Do Environments Matter? CRE Value Mindsets

Corporate real estate occupiers typically fall into one of three different categories, which I reference as “Mindsets.”  Those that view corporate real estate (CRE) as:

  • a commodity whose Cost should be managed as aggressively as possible;
  • a strategic asset that can provide Value to other aspects of the business; or
  • those who are Agnostic – they acknowledge the possibility that CRE could be more than a commodity but lack a philosophy or language within the corporation to effectively measure the potential value.

Each organization employs at least one Mindset and I’ve seen a marked shift from a Cost to Value Mindset over my 19 years in this industry.

Cost Mindset

Organizations with a Cost Mindset analyze CRE almost exclusively through the financial lens.  Because of our Midwest orientation and proclivity for generating the lowest cost real estate solutions for a given market, my team has many CRE clients with this mindset.  The lowest cost alternative that fits relatively basic space program requirements wins.  “Cost” is defined differently for each organization. For example, some of our clients are focused on a cash-cost “run rate” or EBITDA impact without as much regard to the capital expenditures to implement a given solution. For others, it’s the all-in project NPV.  CRE managers are rewarded primarily for how much cost is pulled out of the portfolio each year.  These organizations are often heralded by their investors for their disciplined approach to managing margins in cost-competitive industries and for the majority of their portfolio, this is the appropriate approach.

For manufacturing sites that are expensive to relocate, for companies whose culture extols the virtues of  cost leadership above all else, or when labor availability isn’t affected by the facility condition, a Cost Mindset may be warranted.

Value Mindset

I’ve seen a marked shift to a Value Mindset over the past 15 years.  It’s a trend that transcends the business cycle (though certainly slowed down).  The Value Mindset is primarily a function of (a) space that is more readily differentiated by advances in design, furniture and interactive technologies, (b) the need to increase collaboration between employees, since innovation is essential to company success, if not mere survival, and (c) increased competition for the best labor.

Function (c) has historically been the primary driver and cannot be understated.  If there is not sufficient competition for labor (i.e. back office, lower wage functions), then the ROI in the improved environment is low.  However, my CRE advisory team has a call center client that’s in a war for good (albeit cost effective) talent. Between parking and rent, they increased per-square-foot total cost of occupancy (TCO) by 80% in a relocation.  How could a cost conscious company in a margin-constrained business justify this?  They densified the space (from 145 to 134 sq. ft. per employee) and justified the per-seat rent increase in hopes they can generate 2.8% more productivity (breakeven threshold). The increased rent expense would also be paid for by a 0.86% reduction in their employee turnover rate (or some lower combination of the two). Given these low payback thresholds, and plans to grow the workforce, the business was confident making the additional expenditures.

Function (a) above is a bigger factor today than in past years because better space is so much better today.  Early in the last decade, a private equity/capital management client of mine spent $350/sq. ft. for a lavish and impressive space – ego space possessed little additional utility beyond brand.  Today, a well-known tech client of mine spends $290/sq. ft.  20% of that cannot be seen (i.e. Mechanical, Electrical & Plumbing) but makes for a more comfortable occupancy.  Another 25% is Audio/Visual and other technology-related enhancements that provide for more dynamic and rewarding interactions between employees. The balance is spent on creating an environment that draws employees into the space and gets PR for “best workplace” or “best place to work” awards.   If you get Function (a) right, Function (b) is a natural result and drives innovation.

Agnostic Mindset

It’s the CRE managers of companies with an Agnostic Mindset that have the biggest opportunity to drive change in their organization.  These organizations acknowledge that environments might be able to generate top-line revenue growth (e.g. employee productivity or innovation)) by improving employee productivity, accessing better talent and driving innovation but lack a c-suite directive/understanding.  Oftentimes, these companies are beset by ambiguous cultures, low employee engagement scores, or lackluster recruiting and CRE is not a widely accepted solution.  For these companies, it’s the responsibility of the CRE manager to create the business case for facilities investment (assuming said manager believes that such an investment can in fact help the organization).

