By John Salustri
Health risks aside--a difficult issue to ignore in the face of Covid-19 cases numbering in the thousands and climbing--the impact on manufacturing and distribution, especially when it entails a global supply chain, is staggering.
The issue also raises important questions about what corporate real estate managers can do in the face of any downturn to help maintain profit margins when economic conditions change for the worse. The answer we received from IAMC members can be boiled down to one concept: “Constant Diligence.”
All Good Things?
“I think there’s a real potential for a correction of some sort as a result of the coronavirus,” says Michael G. Connors, senior VP of Real Estate for CORT Business Services in Chantilly, VA. “We’re such a global economy, and we purchase a lot of furniture from China.”
He points to the current upcycle as the “the longest bull run in the history of the US, but all good things must come to an end. This virus could be the thing that puts us over the edge.”
Whatever the cause and whenever it might happen (economic gurus urge investors to take a view longer than the course of an epidemic), you can be prepared, “if you're constantly mindful of your expenses, and you know what your sales are doing well enough in advance,” says Colleen M. Caravati, director of Corporate Real Estate for Corning Inc. “We stay closely aligned with the different businesses that we support within Corning, and we watch sales. It’s knowing in advance so you can prepare and slow your spend accordingly.”
Brad Manns agrees. “The number-one thing we can do is serve as strategic leaders to our business partners,” says Manns, executive director of Global Integrated Services for Cummins in Columbus, IN. “One way we do that is to constantly plan and take a strategic approach to our work, whether we’re anticipating a downturn or not. For our major sites around the world, we have master plans already developed or being developed, and they must be flexible and scalable so we can dial up or down based on business conditions.
“If sales go up, there’ll be a small increase in support
operations to accommodate it. If it goes down, we have the levers in place to
reduce budgets.”
— Colleen M. Caravati, Corning Inc.
“We know what our end goals are,” he continues, “so it’s not a matter of if something happens but when, and we keep this in perspective so we can make the best decisions for the company with these goals still in sight. So if business conditions have slowed down, we can slow our pace and increase it again when conditions recover.”
Much the same at Corning, where, in upcycles and down, the company has a formula by which they can tie those sales to spend. “So if sales go up, there’ll be a small increase in support operations to accommodate it,” says Caravati, this year’s IAMC chair. “And if it goes down, we have the levers in place to reduce budgets.”
Levers? “I think of them as rings of defense,” she says. “The last thing you want to do is reduce your workforce. So first you cut back supplies, printing, catered meals or overtime.”
C-Suite Surprises?
A constant theme at IAMC get-togethers is the relationship between the C-Suite and the Real Estate department. The members interviewed here state that a close working relationship between the two is a must to minimize cyclical disruptions in the economy.
“I’m a firm believer that, if you’ve established your CRE department’s value prop at the C-Suite level and with the extended leadership team--and they view you as their advisor and partner on all real estate matters, surprises from above won’t be your issue,” adds Caravati, whose mostly leased portfolio stretches to slightly over 50 million square feet in 31 countries.
“We've been making a move to bundling larger portfolios of square footage under a single integrator for maintenance purposes and seeing efficiency come to the bottom line.”
— Brad Manns, Cummins
She says that a centralized structure is also key and greatly enhances her ability to keep her ear to the needs of the various constituents as cycles fluctuate. “If you’re letting 20 different businesses or entities manage their own real estate, you won't be looped in.”
For Cummins, the problem of reportage was solved during a business-alignment exercise the firm mounted five years ago. Based on that realignment, the firm created a five-year strategic plan. (The Cummins industrial portfolio covers 180 countries and combines owned and leased facilities. “We typically own the larger strategic properties,” Manns says.)
Three Steps to Strategic Planning
There are essentially three money-saving initiatives that Colleen Caravati says she considers.
Much as Michael Connors mentioned at CORT, first for Caravati is to advise business units on “opportunities to optimize their portfolio, such as selling off surplus properties or consolidating multiple lease locations.”
Next on her list, applicable to multinational players, is understanding global markets. “We’re always looking at the next manufacturing, low-cost market we should consider and what it looks like, not just the cost of real estate, but in terms of the supply chain, the labor cost, site accessibility and utilities.”
The final leg of this economic stool is to consider alternatives you’ve never considered before. She includes here options that can range from sale/leasebacks to synthetic leases. She doesn’t recommend any one possibility, but the point here is that no stone should be left unturned in the search for capital.
He’s frank that the program won’t always help them skirt around surprises from above, “but for the most part we’re much more aware now than we were years ago and can anticipate changes or new initiatives that may be coming.” It also helps keep CRE “in perpetual alignment mode around the work we’re doing and the strategic initiatives we’re pursuing. We’re now at the table sooner than later and this helps to adjust.” He adds that there is one CRE team member dedicated to keeping the alignment between departments solid.
In terms of specific recession-hedging initiatives impacting the C-Suite, Connors says that, while CORT tends to lease most of the 2.7 million square feet of industrial assets it holds in the US and UK, that might be changing, especially in the wake of the new FASB lease accounting regs. “I’ve suggested to the C-Suite that we begin to consider purchasing, and they’ve been open to the idea,” he says.
Other strategic safeguards include sharing facilities between divisions and sharing employees in the same building. “If someone calls in sick, rather than calling in a temp, we might ask someone next door to change uniforms from CORT Trade Show to CORT Furniture Rental, and we won’t miss a step,” he says. They also try to time lease expirations in the same city, “to give us the option of combining divisions in larger facilities, which typically carry lower rental rates.”
And, of course, there are the everyday best practices that don’t need the C-Suite blessing, such as the operating-expense levers Caravati mentioned.
At CORT, “We’ll negotiate time frames in which landlords must provide us with a reconciliation in a timely manner following the end of the calendar year,” says Connors. TI allowances and termination rights are also included in the negotiations, he adds.
Manns is also looking into economies of scale. “We've been making a move to bundling larger portfolios of square footage under a single integrator for maintenance purposes and seeing efficiency come to the bottom line,” he says.
“Your suggestions for improving operations will gain credibility, and they’ll see that you’re making decisions through their lens.”
— Michael G. Connors, CORT Business Services
At the end of the day, serious, impactful anti-recession tactics have to come through a close working relationship with those around you . . . and those above you. That means fostering trust.
IAMC members need to “know and understand their company’s business and what makes it tick,” says Connors. “Engage with the C-Suite as much as you can and with other key operational VPs so you can build mutual trust. By doing that, your suggestions for improving operations will gain credibility, and they’ll see that you’re making decisions through their lens.”
And at the same time future-proofing your balance sheet against economic whim.