CRE Strategic Planning in the Public and Private Sectors Part II: Differentiating Factors

by | 25 April 2019

Part II: Differentiating Factors

In this second article of a two-part series, we analyze the differences in planning for the public and private sectors, and the considerations for each sector. In the first article of this series, our expert analyzed the similarities in planning for the public and private sectors.

The principal difference between public and private CRE is that in the public sector, financial drivers are typically not the primary focus. Rather, accomplishing the organization’s mission—education, justice, transportation or services—is the primary concern and the measure of success. In the public sector, organizations are often working with limited budgets and must decide between spending money on real estate or on staff or services where the impact on the primary mission is more visible and immediate. In the private sector, the real estate decision often weighs the return of investing in real estate, as measured by metrics such as retention rates or decision speed, compared to other investments impacting financial performance such as R&D or salaries.

The number of stakeholders also affects the bounds of a CRE strategic plan and its analysis. In a private sector firm, ownership can mean one owner, a board or hundreds of shareholders. In the public sector, ownership and accountability is more complex, involving at least government agencies, taxpayers, those receiving services, donors, employers and industry partners. This difference can often impact the speed and extent to which a public sector organization can change its real estate portfolio.

Public entities, often more price-sensitive than private for-profit companies, frequently experience high levels of deferred maintenance as they opt to “make do” in order to provide more services to their beneficiaries. Additionally, concern around the optics of any expenses is often heightened.

Additionally, how space is occupied and paid for often varies between private and public sector organizations. The private sector may require more flexibility to accommodate changes in skills, M&A activity and growth or contraction. Thus, locations other than headquarters or facilities with substantial capital investment are most frequently leased. On the other hand, public sector organizations such as government or educational institutions are typically tied to a location and more likely to occupy owned assets. Both groups are concerned with factors such as energy efficiency and planning for resilience in the face of climate change, although specific actions or plans vary depending on if they are owners or lessees.

As noted above, location is equally important for both project types, but public sector entities are less likely to move locations. An agreement that can be mutually beneficial is a public–private partnership (PPP), a type of cooperative agreement between two or more public and private sector entities. While there are various PPP structures that provide framework for these partnerships, a PPP can take the form of exchanging valuable land and assets to offset the cost of new construction, maintenance and renovation. PPPs are common in the United States and Canada and have been used to support development of infrastructure as well as housing, educational facilities and government offices.

One innovative PPP involved the Colliers Boston team and the Commonwealth of Massachusetts. 100 Cambridge/Bowdoin Place is a pioneering PPP where the circa 1965 abandoned, asbestos-filled government buildings were converted to a mixed-use development including public and private office, condominiums and street level retail. This project was the largest PPP for the Commonwealth of Massachusetts at the time, and the first with residential units on state-owned land. Now 100 Cambridge, the former Saltonstall Building, includes 22 floors of Class A office space leased at market rate to private tenants on floors 13-22, with floors 2-12 occupied by Commonwealth agencies at below-market rent with the ground floor holding a lobby and courtyard.

MassDevelopment, the economic development authority for the Commonwealth of Massachusetts, borrowed $195.8 million in bond proceeds to finance the project, creating a master plan with the public, private commercial and residential components, using tax-exempt bond financing for the public office space renovations and taxable bonds to finance the private improvements. MassDevelopment provided $20 million in mezzanine financing with returns designated to debt service, ground rent and project reserves. As a public project, the key financial consideration was not return on investment, but the overall benefit to the Commonwealth, which retained ownership of the project land while executing a ground lease for the development. The Commonwealth not only receives rent from the Class A space and occupies office space at below market rent, it also retains its assets at the end of the ground lease.

Guiding Principles of CRE Strategic Planning

Strategic planning and analysis in CRE must be deliberate and based on guiding principles and objectives appropriate to the organization. Establishing those guiding principles and objectives at the inception of the planning process will help identify the items to make a plan successful.

Strategies that appear very similar from the outside may be driven by very different objectives as well as by the type of organization. A private firm may look to consolidate locations after a series of mergers and acquisitions to reinforce a single brand and culture while a government agency may desire to consolidate public services into a single location to better serve the public.

Often, strategies look to address workforce dynamics specific to the organization: anticipated peaks and troughs in staffing; an aging workforce requiring knowledge transfer between generations; anticipated operational changes; ability to attract talent; or quality of life issues such as commutes or accessibility to housing.

A clearly stated strategy will help an organization’s leadership prioritize real estate initiatives and investments by allowing a comparison to those original guiding principles and objectives. For example, negotiating lease termination or expansion options may involve a tradeoff in cost. The organization that has been able to clearly state its priorities should be able to make that decision between cost and flexibility more readily.

Strategic planning for CRE creates viable solutions for future uncertainties. Portfolio planning provides an opportunity to address and plan for external trends, such as evolving technology, automation and emerging labor markets. At Colliers, we rely on both quantitative and qualitative research to inform our analysis. Our goal is to help our clients optimize space and achieve their highest potential. We combine external and internal data with our understanding of our clients’ needs to create a “Place Strategy.”