In general, corporate real estate strategy is not something that publicly traded companies regularly report on. It might therefore be easy to forget that for most of these businesses, real estate expenditures are second only to salaries on their list of expenses and therefore carry an important weight on their balance sheet.
The overall importance of corporate real estate becomes obvious when we consider the huge annual cost of an employee’s individual workplace – estimated on average at more than 17,000 euro in France – and consider the sheer size of most corporate real estate holdings – large companies own an average of one million square meters. Furthermore, some of the largest firms exceed this figure, with France Telecom owning over 7 million m2, Renault over 6 million m² and EDF over 4 million m2. [i] Clearly, real estate choices have considerable long-term legal, fiscal, economic and financial repercussions; their management should be a key propriety both for firms and for management education.
Who is responsible for such critical choices? More than half of France’s largest firms have restructured their management of corporate real estate expenditures over the past three years as part of a broader strategy to offset rising costs. The Corporate Management Director has emerged as an actor of increasing importance for French firms.
To better understand this transformation, ESSEC Professor Ingrid Nappi-Choulet – within the framework of the Real Estate Management Observatory she launched in 2004 – oversaw a new survey, published last month. This survey addressed members of the French Real Estate Directors Association (l’Association des directeurs immobiliers, ADI) and collected the testimonies of 74 Real Estate Directors of large French companies – including 23 CAC40 listed companies – who together represent some 2 million m2 of headquarters space and 68 000 sites throughout France, totaling over 78 million m2 in real estate properties overall.
From supporting role to strategic leader
56% of survey respondents – and 70% CAC40 listed firms who responded – felt that real estate management plays an important, strategic role in the evolution of the firm. A further 24% of respondents felt that it was of increasing importance. Meanwhile, only 20% felt that corporate real estate managers played merely a secondary role of support.
“We’re witnessing a real managerial revolution,” says Professor Nappi-Choulet. “While most firms previously understood real estate management played a supporting role, our study reveals that it has today become a central strategic preoccupation for many French firms.”
“Obviously, these evolutions can be linked to the progressive increase in real estate costs over the past ten years. Today, falling corporate leasing rates brought on by the financial crisis highlight above all the savings that can be generated by corporate real estate managers through negotiation. Beyond this, more that ¾ of the firms who participated in our study had recently terminated a lease to downsize their corporate real estate holdings.”
The Corporate Real Estate Director: A New Yet Structured Role
For nearly a quarter of respondents, the role of Corporate Real Estate Director was a new one, put in place less than five years prior. Nevertheless, for more than 54% of respondents the role had existed already for more than 10 years. For these companies, the role was linked to the General Directorate (for 33% of respondents), to the General Secretariat (for 23% of respondents), to the Finance Department (for 16% of respondents) and to the human resources department (for 7% of respondents).
Meanwhile, for more than a third of companies the number of positions under the umbrella of corporate real estate management had increased over the past three years, remained stable for 40% and decreased for only 24% of respondents. That said, respondents indicated that teams were generally small with 60% of respondents reporting teams of less than 10 persons, 50% of respondents reporting six full-time employees. Only the largest companies, particularly in the finance sector, reported teams of more than 50 people.
Rationalizing real estate costs
“Even 10 years ago, many French companies did not place great importance on corporate real estate inventory and the associated costs,” adds Professor Nappi-Choulet. “Our survey illustrates that the situation is dramatically different today. Many French companies today are implementing corporate real estate strategies to reduce overall office space and control their operating costs.”
According to the survey, more than 90% of respondents had recently implemented an inventory of their real estate holding and 80% monitored the associated costs regularly. In addition, more than 75% had already been engaged for at least the past three years in plans to reduce and streamline their overall real estate costs.
Towards a new management science discipline
The financialization and globalization of the real estate industry created in the 2000s a strong demand for students trained and specialized in corporate real estate finance, to meet the evolving needs of asset managers. Today, the financial crisis is once again changing the situation, adding a new focus on application and user needs to help reduce costs.
Professor Nappi-Choulet would argue that these new realities call for a new approach to the teaching of management science which has long ignored the management of real estate assets, relegated to the position of fifth corporate resource.
“While it is customary to teach financial management or HR management, it would be useful to integrate real estate management courses to full general management courses (masters in general management provided by IAE, universities or colleges, etc..) and expand these teaching from specifically dedicated professional training. After all, real estate is the second largest expenditure of a firm. It should go without saying that a good management student should know the basics!”
[i] According to l'Association des directeurs et des responsables de services généraux (Arseg)