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Getting Ready for Rough Times
“In preparing for battle I have always found that plans are useless, but
planning is indispensable.” — Dwight D. Eisenhower 
Preparing for a Downturn: a CFO Perspective
Understanding what the CFO is looking for in terms of corporate financial preparation as the economy heads down the business cycle curve can help you earn and keep the corporate finance group's support. The article "Let's Not Say it Out Loud, but Are You Ready for the "R" Word?" says, "Depending on your specific situation, a logical sequence for a CFO to consider is to free up cash, make specific investments that generate ongoing cost reductions, use these to lower cost structure, and then use freed-up cash to invest in projects that will create competitive advantage." Corporate real estate can participate in all of these CFO initiatives to a greater or lesser degree, but particularly the second one because that can involve changing the location of administrative and manufacturing facilities, as well as revising the supply chain. On this, the article recommends, "implement[ing] services globalization strategies to move work from high-cost to low-cost regions. Globalization of work is no longer a leading-edge strategy; it should be considered a best practice for any company striving to achieve world-class performance. The Hackett Group has determined that the typical, $22-billion Global 1000 company has a minimum of $120 million in labor arbitrage savings if it were to fully implement a globalization strategy in its core G&A [general and administrative] processes."
Source: Duke University/CFO magazine Global Business Outlook Survey
More from the CFOs — Take a Hard Look at Facilities and Transportation Energy Costs
The article "Top 10 Concerns of CFOs" describes the findings of the "Duke University/CFO magazine Global Business Outlook Survey" that rising energy costs rank either fourth or fifth among the top-10 concerns of CFOs in the U.S., Europe and Asia. Corporate real estate executives manage energy expenditures through facility budgets and indirectly when they recommend locations for manufacturing and distribution facilities, through the effects on transportation costs.
Fine Tune DC Locations to Cut Freight Costs and Hike Performance
Location modeling software is available for evaluating different scenarios for situating distribution centers (DCs), but according to "Locating your distribution centers Part 1: Re-engineering the distribution center network," the process still depends heavily on skill, experience and business judgment. The article quotes Jack Kuchta, vice president of the logistics consulting firm Gross & Associates, as saying, "The most common driver for distribution center (DC) network re-engineering has been the realization that freight costs have a significant dollar impact on the bottom line. With today's rising energy costs, reducing transportation costs across the network has certainly become more pervasive and cannot be ignored." The write-up includes a detailed process schematic entitled "
The approach for modeling the distribution network."
Source: "Three Avenues to Cost Reduction" by Patrick Penfield
Trim Supply Chain Costs by Negotiating Site Selection Tax Breaks
A report by Supply Chain Daily entitled "Three Avenues to Cost Reduction" says, "In the United States we are seeing an unprecedented amount of work being done by various states to retain and attract jobs. Many states are offering lucrative programs to entice companies to relocate or create jobs within their area. Organizations are now negotiating with states to build new plants and facilities within their domain. It has become a lucrative bargaining chip for many companies by opening up competition for these new facilities. The main incentives offered to companies by states are tax incentives." The three avenues in the title refer to materials, processes and overhead. State and local location tax incentives reduce facility overhead.
Take Care of your Human Resources
Companies commonly trim their headcounts in preparation for lean times, but, ironically, these are the very times when companies need the best minds to prepare them for the upswing. So, now is the time to make sure key people stay on board. Once business slows, there's likely to be a hiring freeze. Even if there's not, bringing on the right person is time consuming and expensive. Sometimes no suitable individual will be available. A blog called "Sourcing Innovation" says, "What should companies be doing now, before it's too late? We see development of a 'talent strategy' emerging as a key business consideration...leading companies are determining what skills they have, what skills they will need, and how best to retain or obtain those skills." A farsighted human resources strategy actually can make a company more successful. "Studies have shown that companies with the best retention practices outperform the Dow, NASDAQ, and S&P500. Surprisingly though, we see it's not the things that have never been thought of before that hold the most promise, but rather the things we knew we should be doing but have not been applying enough. The simple answer - train and develop a creative culture. To fill at least part of that talent void, employees of leading companies are completing extensive training courses & seminars to develop today's needed skills and abilities," says the blogger.
Real Estate & Construction Insights and Data
“In the modern world of business, it is useless to be a creative original thinker unless you can also sell what you create. Management cannot be expected to recognize a good idea unless it is presented to them by a good salesman.”
