporation, we were forced to juggle the often conflicting demands of the constituents while focusing on our asset management goals of improving services, reducing costs, and developing a long-range capital plan.
The Services
In addition to contending with the physical and political complexities noted above, our team delivered the following services: HVAC, electrical, plumbing, carpentry, engineering, design, project management, energy conservation, environmental health and safety (including groundwater remediation), security, cafeteria, mail, copiers, supplies, grounds, custodial, recycling, space planning, audio-visual, and customer tours. It’s easier, however, to appreciate the breadth and depth of the services when looking at just one in greater detail; e.g. electrical. One of our key measurements was the prevention of business interruption due to infrastructure failures – especially electricity. To insure uninterruptible power without the benefit of UPS and generators, we conducted an annual 3-day shutdown for high voltage testing. And as one of the major power users on the metropolitan Boston grid, we were networked to the utility in the event they needed us to reduce consumption during brownouts – an interesting proposition when trying to be good citizens without affecting the manufacturing and engineering activities – but our engineers developed a satisfactory solution for all.
The Conclusion
Facilities Management may still be considered the stepsister, but it is nevertheless a valuable member of the corporate real estate family. A Corporate Real Estate group, often with responsibility for 25 to 35% of its company’s assets, cannot succeed without valuing the contributions of the Facilities Management teams – the deliverers of essential services and the maintainers of critical infrastructure.
Posted in Facilities Management | Comments Off
Software Envy?
Wednesday, February 10th, 2010
By Jeff Tosello
Maybe it’s just software confusion that has people looking, wondering, and scratching their heads asking about which lease administration software is the best and how they can get their systems to “talk to each other” or to generate this report or that one. Entering the words “lease administration software” in Google produces more than 11 million results! But the truth is, aside from the interface, most of the prevailing systems out there today do many of the same things. When clients begin thinking that software can solve their problems it can be an opportunity to educate, but it’s often an uphill battle against a tide of marketing dollars spent to make it look about as easy as a diet pill…just buy this and you’ve found a magic cure. Furthermore, what they might think they are looking for in software can sometimes be found in their existing systems if they can change business process enough to generate the data the software needs to run in the first place. At a minimum, reviewing these processes is an important first step even if software procurement, data migration, and new reporting are in the company’s future.
Real estate software applications break down into a few neat groups. First, there are applications that can be purchased and run on a company’s own network environment. Typically a license fee is paid once, the software ships, and then there is an annual support contract that is a percentage of the upfront cost. Opposite that model are the ASPs (application system providers) that provide web access to the software on a monthly license fee basis, but the application itself and the data are stored in their own server environment.
The next division is between applications that have built-in accounting functionality and those that do not. The accounting-based systems have an underlying general ledger so that when items like rent are “posted” or bills are “paid”, this debits and credits ledgers that run behind a number of the applications and can produce financial statements for properties or companies. Typically these systems are in place when a company has a lot of owned property and is, or at least functions like, a landlord or asset manager.
Finally, software applications can be grouped by features. Some applications are designed to take care of a particular function like lease administration, project management, or property accounting. Others integrate a number of functions on a relational basis such as property and lease management (data, dollars, and dates), transaction and project management (starts, stops, and status), and facilities management (parts, places, and people). Often though, and this adds to the confusion, these applications morph from one area in which they are or were strong into the other areas where they have added features to make them appear as though they can also handle other functions as well…but do they?
Everyone has probably seen many different software demonstrations for different reasons. Despite a few horror stories where someone’s demo crashed or failed, these demonstrations are usually very enticing. Dynamically updating charts, colors, graphs, alarms, maps, links to web sites….they practically run themselves (at least for the short time that the demonstration runs). At the same time, everyone has also probably bought something they saw on television or read about, taken it home, gotten it out of the box, and had that moment when they realize that “some parts are sold separately” and this thing isn’t going to work like it did on the commercial. Falling in love with features but not considering functionality can be a problem because now you own the software, and the only answer might be spending more money on software development consulting time. Ouch.
The decision to replace the old spreadsheet and try to get information access the new way via portals or dashboards can be appealing and often leads business customers to their real estate broker for an opinion. This can be a great opportunity for advisors to demonstrate the ability to listen. What is it that customer is really trying to accomplish? How can your real estate advisor help? There is a lot to consider and it certainly can start with what the customer wants things to look like when it’s all done but should it start with CresaTrac? Virtual Premise? Archibus? LeaseHarbor? Acruent? The answer is simple: maybe.
Tags: lease administration software, real estate software applications
Posted in Lease Administration | Comments Off
Understanding the Capital Stack is Critical in Today’s Market
Wednesday, February 3rd, 2010
By Jim Leslie
The underlying debt and equity which capitalize real estate assets has changed dramatically in the past 10 years. With the acceptance and explosion of Commercial Mortgage Backed Securities (CMBS), developers and investors have been able to piece together very aggressive debt structures, reducing the equity requirements of the owner. This structure makes sense and works wonders for financial modeling as long as demand for space remains strong. The typical projections for these types of structures routinely assumed ever increasing rents with no slowdown in leasing velocity. This gave Wall Street underwriters justification for doing more of the CMBS product and justifying debt ratings to lower the cost of the debt. We are all aware of the financial meltdown caused by the realization that these assumptions were faulty, and as a result the “low risk” nature of the CMBS product was recognized to be fool’s gold.
This unsettled debt market creates opportunities as well as obstacles for tenants. Careful analysis and understanding of the “capital stack” is critical for consulting with the tenant as to the correct course of action in renewing their lease or committing to a new building. Owners with CMBS debt have many issues to contend with and few answers. Most have maturities in the near future with no prospects for refinancing at the current debt levels. Others have depleted all of their cash reserves and are not in a position to invest any money into the building for tenant improvements and other transaction costs. In either instance these are issues advisors need to be fully informed about before introducing the tenant to the opportunity.
It is important to spend more time on the initial underwriting of prospective buildings to know how the developer/owner is capitalized in order to structure a transaction that is acceptable to both the landlord and the tenant. That being said there are still traditional capital stacks in many of the buildings throughout the country, but one must inquire early in the process. Our Capital Markets group can help you understand the objectives and limitations a landlord may have based on the financing in place on the building. This knowledge should be very helpful as tenants strategize with their advisors as to the approach to take with each prospective building. All of this chaos can bring opportunities we have never experienced before.
Tags: capital stack, CMBS, commercial mortgage backed securities, debt structures, real estate assets
Posted in Capital Markets | Comments Off
