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.

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 will be great.  The Skyway and parking meter privatizations were $2.4 B. Olympics spending is projected to cost north of $3.5 B (so figure $7 B).



Thoughts on the Stimulus

Initially drafted on Sunday, February 15 (the weekend after passing of the stimulus)….

Not more than 12 months ago, many were debating whether we were in a recession. I wondered how trivial it was. No one doubted that we were certainly heading for one, if not already in it. Today, you are beginning to hear rumblings that we’re in a depression – where the fundamentals of capital markets cease to work. There’s little doubt in my mind that history will view this period as a depression. Whether we’ll reach 25% unemployment or it will be characterized as a “lost decade,” we are in the fourth inning of cataclysmic economic pain.
The federal stimulus plan is an utter failure. Spending totals $223k for every job purported to create. Eleven percent of the $787 B spending bill is expected to be realized this year, although I’ve heard claims as high as 22%. At 9% of GDP it’s bold. What it’s not is stimulus. Add in the cost of financing and those entitlements, which are stated to be temporary but lack any mechanism to end them (as an aside, McCain was proponent of great idea to tie these entitlements to two quarters of positive GDP growth, after which point they would cease), and the burden for future generations is $2.3 T. Infrastructure spending is a small portion of the total. Only 18 – 27% of bill is tax cuts, and most of those are for people who will spend as they otherwise might or save.
Most importantly, it fails to use tax policy to sculpt behaviors. As is often the case, the best fixes are simple and have been around for a while. An immediate expensing (i.e. tax reduction) of business’ capital spending would fuel targeted improvements in innovation and create lasting jobs. Too bad our politicians don’t have the balls to pass it. Instead, they continue to pander to financial firms, making their profit (i.e. interest payments) tax deductible and creating a bias for debt. Another bias to debt is primary residence mortgage deductibility. Rates are higher and interest isn’t tax deductible in Canada so Canadians pay off their mortgages a.s.a.p. I happen to selfishly favor mortgage deductibility but it’s an interesting social question.
My admiration of China’s administration is largely because of their use of tax policy to cool the housing market a few years back and address causes of the problem (it helps to have a one-party system). The U.S. needs a governing body of wise, non-political academics responsible for spotting issues such as the U.S. total indebtedness rising to 3.5 times GDP. Who didn’t know that would end badly??
At least Obama was able to remove most of the protectionist language which would have incentivized other countries to retaliate and limit U.S. exports. There is near universal agreement that protectionist measures and putatively high marginal tax rates exacerbated the Great Depression.
Limits on executive pay for governmental infusions of capital? I don’t buy the brain drain argument: (a) the brains got us into this mess, and (b) where are they going to go? The senior-level executives with relationships might start or join smaller I-Banks but I doubt they’re the solution to the problem anyway. Innovation will start from the people in the trenches who figure out how to get our shadow banking market (i.e. syndications) back. There should be no higher priority for this administration. One idea kicked around that I like is to give B-Piece buyers with good track records the option to lever 10:1 with the fed’s money. Until spreads narrow in the secondary market, primary conduit lending will not resume.
The Congressional Budget Office projects the stimulus with detract from the economy’s 10-year growth rate.
One thing that continues to be reinforced in debacle after governmental debacle: Pelosi is as deleterious to the democratic process as Dick Cheney.