Corporates have faced many tough decisions in response to the global recession. The need to cut costs and streamline operations has thrown all the components of businesses into the spotlight, including a greater emphasis on the effective management of property portfolios, which is commonly one of the largest costs for corporations. As economies around the world emerge from recession, occupiers of commercial property are maintaining a strong focus on costs, but are also addressing longer-term issues such as expansion and relocation considerations in line with their projected business strategies.
So, with most major global economies and property markets now in recovery mode, what issues are uppermost in the minds of corporate occupiers of commercial property?
In order to understand how occupiers’ perceptions of their property portfolios have been changed by the experience of recession, and how their property-holding patterns and decision-making processes help or hinder the execution of their business strategies, we recently consulted 75 mostly multinational corporate occupiers. Some of the main impacts of the downturn on European office markets over the past two years – reduced leasing activity, falling rents and increased vacancy among them – have a direct relationship with the responses to our research. Almost universally, corporates said they have adjusted their cost base and business strategy to reflect lower levels of demand for services and reduced access to capital, which in turn clearly impacted office markets.
The global perspective
Expansion plans were rapidly put on hold by the majority of firms during the recession, as businesses shifted their priority to cost-reduction and balance sheet management rather than growth strategies. Our research suggests that it is still the case that few corporates expect to expand their real estate portfolios in the short term, with around half of all respondents considering expansion within the next five years. Of those who are considering expansion, around a third expected this to happen in 2010, with roughly the same proportions expecting to do so in 2011 and beyond 2012. IT and telecommunication firms were the most likely to expand, with around half expecting to do so by the end of 2011.
As corporates seek to diversify their businesses through global expansion and the globalisation of their business models more generally, there is a natural drive to Asia. This is largely encouraged by current demand patterns, the swift economic recovery of the region and the prospect of higher returns. According to our research, Asia will account for nearly two-thirds of global office development over the next two years. This significant office development pipeline reflects strong corporate and investor confidence in most of Asia, which has emboldened developers in some of the region’s largest office markets to reactivate new office projects which had been delayed or halted during the downturn.
Of the 293.3 million square ft of office space expected to be completed in the leading global office markets between 2010 and 2012, some 65 percent, or 190.6 million sq ft is set to arrive from Asia. About 24 percent, or 69.1 million sq ft, is slated for completion in the business hubs of Western Europe. London is currently the only major Western European market where reviving interest in development looks likely to produce a significant upturn in new construction activity over 2011. Prime rents in the City of London have rebounded strongly from their 2009 low and the scarcity of new supply completing during 2011-12 is supportive of further rental growth and the prospects for pre-letting of new schemes.
The rest of Asia (that is, Asia excluding China and India), was identified as the most popular expansion location choice (48 percent) for corporates. This trend seems to reflect current economic sentiment and wider strategic ambitions to grow global businesses. This trend was particularly apparent in the Banking and Finance and Professional Services sectors. Eastern Europe, China and Western Europe were also popular with more than 20 percent of corporates we consulted targeting each of these.
Relocation, relocation, relocation
Just under half of all corporate occupiers we spoke to are considering relocating whole business units to another country in the next 12 months. Banking and finance and manufacturing firms revealed that they were more likely to consider relocating than other sectors. Where these intentions exist, they relate overwhelmingly to moving functions out of Western Europe. Eastern Europe and parts of Asia are proving to be the destinations of choice for relocation. International relocations of at least some business functions over the next two years are on the radar for around half of corporate occupiers of commercial property.
The driver is overwhelmingly a desire to secure skilled labour at lower unit cost than is possible in developed regions. Local tax incentives, such as those to be found in the Swiss cantons, have also played a role in the decision making process. This suggests an increase in relocation demand, certainly when compared against the small number of respondents who have pursued this as a cost-saving mechanism so far.
Over the last 6-12 months, we have seen significant uptake in demand from corporate clients for location advisory support, particularly examining near-shoring and off-shoring options. Corporates looking for advice on new locations reduced significantly with the arrival of the global downturn, but the trend has started to grow again over the past 8-10 months. This is still mostly off-shoring demand – moving back-office functions into lower cost locations – with a noticeable resurgence of CEE markets; Poland is proving particularly popular.
Manufacturing and pharmaceutical firms also identified access to new markets and customers as a priority when relocating. By contrast, fixed infrastructure factors, such as the quality of communications and transport links and government incentives, are minor factors when relocating.
How much does property cost a firm?
Control of property costs has been, and remains, a key element of corporate strategy.
Despite ongoing uncertainty in the market and the imperative to reduce costs, only half of respondents to our survey reported that real estate costs had declined over the past year, with 46 percent indicating that they had remained stable or increased. The proportion of corporates who have not succeeded in reducing property costs may still be tied into leases created at or close to the peak of the market, with no flexibility to alter property costs at present. Those organisations with centralised corporate property functions, robust lease administration and data management processes were the most likely to be able to rapidly adjust their occupational strategies. This allowed them to take advantage of reduced rents and deteriorating property market fundamentals and adjust their associated lease expenses and occupational costs.
In particular, we have found that there are noticeable differences in companies’ abilities to adjust to recessionary conditions and manage costs and vacancy levels depending on their decision making processes, and portfolio structure. These adjustments were made more consistently among those with centralised control and a predominantly leasehold portfolio structure and in companies where property was represented at board level.
To the future
It is likely that we will see ongoing change in demand for property throughout the world. Demand for new industrial space, associated with increased manufacturing activity, will remain throughout most of Asia, Central and Eastern Europe and the growth economies in Latin America. This will also coincide with further growth in demand for both office and industrial property throughout developed economies in North America and Western Europe.
With increased competition in the global economy, and a bumpy economic ride being predicted by many, we would expect large corporations to continue to aggressively manage their property-related risks and obligations over the coming years.
Significant opportunities exist to take advantage of cost-efficient labour markets globally, and as countries continue to aggressively pursue foreign direct investment, opportunities are inevitably created for global corporates. As a result, there is currently major competition between countries to attract knowledge-based investment activity.
Clearly different business sectors have varying requirements when it comes to property, and this is inevitably driven by the type of business activity in which they are engaged, which also drives responses to relocation and expansion issues. However, regardless of sector constraints, all companies can maximise their flexibility and responsiveness to economic change by careful structuring of their portfolios and decision making processes. The key, as always, is to be prepared.