Especially in research-intensive and manufacturing-intensive sectors, regional proximity of individual actors in the form of clusters is evident. This includes access to a potential pool of skilled workers, proximity to other SMEs and international organizations. When such an organization chooses or expands its location in Switzerland, what do you think are the most important location factors?
Location itself is one criterion. In general, this means proximity to customers and accessibility for employees in terms of infrastructure. On the one hand, employees want to be in a vibrant environment with amenities close by. On the other hand, they want a high-quality building that meets health, sustainability and environmental standards. The occupier, meanwhile, is going to focus mainly on the letting terms. Any occupier, regardless of industry or country, will use a combination of these to select the right location. Proximity to a talent pool for future product development and innovation may be even more important for laboratory and R&D facilities. This means that future revenue streams and product pipeline are literally dependent on these investments being located in the right place and accessing the right talent, as well as the significant CapEx that is invested in these locations.
The operating costs of Corporates that are highly active in manufacturing, production or R&D are significantly higher than those of typical property asset classes. There has been a significant increase in energy costs in light of the energy crisis caused by the war in Ukraine. Could you please elaborate on the measures taken to secure energy supply in such locations?
In general, the Real Estate and Facilities teams do not manage energy supply, it is managed by Procurement. However, by promoting energy efficiency and sustainability across all assets, the real estate teams contribute to securing and protecting the energy supply. The focus tends to be on manufacturing assets as these are the most energy-intensive and rely on uninterrupted power to keep machinery running.
I am noticing that more and more corporate occupiers are exploring local power, from off-grid solar and wind power generation that feeds power directly into production and manufacturing facilities. In the medium to long term, energy hedging contracts will also be common in markets where energy is deregulated, as protection against large cost spikes. In fact, to ensure energy supply and business continuity, some sites operate their own energy generation facilities.
How are the operating costs being benchmarked? Are there differences in the methodology used? Is the data typically from the company's own sites or does the benchmarking process have external benchmarks?
Occupancy costs are measured by most occupiers. This includes the energy consumption of the entire occupied portfolio. External benchmarking, i.e. comparing one's own site with industry averages such as those developed by MSCI, has not yet been undertaken by many occupiers. The focus has been more on internal benchmarking. That is to say, one region is compared with another region, or one building is compared with another. While this is helpful, it is less meaningful than a comparison with the industry or with the average. Benchmarking is therefore less consistent across organisations than the measurement of occupancy costs.
How are existing properties managed and controlled? Are there in-house facility management experts? Or are these services outsourced?
Rather than by sector, trends are more based on asset type. A mix of in-house experts and outsourced specialists are often used to provide services for R&D and manufacturing facilities. This can be in the form of a number of individual contracts, a bundle of contracts or a full IFM model. In short, activities related to manufacturing and production are often provided in-house. In general, there is often a reluctance to outsource GMP related activities, as this involves relinquishing some control over these production areas. However, in some locations this is done. Also, due to the proportion of hard services required as part of these facility management contracts and to ensure business continuity, more advanced procurement models such as IFM or bundled contracts are preferred. By comparison, smaller occupiers, possibly due to a greater focus on soft services and a smaller, or more fragmented footprint, still have more in-house staff or multiple individual outsourced service contracts.
Depending on region and location, occupiers use a variety of models for the delivery of facilities management services. The general trend is towards collaboration with external providers of IFM solutions. For example, most hard and soft services are provided by a single company per site or region, and sometimes on a global basis. In this model, internal staff and resources are still in place, but these experts focus more on vendor, supplier and contract management rather than individual service delivery.
“Flexibility as a prerequisite for highly operational real estate. This means: Operational real estate should have both development and expansion potential. With this potential, expensive relocation costs can be avoided, and the site can be developed according to one’s own needs. Are these considerations of importance to different industries when choosing a new location, or to what extent is flexibility in terms of expansion potential required when choosing a new location?
Flexibility is key to any high-performing CRE portfolio. In principle, real estate decisions commit organizations to relatively high costs over long periods of time and are difficult to change. Thus, flexibility to adapt to external changes or evolving business needs, for example COVID-19 (working from home) with minimal friction or cost is essential. This means the ability to take action and initiate actions that will have an impact in less than 12 months in a given business unit.
It is important to keep in mind that business strategy is disconnected from contractual property commitments. In the case of leases, for example, business revenue is not dependent on the length of the lease at a particular location.
Flexibility can also be linked to CapEx allocation, that is, the response to the need for adaptations in the workplace as employee demands change. Ideally this means changing the layout in a way that can be done quickly and at low cost when user feedback is obtained. Designing more flexible and adaptable spaces with desk sharing, activity-based working and occupancy measurement is required. Although there is more interest in working from home or third places, it is not something most Corporates lean on heavily. In my view, a well-negotiated traditional office lease with flexibility (break options, contraction, expansion, etc.) is generally sufficient flexibility for most occupiers.
Volatility, flexibility and the pattern of comparative advantage are not all like growth, but if you are in a B or C industry, how do you deal with it in relation to your real estate portfolio?
A certain amount of flexibility is essential for any high performing CRE portfolio at any size of organization. However, in B or C industries, the need for flexibility is considered to be greater. This is because these industries are more exposed to external factors. That means less capital and maybe greater revenue streams.
Transaction market sentiment suggests that chemical and pharmaceutical Corporates are withdrawing capital from their assets to reinvest the freed-up capital in their core businesses. What is your view on this decision - do you think it is strategically the right thing to do and do you think other industries may follow in the future?
Most Corporates do not have a lot of owned assets that they are waiting for the right time to sell off. The vast majority have already sold what they would like to sell. This is not a new concept at all, especially when it comes to offices. Unless they are located on the campuses primarily focused on manufacturing, with neighbouring ancillary activities, it is not so common to own office assets.
Most of the time, Corporates are trying to be space efficient, unless looking at divestment or securitization projects. In a nutshell, every square metre that a corporate does not occupy, does not require CapEx or OpEx. The leaner an organization is, the lower the CapEx impact and the lower the carbon footprint. Most organizations apply fit-out CapEx KPIs to encourage the design of high-performance fit-outs that are easily adaptable with minimal change costs for occupied space.
Every Corporate is different. Some are large international organizations; others are small Corporates that operate locally. So some may be very CapEx-centric and others may be very cash-flow-centric. For CapEx focused organizations, do you see any specific trends?
AW: There is an increased interest in coworking among organizations with a very strong CapEx focus. That is to say, flexible offices where no CapEx is spent on space, but where the depreciated cost of fit-out is converted into rent. In this case, real estate costs are all OpEx. This could be financially motivated as well as for reasons of flexibility. Generally speaking, this is not the norm, but I think there is a desire to be efficient in terms of capital allocation. Especially post-Covid, Corporates are focusing more on the quality of the real estate portfolio. This is not to say that more CapEx spending equals better quality. The focus is shifting from real estate as a cost to real estate as a value. This means that the portfolio has the potential to improve the productivity of employees, to implement sustainability actions for the general well-being or to improve the corporate culture.