Real Estate in COVID-19 era - 5 Ways How Corporate Real Estate Transformation Can Improve Your EBITDA.

5 Things every CFO should understand about real estate in 2021

Article published in 5/2020 "Obiekty" https://lnkd.in/eCv9bBm

Do you rent an office, commercial premises? Do you have a branch network? Offices scattered all over the country or one headquarters of the company? What is happening to them today? They probably stand empty for the most part, and customers are a rare visitor to your retail outlets. To make matters worse, the duration of the lease contracts is a few more years without the option of early termination. 

The commercial property rental market, like many other sectors of the economy, has slowed down significantly as a result of the COVID-19 pandemic. Organisations, after initially mastering the crisis situation in March / April this year, implementing business continuity plans remotely and focusing on re-learning the management of people working in highly dispersed teams, who often shared their desk with a partner and children remaining in remote education school, began looking for ways to optimise their costs, getting ready for unknown turns of achieving their goals for the next months of the pandemic. 

Adapt or die

The situation has created enormous pressure on changes in organisations, the search and acceleration of technological solutions, the digitisation of processes and technologies, the search for new development opportunities, analysing potential revenues from new sources and looking for cost savings. The way of looking at business had to change 180 degrees.

According to the latest forecasts of the World Bank, the Polish economy, after more than three decades, will have to face a recession of -3.9% for the first time. What can and should an organisation do in the strategic area of facility management, which is the largest item in company expenses after human costs? 

How to look at the costs of real estate, both rent and daily maintenance of office space, parking lots or the costs of utilities?

From the cost position, can they become part of the main strategy of the organisation in terms of the company's development, attractiveness of its work environment, creating unique, personalised experiences for its employees, and finally a tool increasing the attractiveness of the organisation as an employer? 

They can and even should.

Changes, changes, changes

Let's hope that the virus will soon go down in the history of epidemiology, but our lives will definitely change a lot. The situation that we observe today on the commercial real estate market means changes for all companies that rent office, retail or warehouse space today. Not only does the way we use real estate change, how much we pay for it and under what conditions, what are the provisions of the lease agreements and how long we decide to lease, but also what will happen with office or commercial space in the future, how modern will look like office and what function it will perform. 

The area of support services in an organisation is often seen only as a considerable expense and is the first on the cut list. Often there is a lack of transparency of costs related to them, they are scattered in various departments of the organisation, just like the management of individual services, constituting a necessary but not a strategic administrative addition to the company's core activity. 

In small and medium-sized companies or branches of international companies, these functions are located in the area of HR, finance or purchasing, and often there are no separate teams to manage them. Meanwhile, the largest element of these services, i.e. lease contracts or management of the organisation's own properties, is the second or third cost item in the budget of each organisation and constitute between 5 and 40% of its total costs, most of which concern the costs of current maintenance (80%) and only 20%. investment.

So what is worth doing today when planning the budget for next year, facing economic uncertainty and wondering what to do with the current lease agreement for an office that has been practically empty for months? 

Here are the 5 most important strategies for the coming year in my opinion!

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1. DATA

It is said that "cash is king and data its twin" - without detailed information, not only will we not have current knowledge about our activities, but most of all awareness of how toin the short and long term manage costs related to a given service. 

In the case of real estate, it is particularly important taking into account long-term fixed-term obligations. If we do not know exactly how much a given contract costs us, we also do not know whether this cost is on the market, we do not compare to similar locations. Maybe the contract specifies the possibility of changing the size of the space or maybe it includes an automatic extension for another period if we do not resign at the right time. 

It is best to use technological solutions and implement appropriate software that will help us organise this information, categorise, prepare selected reports on an ongoing basis and receive information about upcoming important dates.

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2. STRATEGY

Keyword - what kind of real estate should we choose? Where should it be located? How big is the building and for what period should we rent? Finally - for how much and under what conditions, taking into account the increase in these costs over time, while analysing our core business activity and its development over the same period. 

After all - how many employees will the organisation have in 3-5 years? How will people work in it? What space will they need to do their job most efficiently? How many of them and how often will they work remotely? What spaces should an office have and how is it to ensure security?

Only after answering these questions, you can make decisions about what to do with the existing contracts - changes will be possible only in a few months or maybe in a year or longer. Will then our decisions still meet the needs of the organisation? You need to take this into account and keep track of the impact of your company's strategy on your real estate needs in order to be as flexible as possible and make changes.

 And these changes won't happen overnight either. Therefore, let's look for solutions that give the most possibilities of adaptation, both in terms of size, location or arrangement of space, as well as in relation to the provisions of our contracts.

