Digitalization is changing Corporate Real Estate Management
Manufacturing companies in Europe are facing major structural changes, particularly in the management of real estate for production sites. Digitalization, as well as globalization, innovation, and demographic changes are placing new demands on space and its availability. These changes require a contemporary Corporate Real Estate Management (CREM).
In Corporate Real Estate Management, there will be no “carrying on as before”. The changes in this corporate function are in full swing. Digitalization is dematerializing structures, products, and value creation processes. This results in reduced spatial requirements and different demands on the quality of the space, the floor plans, and the technical building equipment as well as on the way these are managed. Accompanying trends are accelerating the process of change: globalization and the corresponding international competition are adding to the pressure on CREM’s efficiency and strategic responsiveness. Innovation also changes production conditions: Production sites are brought back from low-wage countries to the sales markets; production is automated and individualized just-in-time. This favors small-scale, decentralized locations directly in the sales market. As a fourth factor, demographic change determines both the demand structures of the sales markets and the labor supply. Companies are in a “war for talent” and are fighting over the best employees. This not only means that the demand for floor space follows the sales and labor markets, but that youthful talent must increasingly be promoted with novel working environments in the style of Google or Yahoo.
The core business is changing
The core business is changing significantly under these influences and CREM clearly must adapt to new requirements. This not only has an impact on the real estate portfolio itself, but also on the management of real estate and technical facilities. The two main areas of activity that this structural change affects are as follows:
For real estate it means that the corporate portfolio is shrinking and changing. The high property ownership ratio (in Germany about 75 percent for SMEs, about 66 percent for large companies), and thus the high capital tie-up, is in decline. Office space is reducing because more people are working from home. Available space must meet modern demands and collaboration trends such as Scrum and Agile teamwork, which results in relocations. Smaller, decentralized spaces are in demand for individual just-in-time manufacturing using 3D printing.
Real estate management must also adapt. CREM processes need to be further standardized, automated and, in the future, extended with algorithms and artificial intelligence. New data sources and processes must be integrated. The “internal customer” is even more in the spotlight: digital interfaces to the renting departments are expanded, live feedback systems established, and customer analytics introduced. All IT systems, databases, and technical building equipment data – including Internet-of-Things – will be merged to comprehensively map and manage the life cycle of real estate. Data from Building Information Modeling (BIM) form the basis for digital asset management and need to have been already collected during the planning and construction phase. “The implementation of digitalization (Internet-of-things) and the introduction of ‘Best Place to Work’ into the existing infrastructure is the challenge here, and this requires intelligent solutions,” emphasizes Wulf Reclam, Head of Real Estate Portfolio Management at BASF SE.
Flexibility versus rigid contracts
These changes alone present CREM with major challenges. Added to this is CREM’s special position as an intermediary between supply and demand.
In response to structural change, companies are demanding and anticipating increasing flexibility and variability in terms of space and services. Changed spatial requirements need to be met quickly and flexibly – not based on rigid contracts, but rather based on flexible service fees.
The market supply of space and services remains unchanged. CREM satisfies the needs of the core business through property, long-term rental, or facility management contracts; precisely those contractual arrangements that do not allow flexibility. The amendment of IFRS 16 reinforces its effect from 2019 onwards, with the requirement that long-term leases be recognized as a liability on the balance sheet over the term of the contract.
As a result, CREM finds itself in the intermediary role between supply and demand in an increasingly asymmetrical business relationship: On the one hand there is the growing demand for more flexibility, and on the other, unchanged rigid contracts. “For CREM, the structural changes mean the increasing need for higher spatial agility to meet the new ways of working,” confirms Olaf Kamlah, Head of Facility Management & Real Estate at Airbus.
The forecasting of real estate demand, both in terms of quality and quantity, is also becoming significantly more complex. This unpredictability is compounded by new business models that focus on “real estate as a service,” “pay-as-you-use,” and co-working models such as WeWork or Mindspace.
At the same time, the way in which spaces and services are being requested is changing. Thus, digitalization is not only changing the core business of companies, but increasingly also the way in which CREM and other internal tasks are performed. Today, digital transformation must, strictly speaking, constantly complement the typical professional evolution of a CREM department in the final stage.
This leads to a dilemma: The digitalization of the core business itself is still in its infancy in most manufacturing companies and, accordingly, successful concepts for digitalizing CREM are few and far between. In addition, business models of digital real estate startups (“PropTechs”) are not transferable to CREM on a 1:1 basis. As a result, CREM’s digitalization attempts are mostly limited to isolated individual measures resulting from internal brainstorming sessions. Comprehensive conceptual approaches or a “CREM digitization strategy” are missing.
Expanding CREM through digital transformation
The solution is to use digitalized CREM methods and thinking that will make digital startups, such as AirBnB for example, successful. These focus on relevant interest groups (stakeholders) and consistently build digital products and services according to their needs, without lengthy pre-planning stages. The typical conceptual way of approaching digital startups can be subdivided into six steps and forms the basis for the digital transformation of CREM:
The first step is to identify the stakeholder landscape, such as tenants, investors, owners, service providers, or public institutions. The interaction between CREM and these stakeholders is recorded in a structured way, e.g. throughout a customer journey.
The second step is to identify the real problems and needs of these stakeholders. These include, for example, the everyday problems of tenants, internal processes, or administrative needs. The main concerns are identified and prioritized.
A synthesis summarizes the need for action as a third step and substantiates it.
This is followed by the development of different approaches and strategies for (digitally) solving the problem. The space for possible solutions is thereby extended by a deliberate change of perspective (for example: “What would a press release from 2050 about this solution look like?”). To select the best proposals, feedback will be gathered from the stakeholders concerned and the approaches further enhanced with the help of the lessons learned.
An important feature of digital startups is step five, the immediate development of prototypes based on the motto “fail early to succeed sooner”, i.e. without the characteristic, lengthy preparation and planning phases. For example, what could a new digital interface look like to the other departments? The techniques used by digital startups allow ideas to be further substantiated quickly.
The last step is the test phase. Does the idea work? One-on-one interviews and discussions with focus groups provide information on future acceptance. It is also important that there be a sufficiently high demand for the solution – surveys or field trials can provide information about this.
According to the procedure shown, a transformation of CREM is necessary. Digitalization approaches also must prove themselves quantitatively. This is why every prototype has to be evaluated as an independent business case. The way this is done is through a precise assessment of expenses (required resources, investments, and internal expenses) as well as the expected effects (efficiency increases such as accelerated processes or monetary savings).
This evaluation of the prototypes from a business perspective allows quick decisions about the sense of implementation and secures support and funding only for the “right” ideas.
With the implementation of digital structural transformation, the requirements of not only corporate real estate, but also of its management change. Since a universal approach to digitalizing CREM does not yet exist, the most promising approach, methods, and mindset of successful digital startups is still up for grabs.
For further information:
Dr. Michael Müller, Principal CYLAD Consulting
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