— David M. Ogilvy 
Source: CB Richard Ellis
CBRE's Torto: Some Commercial Distress, Opportunities too
Raymond Torto, long with CBRE's subsidiary Torto Wheaton Research, was recently appointed CBRE's global chief economist. In the February 2008 "CB Richard Ellis Viewpoint," Torto says, "we expect that 2008 will be a year where the commercial real estate market will take some lumps in pricing and leasing, and some investors will be caught in the liquidity trap." However, the downside for some will represent an upside for others. He says, "long-term real estate investors will view the year as one where opportunities will arise from others' mis-pricing or misfortune." In conclusion, he notes, "And all the evidence is that the major investors will continue to invest, albeit cautiously and with appropriate analysis and assumptions."
E&Y's "2008 Real Estate Market Outlook:" 15 Points to Ponder
This report seems to be organized along the company's real estate service lines. It's a bit chopped up but still has nuggets for those willing to pore through it. For instance, it says, "The construction sector will need to depend on something other than homebuilding to take it forward in 2008. Luckily, 2007 increases in U.S. infrastructure (43 percent)and hospitality (15 percent) construction are likely to continue into 2008 and offset the sharp drop expected in housing starts. Leading-edge issues for the industry are rising commodity prices - especially copper, steel and asphalt - and staffing." The report covers "sovereign funds" (point 2) , infrastructure (pt. 3) , accounting issues (pts. 4 and 15) , lending (pt. 7) , REITs (pt. 8) , construction (pt. 11) , and more.
Source: Portland Cement Association
Cement Demand Pulled along by Population Growth
A study by the Portland Cement Association has found that half of the increase in cement consumption is due to population growth and half to more intensive use of the product, for example as a substitute for other building materials. The report forecasts that "By 2030 the U.S. population is expected to reach 363.5 million persons. Supplying the needed housing, buildings and roads will lead to a 43 percent growth in U.S. cement consumption by that year." Annual cement consumption "will hit 183 million metric tons, reflecting a 55 million metric ton increase compared to the past cyclical peak level in 2005," says the study. In the next two decades, highway construction is expected to require a growing share to cement production. "Today, this segment accounts for 30 percent of total annual cement consumption. To meet the demand of the expected additional 49 million drivers, at least 400,000 additional lane miles of highway must be added by 2030."
Brownfield AAI document available and useful
Released in December 2007, a document from the Institute of Brownfield Professionals details the specific issues and challenges inherent in meeting U.S. federal guidelines for "all-appropriate inquiry" and environmental site assessments. The rules underwent a change in late 2006, bringing into doubt whether established environmental study standards were still sufficient. The IBP document analyzes the risks that need to be managed in the process, and what vehicles do and do not afford innocent-landowner, bona fide prospective-purchaser or contiguous-property-owner protection.
“In my experience, in the real-estate business past success stories are generally not applicable to new situations. We must continually reinvent ourselves, responding to changing times with innovative new business models.”
— Akira Mori  Share Prices Settle for Publicly Traded Real Estate Companies
The Dow Jones Wilshire Real Estate Indexes are designed to provide measures of real estate securities that serve as proxies for direct real estate investing, in part by excluding securities whose value is not always closely tied to the value of the underlying real estate. The reason for the exclusions is that factors other than real estate supply and demand, such as interest rates and health care, influence the market value of these companies.
To be included in these real estate indexes, a company must be both an equity owner and operator of commercial and/or residential real estate. Businesses excluded from these focused indexes include: mortgage REITS, net-lease REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers and estate agents, home builders, large landowners and subdividers of unimproved land, hybrid REITs, and timber REITs, as well as companies that have more than 25 percent of their assets in direct mortgage investments. A company must have a minimum total market capitalization of at least $200 million at the time of its inclusion, and at least 75 percent of the company's total revenue must be derived from the ownership and operation of real estate assets. The liquidity of the company's stock must be commensurate with that of other institutionally held real estate securities.
REITs
The Chicago Board of Trade expands its DowSM futures complex by introducing CBOT Dow Jones U.S. Real Estate Index futures (DJUSRE Index futures) , an electronically-traded equity index futures contract. Based on the Dow Jones U.S. Real Estate Index, which is composed primarily of Real Estate Investment Trusts (REITs) , DJUSRE Index futures provide investors with efficient, cost-effective exposure to the U.S. commercial real estate market.
-- Joel Parker
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