The misalignment is often with companies that apply a Cost Mindset across their CRE portfolio.  For an organization in competition for labor (i.e. headcount growth or in a tight labor market), that desires to maintain/improve employee engagement; is focused on employee culture; or where brand is important, the Value Mindset is warranted for at least a portion of the employee population and/or CRE portfolio. The biggest impediment is often how to prove that CRE is an effective solution for which there is a measurable ROI.  More on that to come.

Sam Zell’s “Am I Being Too Subtle?”

A quick read (or audiobook) that’s entertaining for any deal junkie but has applicability to goals setting and management philosophies and some (badly needed) Chicago pride.  I’ve seen him speak many times.  He’s typically – though not always – ahead of the curve.  One of my favorite speaking engagements of his was when he played his New Year’s 2000 Zellennium song.


  1. It appears that Sam wrote his autobiography long ago, and then shaped actions to build the desired legacy.  If this is true, this is a great example of the habit of writing your biography or eulogy.
  2. He’s a list maker, a common activity for high-performing individuals. I view them as “mini goals.”
  3. As a risk-taker, he says that his greatest fear is making a decision without having all the information.  He’s confident in his ability to evaluate and assess the known risks but, it’s the unknowns that bother him.  He clearly did not see the capital markets shut down right after the Chicago Tribune acquisition.
  4. He prides himself at being innovative and incentivizes his employees/partners to do the same.
  5. He hired a creative director early on to build his brand and leverage his considerable skill set in this regard.  He understands the value of his personal and Equity Group’s brands. Forward thinking.
  6. Incentivize employees to act like owners – think big, long-term and be conscientious.
  7. Creating wealth is about leverage. The primary levers are people and capital.  I know someone that calls the structure that pulls these levers a “pyramid.”   Such hierarchical structures are demoralizing.  It’s not a coincidence that both Zell and Ray Dalio talk about meritocracies (though I haven’t researched how well Dalio’s people share in the spoils).  A key question is how to motivate people for the common good.  It goes beyond financial rewards.
  8. History (re)written?  The winners get to write History and I always question the biases of an author. Does Sam rewrite it?  The physicist in me probes every observation.  Zell is clearly concerned about his legacy and paints a favorable picture, as one would expect.  I’d like to believe it.  He’s been so generous with his time, speaking around Chicago, and does indeed make large donations, though these good just be examples of ways to pacify an ego.  His reputation supports much of what he extols in the book.  Perhaps my one area of doubt, which he ultimately convinces me of, is whether those on the opposite side of the negotiating table share his perception that the negotiation was win-win.  My experience is that the more the counterparty says “I’m a good guy” the less (s)he will be.  Regardless, it is instructive to see how concerned he is for this aspect of his reputation.  When you need to do that many deals (because you have so much capital to place), I’m sure his reputation is important.

There is certainly, on average, a different/higher professional courtesy amongst corporate real estate brokers and with landlords that work in a given geographical market and must do so repeatedly.  This can help the corporate occupier client, oftentimes getting to final deal terms more quickly.  The downside is when there’s a “market-middling” of the transaction, particularly common when brokers also represent landlords.  For those brokers active in a geographical market, they are worried about future transactions and may therefore be reserved in the representation of their corporate clients’ interests.

Data is everywhere but CRE. Why?

How many hours has it been since you heard the phrase “Big Data?”  Albeit, other technologies capture the public consciousness (Blockchain in 2017) but I find the silence deafening.  We all predicted Amazon would crush retail back in 1999 but this has only recently come to pass, as evidenced in Fig 1.   Reality takes longer (and a good bit of execution) to materialize.  As the hype wears off, the real fundamental change starts to happen.  It’s permeated most areas of the organization but two: HR and corporate real estate (CRE).  Why is there not more emphasis on quantitative measurement of a company’s human capital and how its CRE drives economic profit? For most firms, they are the 1st and 3rd largest cost categories respectively.

