Corporate real estate leadership is not revealed only when market conditions are favorable for the company’s portfolio. Rather, says strategic planning consultant Martha O’Mara, real leadership can be shown in a period of crisis.

“Ninety percent of the books on leadership are garbage,” O’Mara, founder of Corporate Portfolio Analytics, told the IAMC Leadership Development Seminar participants at the Grove Park Inn in Asheville, N.C., on May 3. “Leadership is required to set vision and motivate change. This is not ‘Self Help 101.’ In fact, change drives the need for a proactive place strategy in your company, especially now as you are dealing with globalization of your customers and your competitors.”

Dr. Martha O'Mara

The one constant for any corporate real estate (CRE) executive is this, she said: “Organizations hate making decisions about real estate and facilities. It is very disruptive and expensive. You can see the real estate decision; many other decisions are not visible. And real estate mistakes are harder to cover up.”

The challenge for CRE executives today is to build up their competitive advantage during these turbulent and unpredictable times, O’Mara said. “You must offer something different than your competitor. If you do, the customer will be willing to pay a premium for the difference,” she said.

O’Mara, whose current work includes advising clients whose portfolios total more than 500 million square feet of space, told attendees that “real estate strategy and workplace design will differ according to how an organization builds and maintains a competitive advantage. So, your key thought ought to be, ‘How can I link every real estate decision back to competitive advantage?’ ”

To properly prepare for the changing demand for space in the future, O’Mara says CRE executives should take a 40-year view. “We are on the verge of social change that could be as dramatic as what we saw in the 1960s,” she said. “We have shown huge changes in behavior in society in the past 40 years, and 2008 could turn out to be the year that we use to benchmark unrest, tumult and change.”

Understanding the scope of this change will be critical, she added. “The Dow Jones Industrial Average sustained its biggest percentage drop since 1932. Our rate of GDP growth, while positive, had been declining since 2004. And then it finally turned negative in the fourth quarter of 2008 when it declined by 6.7 percent,” she noted. “It will be 2010 before we see it turn positive again.”

Buyer’s Market Creates Opportunities
The question for the real estate industry is simple – which way will inflation turn? O’Mara says that “inflation is real estate’s best friend, but the fear now is deflation. Borrowing was driving over 30 percent of the economy. Consumer debt is up 17 percent from 2004. And in 2006, Americans spent 103 percent of their income. This allowed homeownership to peak at 69 percent in 2006. Since then, it has gone down. This leaves us with a dilemma: where is economic growth going to come from? We cannot turn around the economy on consumer spending.”

For real estate, the effects are being felt hard. “We see real estate demand hitting bottom in 2009, with demand for retail space being the worst of any sector, down 5 percent this year,” said O’Mara. “Demand for office and warehouse space is down 2 percent this year, but the one bright spot is that we do forecast demand for warehouse space to increase by 1.5 percent in 2010.”

For real estate prices, the result has been a record gap between asking rates and actual rates. “We have never seen a greater spread between actual and asking rates for space,” O’Mara noted. “The gap will go to 17 percent.”

Among the hardest hit markets in the U.S. are Los Angeles and Orange County, Calif., followed by the big cities in the Northeast, where vacancy rates are the highest in the country.

“Interestingly, industrial inventory built since 2000 has much higher vacancy than space built in prior years,” she said. “This creates opportunity for tenants. We are seeing all kinds of creative financing going on, and we will not see a bottoming out of the industrial market until 2011. Industrial rates will begin to go up again in 2011 after four consecutive quarters of negative demand. Another 44.5 million square feet of industrial inventory will be completed between now and then, but rents will not grow.”

Summarizing the predicament of many in the industry, she said, “We’ve seen tough times before, but this is bad. For commercial real estate, it’s been worse, and it will get worse. We are seeing a lot of aggressive negotiating going on. The highest buying power will be in Detroit, Phoenix, Dallas and Atlanta, but you really have to do your homework. Markets are in flux, and you really have to monitor pricing closely.”

Asia, Europe Offer Deals for Space
Advising attendees on strategies and tactics for CRE management, O’Mara counseled them to pay careful attention to changing real estate market conditions and prices; be prepared to go long on selected core locations to lock in rates at the bottom; have their occupancy strategy ready when negotiating a deal; have the flexibility to go short; understand their customers and prepare them for action; and constantly invest in and monitor quality data.

“From a real estate buyer’s point of view, this is a great opportunity,” she said. “This is the best time to plan, but you must understand your customer and know how their business platform is changing. And you must know your portfolio.”

Internationally, O’Mara said the best real estate deals right now can be found in Latvia, Singapore, South Korea, Lithuania and Hong Kong. “There has been a 30 percent drop in office values in the U.S. during this recession, and Europe is going to see the same adjustment in office values before this global economic crisis is over,” she said. “Asia office rents will also see a similar decline, with the worst corrections occurring in Mumbai and Singapore.”

O’Mara also alerted attendees to possible bargain deals in industrial space in the months ahead. “The highest rates of industrial real estate foreclosures are in Jacksonville, Fla., California and Arizona,” she said. “These are good opportunities for buyers, as there are incredible seeds of growth that happen during any recession.”

The smart CRE leader will take advantage of these opportunities, she added. “This is painful what we are going through, but this recession was a long time in coming. The good news is that we can actually build a more viable economy in the long run.”