10 Years Later: Revisiting Harvard Business Review’s Real Estate Advice for Leaders
2009 gave us Bitcoin, smart thermostats, and Beyoncé’s “Single Ladies.” As if all that weren’t enough, we were also treated to this excellent Harvard Business Review piece, “What Every Leader Should Know About Real Estate.” The article broke down the broad, seemingly impenetrable fortress of commercial real estate by sharing five action items that business leaders should explore to enhance productivity, ensure long-term success, and respond to an ever-changing market. Ten years later, do the same rules still apply, or has commercial real estate moved on? Let’s see if HBR’s five maxims have stood the test of time.
Manage the Portfolio
In 2009, the housing bubble burst, but the commercial sector didn’t slow down for another few years. The old ways were beginning to change, supply gently surpassed demand, and by 2010, it was a “renters and tentant’s market.” A company’s portfolio of real estate holdings should have more value to the enterprise than the sum of its individual sites, went the first maxim. Essentially the message was arm yourself with loads of data and insight about your company’s real estate footprint, and use those insights to make strategic decisions. This method worked as an insurance policy for big companies going through change or acquisition (HBR offered the example of Bear Stearns’ Wall Street property, which became the now-defunct firm’s biggest asset).
Does this still shake out in 2019? Yes and no. The nature of that insurance policy has changed in that, today, there is another route, one that involves less risk, less upfront CapEx than leasing or buying, and more flexibility overall. Today’s largest enterprises are incorporating flexible workspace into their global portfolios as planning horizons get shorter and adaptability becomes increasingly important. In order for companies to be resilient in their operations, they need resiliency in real estate.
2. Build in Flexibility
HBR referred to “flexibility” in broad terms, in relation to a company’s finances, physical space (modular buildings, for example), and organizational flexibility (e.g., telecommuting and remote work). It noted that “[l]ease terms themselves offer a way to maximize flexibility … and help a company adapt to changing circumstances” and that “in volatile times, up-front costs may be low relative to the hidden operational costs of having too little or too much space, or the wrong type of space in the wrong place.”
Ten years on, it seems that HBR only just scratched the surface. While in 2009, savvy managers could “negotiate leases as they do equipment purchases,” e.g., exit rights after one year or modular options on new space, in 2019 they don’t even have to. Today, flexibility isn’t just a buzz word — it’s a business mindset. Between flexible lease terms, modular conference rooms, adaptable build-outs, subscription-based furniture, and more, the shift is real. If the way companies do business is evolving, why wouldn’t the way we think about the workspace change as well?
The ability to grow and scale up or down is one of the main reasons why flex space has seen a rise in popularity. Why stay locked in that old-school lease if you don’t have to? Another reason to be flexible in 2019? Customers want it. Lease and space innovations translate to adaptability, and executing efficiently on your clients’ needs is crucial to a successful, ongoing relationship. Understanding today’s new flexible options and what they mean for your business strategy brings us to the third maxim.
3. Cultivate Intelligence
HBR intended its article for company leaders and senior managers, rather than traditional real estate deal makers. It suggested to them a new way of approaching real estate, to consider it a sustainable and strategic path toward long-term success, rather than a series of reactive deals driving short-term goals. HBR called this Cultivating Intelligence, stating that successful business managers know to “connect real estate decisions to corporate strategy.”
Today, you no longer need to take anyone’s word for anything — data is everywhere. Use the feedback loop to learn what people want from their office and how they use space. Companies can now use technology to improve efficiency; for example, sensors that detect and report on occupancy and use. Bonus — this also generates insight into waste and energy conservation. Approximately 30% of energy consumed in any given building is wasted, a number that could be easily improved upon. This is just one way to use data to help keep costs down, which keeps everyone happy. Automated management tools keep buildings more secure, and run more efficiently overall. In the past ten years, both the technology available and the ways that we utilize it have transformed operations all over the world. Using the information at your fingertips doesn’t just solve existing problems, it helps business managers and companies anticipate new ones, and innovate accordingly.
4. Team with Professionals
Ten years ago, HBR noted that “the most efficient organizations often do the least to operate their business real estate.” It was commonplace for businesses to work with firms that could offer a full range of services, from service partnerships to performance leases, where a retailer’s rent is based partly on its revenues.
Teaming up with professionals to meet goals and take the management burden off the table is still a great option today. In 2019, there are new opportunities for owners to partner with their tenants through management deals, technological solutions to optimize building operations, and software to make portfolio management a breeze. Many commercial real estate owners are also getting in on the flexible movement by partnering with a new breed of workspace providers, who bring attractive tenants, higher rents, and increased property value.
5. Embrace Sustainability
In 2009, HBR noted that the construction and operation of residential, commercial, and industrial buildings was responsible for nearly 40% of all carbon emissions contributing to global warming. Finding more sustainable methods was considered both a long-term obligation and an opportunity.
Today, the question of sustainability remains definitively unanswered, but more and more buildings are going green, and enterprise companies are looking for creative solutions that bring sustainability in line with company-wide goals. Sheetrock is increasingly going the way of the dinosaur, and modular elements are taking its place. Not only are they environmentally friendlier than putting up new drywall, they are a perfect complement to changing company cultures. Nobody wants 1980’s-style cubicles to make a comeback, but the ability to create privacy will always be valued in the workspace. A modular wall means you can have a chic, open studio-style workspace when you want it, and privacy when you need it.
In 10 years, the face of commercial real estate has changed, but only in sync with the needs of the market. These maxims may have evolved but they are still crucial to staying on top of the game. Expect to see more on flexibility and sustainability in coming years as real estate becomes a benchmark in corporate strategy.