Decisions, Decisions

01st February 2018

The real estate decisions made by businesses are becoming more critical and influential to business performance.

We believe contemporary real estate decision making breaks down into four keys areas:

A decision of strategic importance

The real estate decision receives greater attention at board level than ever before. The reason is simple. There is now acceptance from business leaders that the office is far more than simply a vessel in which to place staff. In this interpretation, property decisions can serve to support a broad church of other strategic considerations such as CSR, operational productivity and efficiency enhancement, brand promotion and the attraction and retention of the talent required to drive the competitive advantage of the business.

There are three clear consequences. First, the occupier is more exacting about what they need and why they need it. They are also better informed, advised and market aware than ever before. Second, the time-scales over which decisions are made tend to be longer given their gravity. Active requirements and searches are coming to the market much further in advance of the time at which commitment to a property option is required. Third, the range of stakeholders in the decision- making process has become broader, encompassing not just the CEO but also the CFO, the HR director, the IT director and, in a growing number of cases, existing staff.

It’s about people rather than bricks and mortar

Indeed, the HR director is involved earlier in the real estate decision- making process and has a powerful influence over the ultimate outcome. Again the reason is simple. People constitute around 55% of the cost base of any business. There is widespread recognition that a poor location or real

estate decision can create costly churn in the workforce – staff reinstatement costs run at circa 150% of salary.

This cost is compounded by labour market conditions, which can best be described as tight, given the UK is currently running at record levels of employment. Crucially, there are specific skills and talents required by modern businesses as they react and respond to a digital age.

Recruiting the technical and creative talent required is costly, competitive and cannot be compromised. In this sense, real estate becomes part of a corporate talent strategy whereby the quality of the workplace, its vibrancy, amenity, services and its ability to accommodate different ways of working are all integral to winning the ‘war for talent’ and thus support business competitiveness.

Increasing cost sensitivity

Although representing no more than 15% of an occupier’s cost base, real estate is a tangible cost that can be measured and monitored. It will be scrutinised and there will be a cost sensitivity that shapes market demand going forward. But there are two clear distinctions from the cost sensitivity of the past.

First, the occupier’s focus is firmly on total occupational costs – not just rental costs – and as such business rates and service charge costs are also considered.

Second, and linked to the points already made, real estate costs will not be considered in isolation. We will not return to the approach immediately following the Global Financial Crisis when real estate costs were attacked and taken back to such an extent that they actually compromised staff productivity. Businesses will be more accepting of real estate costs where a clear linkage can be made to mitigating costs in other areas of the business such as the cost of lost output or talented staff.

"Many established businesses need to respond to more collaborative work-practices as well as the need for more innovative behaviours within the business."

A decision which can shape corporate culture

Businesses are rapidly responding to the twin pressures of a relatively low growth economic environment and the disruptive effects of both digital and emerging technology. The latter is emboldening new market entrants across a range of sectors which further challenge the premise and performance of many traditional businesses.

This requires transformation - a transformation in the talent pool driving the business, as well as one altering the underlying corporate culture. Real estate matters in this respect. For example, many established businesses need to respond to more collaborative work-practices as well as the need for more innovative behaviours within the business.

The configuration, character and style of the workplace are essential in embodying and facilitating this transformation.

So, what at first glance appears to be a relatively simple decision-making process is in fact an ever more complex endeavour. Real estate decision making is strategically significant, balancing costs against operational needs, and is at the very forefront of attempts to transform the workforce and culture of business. Places and spaces that attract and retain talent will, for the modern occupier, be worth their weight in gold.

Written by Dr. Lee Elliot

Head of commercial research, Knight Frank