Fig 1:  Graphs of Tech (Amazon) vs Bricks and Mortar (Simon is the largest retail REIT) stock prices are always entertaining.

Tech vs Bricks & Mortar

Long after we started discussing the marginalization of physical retail, it has now taken hold.


Hello World!

October 28, 2001, I posted my first blog entry on   I was trying to make sense of the world — two years out of school, enjoying the wonderful spoils of Chicago and seeing a lot of upheaval after 9-11 and an impending Tech Bust.  I now find that Google re-posted them, after tearing down after 2010.  The posts below were brought over from that site.

As I embark on a new round of journaling, I plan to explore how I see the world changing, most notably from the lens of my primary job – a corporate real estate advisor for Colliers International, – as a multifamily investor (, the economy and, possibly, American culture.

U.S. Unemployment Varies Significantly Based on Income Levels — Seeking Alpha

When you get granular, it’s a wonder office real estate has been beset by such challenges. As reported by Seeking Alpha, U.S. Unemployment Varies Significantly Based on Income Levels. The top three income deciles, representing those with household incomes in excess of $75k, have an unemployment rate of 4.07% (vs 9.7% in January overall) and underemployment (ie U3 + U4) of 6.63%. This could help explain why office CRE has held up so much better than industrial (warehouse / manufacturing) space.
It could be that there is not the extent of shadow space many (I) believe and thus office CRE, which has held up better fundamentally than all other major RE classes, will bounce back sooner. Admittedly, I’d like to understand the historical relationship of these values….it’s on the to-do list.

Tishman Speyer’s Chicago liquidity problem

Tishman Speyer’s EOP portfolio is in (even more) trouble….word is that the FDIC, who took over ownership of Lehman’s assets, has refused to fund a substantial TI /LC reserve committment Tishman has for tenanting it’s 6 MSF EOP portfolio. It will be tough to get deals done without the capital but I have to believe TSP can reduce thier principal obligations b/c of the FDIC’s unwillingness. Then again, the FDIC might cite breach of technical loan covenants like LTV.
Imagine what rents will do if TSP’s vacancy is essentially removed from the market. Fun times in CRE!

Will public equities climb higher once fed starts sapping up all that liquidity?

I don’t see how the capital markets go higher once the government starts sapping up all that liquidity.

U.S. gross domestic product rose by a seasonally adjusted 3.5% annual rate from July through September, the Commerce Department reported in its first estimate of third-quarter economic activity. Economists had forecast 3.2% growth.

The economy’s growth was the first since the second quarter of 2008 and serves as an unofficial confirmation that the longest and deepest recession since the Great Depression has ended. The GDP gain was driven by consumer spending, which rose by 3.4%. Economists said the massive stimulus injected by the U.S. government, such as the cash for clunkers program, helped boost consumer spending.



Olympics in Chicago

As we are days away from the decision for the 2016 Olympics, it’s time to handicap the game.  From the moment it was announced, I tried to play the southside real estate market. Fortunately, I wasn’t too successful – limiting my interest to one property (greater economic headwinds have limited the payoff).  Any new capital put to work on the southside will benefit if Chicago loses but I’m going to stick with my 2007 prediction and say we clinch.  I don’t feel as good about it as I did six months ago.  Rio has performed well in competition. 

In the end, my prediction comes down to a few things: (a) we’re regaining some popularity in the global scene, (b) historically, U.S. Olympics have proven economically successful, and (c) Daley and Ryan don’t lose.  That said, I do think it will be a loss economically in the short run.  I’m still a supporter of it because of the long-term benefits and possible infrastructure improvements, but, the costs of Daley’s boondoggle will be great.  The Skyway and parking meter privatizations were $2.4 B of shady spending. Imagine what happens he gets his hooks into $3.5 billion plus in spending that’s far more difficult to track.  He makes Blagojevich look saintly.