Were McKinsey or Bain to research the path of CEOs from gangly entry-level employees to the C-Suite, they’d probably confirm that few had gained that title from decades of working in the corporate real estate office. However, today’s most effective executives are harnessing its power to amplify their brand, culture, and, ultimately, their bottom line.
We frequently hear that the building blocks of great companies are leadership, sound strategies, a winning culture, deep talent pool, and the collective tenacity to pursue excellence. You might ask, “Where is corporate real estate in that collection of superlatives?”
For companies where growth is tied to its human capital, the answer is woven into almost every fiber of corporate existence, and most especially its forward progress, or lack thereof. Let’s segment the discussion into emerging, small cap, mid-cap, and large cap firms, as each reaches a stage where capital and scale change the way that real estate is used to enable their success.
Real estate matters, even for startups
Certainly the emerging firms are the most capital constrained. Great ideas are born in tiny rental houses in Palo Alto, or garages in Minneapolis. The corporate real estate function would be defined as providing work benches, bandwidth, music, and lots of coffee. Nevertheless, the physical environment still impacts the speed with which communication occurs, and the setting within which deep relationships and passionate goals are formed and achieved.
At the small cap level, real estate gains scale and importance. Thoughtful leaders begin to shape their brand and culture. Well-considered locations afford customers or employees with easy access. Provision of ergonomic chairs, well-lit, functional desks, and up-to-date technology impact productivity. Capital is still scarce, so the confidence to make bold statements versus conservative commitments may not yet be there. Nevertheless, the real estate costs may still be a top five item on the P &L statement. Executives can carefully consider the demographic profiles of their teams and “dress” the corporate real estate accordingly. What are the logical ratios of “me” and “we” space? What amenities are provided to employees? Is the CEO at the end of a long hallway, protected by a VP, a CFO, and an administrative assistant, or do they sit in an open workspace, in the “mix” with everyone?
As companies grow, the most progressive leaders look to CRE to boost morale (and profits)
At the mid-cap level, metrics start to matter. Occupancy costs per employee, and square feet per employee, have been on the dashboards of CRE professionals for years. However, the more progressive leaders are looking to their CRE teams to expand the metrics closer to those that have a multiplier effect on corporate morale and profits. Can the inclusion of fitness facilities increase productivity and reduce sick days? Can products get to market more quickly when technology, collaboration space, and design are used to inspire and embrace teaming?
Can the strategic use of space and workplace standards start to impact earnings per share? For example, a firm with 1,000 employees, operating at traditional norms of over 400 square feet per person, can reduce its real estate “spend” by 37 percent if they re-stack their space to occupy 1/250 square feet. The savings can be spent on new investments, branding, recruiting, technology improvements, or increased dividends. There may be no CEO that comes from a corporate real estate background, but those who leverage their real estate occupancy spend and empower their real estate executives may see earnings and employee morale accelerate.
Scale: a blessing and a curse
The large cap firms enjoy the blessing and the curse of scale: great and poor decisions are magnified by the overall breadth of the firm. The same example of workplace efficiency (above) becomes even more important when you apply it to 10,000 or even 50,000 employees. Even on 25,000 employees, revised workplace programs that deliver 30 percent efficiencies from a 400 square foot standard could mean $75 million in annual savings. I call this “playing defense”. Cost-driven executives obsess over initiatives to squeeze expenses out of the necessity of real estate, while innovative leaders are looking at it as an investment to drive revenues. That’s playing offense.
Sensitivity to the impact of corporate real estate across multiple components of a firm’s success is the first step towards leveraging its power. Then, going on “offense” is the differentiator. Reinvesting in distinct uses of space begins to affect brand, culture, wellness, and joy. The most tedious of cost managers may bristle at this as radical thought, but the results are being validated by progressive firms combining opportunity with cool spaces. Enhanced areas for customer engagement, chill zones, pilates, spinning, and yoga rooms, dog parks, on-site clinics, and so on are proving that the re-allocation of space can affect absenteeism, attrition, productivity, and yes, even revenue generation at firms that can play at this scale. Using the example of $75 million saved above, even the use of 50 percent of that amount for only one year would have a profound impact on a large cap firm’s workplace.
There is an eerie correlation in the relationship between today’s most productive firms measured by their “revenue generated per employee” and their application of bold real estate strategies. While many scoff and merely assume technology to be the reason, I say, not so fast.
Human capital drives our economy
More than at any other time in modern business history, human capital is driving our economy. And employees vote with their feet. They choose where they live, where they work, and how they work based on multiple factors, many of which are physical. At the highest levels, do they feel safe? Going deeper, do they have the physical tools in their workplace that deliver comfort and convenience, which impact their joy of being there? Are they proud to be associated with what their employer stands for, and who they work beside? Are they proud of the brand they are building personally and corporately? Do they engage in work passionately?
If you want to attract the best talent, foster inspiration and productivity, increase revenue per employee, and ultimately earnings per share, take a walk from the executive floor down to the dinghy office, where you may have your corporate real estate team stashed, and welcome them to the executive committee. Charge them with enabling your broader mission to thrive, grow, and succeed.
This post originally appeared in Work Design Magazine.
Woody Coley enjoys large, complex transactions and development related assignments. He has almost 30 years of experience working across many business lines of commercial real estate.