Today, landlords have to meet the greater expectations of tenants, what is more, they must look for the possibility of flexible adaptation of buildings and spaces, use of possible technological solutions that will make their offer more attractive and allow them to retain customers. This is a good time to negotiate! 

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3. RENT OR WAIT? - NEGOTIATE

Today, negotiations are definitely the best solution provided that we have met the first two conditions described above - we know what we want and on what terms. Negotiations of most elements of the lease agreement, starting with the size of the space, the availability of flexible spaces in the location, rental and maintenance costs, options for changes with regard to the length of the lease period and the size of the space leased, as well as the right to sublet and their assignment or possible rent reductions (and the forms in which can be considered either directly as periods of reduced rent or in the form of covering redevelopment costs for example) - they can bring significant benefits to the tenant.

Today, there is more than 100,000 m2 in regional markets, and in Warsaw alone, it is twice as much office space for sublease. In Q1-Q3 this year, over 200,000 m2 of new office space was delivered to the Warsaw market alone.

Within a few months, the situation of demand and supply has changed and today everyone can and should negotiate their contract, 

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4. TECHNOLOGY AND DIGITAL TRANSFORMATION

Today, in the face of many months of remote work, the need to ensure the necessary security measures and the fight for tenants will become even more fierce. Who will have the advantage in this race? Who will make every effort to introduce innovations and changes as soon as possible that will improve the functioning of the entire building. In every area - from automation and control of the functioning of the building (which affects the comfort or discomfort of each user) to the awareness of the activities of your property management or maintenance department and effective cost management by them. 

Today and tomorrow we will choose buildings that are SMART and WELL. Those in which we will have an impact on whether we cool or heat the entire floor or only selected zones. Those that will adapt to the changing expectations of the tenant and the variable use of space. Buildings will be filled with sensors measuring everything, as long as someone wisely manages this data and, above all, analyses it at all. 

The data itself is just the beginning. The era of platforms that will help select and automate simple, repetitive and mass processes is beginning, helping organisations to move to the next level of digital transformation by remotely managing electronically signed documents stored in the cloud. Building applications creating mini local communities or, on the contrary, helping a dispersed organisation to connect employees from different countries, giving them a sense of community, the possibility of sharing, networking or sharing their own work experience at various levels and in different, sometimes very remote locations, supporting each other in the process of ad hoc coaching and mentoring or through a structured process.

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5. EMPLOY A PROFESSIONAL

You're all fine, but who has time for it? Today, trying to find time for a coffee between the two zooms, we try to address the most urgent needs and projects related mostly to crisis management and the specificity of the year 2020, in which all intricately planned budgets and projects already in Q2 had to be quickly updated.

 And here it takes a lot of work from scratch, so that we can only think about strategic management, let alone its implementation and the time needed for it, even assuming that we can agree on strategic requirements and we will not have to focus only on urgent savings by reducing costs.

Maybe this is the moment to ask a specialist for help, if only because he will devote all his time to a given project without being distracted by the current activity?

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About the author:

Real estate market expert with specialization in optimization and transformation of corporate real estate and strategic facilities management. 

From 2018, Member of the Management Board of the RICS World Europe Board, previously a MEMBER of the Management Board of RICS Polska and IFMA Polska. Member of the Polish Facility Management Council. Licensed real estate manager and broker.

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Over 20 years of experience in the field of commercial real estate (offices, shopping centers, warehouses). He focuses on finding and implementing modern technological solutions for real estate in order to increase the EBITDA of the organization. An expert in the field of commercial asset management and rental for investment funds, corporate real estate and strategic facilities management in large international organizations. She started her real estate career in 1999 at Cushman & Wakefield. For over 7 years she worked for Citigroup as director of real estate management. In 2008-2014, she was the director of real estate portfolio management at Fundusz Nieruchomo?ci ARKA BZ WBK FIZ and FIZ 2, where she also served as a board member of over 15 special purpose vehicles. Then at Octava Property Trust, participating in the construction and management of a commercial real estate portfolio fund. For the last 4 years, she managed the strategic FM area at Liberty Global as CEE Real Estate Facilities Fleet & Energy Head with 1000 lease agreements and 300,000 m2 of leased space in the portfolio.

Speaker and lecturer at conferences and training courses in the field of commercial real estate. He writes articles mainly on property management and lease negotiation; he is co-author of RICS publications “Real estate fund, asset and property management: investment services” and “Procurement of Facilities Management”.