Western Real Estate Business

NOV 2015

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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24 • November 2015 • Western Real Estate Business www.REBusinessOnline.com CORENET 2015 GLOBAL SUMMIT NORTH AMERICA: A LESSON IN THE 'BUSINESS OF CHANGE' Disrupting the old ways the industry does business was the topic of conversation at this year's summit. By Nellie Day I f this latest technology spree has taught us anything, it's that knowl- edge is power. You have to know how to use the latest and greatest technologies in order to appreciate what they can do for your business. While the commercial real estate in- dustry has a reputation of being be- hind the tech curve, conferences like CoreNet 2015 Global Summit North America, held Oct. 18-20 at the Los Angeles Convention Center, are try- ing to change that. The focus of the 2015 summit was "disruptive innovation," as Randall Smith, CoreNet Global's chair, em- phasized commercial real estate play- ers need to be about the "business of change." "Corporate real estate profession- als know all too well that change and disruption are often the catalysts for innovation," Smith said in welcoming remarks. "Knowing how to respond to change and disruption, and in turn generate or visualize opportunity is the task at hand." Knowledge, in the tech world, of- ten comes in the form of data, as par- ticipants in the "A Global Portfolio: I Can See Clearly Now" panel attested to. The panel introduced attendees to "actionable intelligence," or the pro- cess of not just collecting data, but maximizing its value and use. This is what global pharmaceutical company Merck (known as MSD outside the U.S. and Canada) set out to do when it hired JLL to analyze and scout its cur- rent and future ofce spaces. "We needed to fnd ways to make the Merck portfolio more intelligent," explained David Sawdey, senior vice president and director of business in- telligence for JLL. "This all starts with data." The JLL team set out to collect data on Merck's operations, spaces and f- nancials that it could store and ana- lyze in one single source. The team used a transaction tracking software platform and converted it into a data collection system called a data valida- tion tracker. Like all new web-based programs being introduced to a staf, JLL had to create an instruction manu- al Merck would fnd intuitive. The end goal was to assist the pharmaceutical company in making better-informed decisions when it came to negotiating leases, both existing and new. "Everybody wants to better un- derstand occupancy," Sawdey said. "They want to know where they have underperforming locations. You need to create an interactive, easy to man- age tool to do this. You're not selling a tool, you're selling a concept of what the tool's doing." The team focused on three specifc points of data: fnancial data, includ- ing the total cost of a site, the rent, operating expenses and annual de- preciation; capacity data, including how many people and cubicles each site in the portfolio can accommodate; and occupancy usage, including how many people are assigned to desks, cubicles and touchdown spaces, or places people can plug-in and work. The data validation tracker also in- cluded features that allowed Merck to analyze its real estate portfolio, map sites where its key customers were based, and overlay trafc patterns, including rail and subway times. This ultimately produced a very visual, in- teractive overview of an entire region, city or country Merck could then use to determine its next spatial move. After buying pharmaceutical rival Schering-Plough in 2010, Merck used this data to acquire a second labora- tory space in Boston. The company was looking to obtain ownership con- trol of a site within walking distance of Harvard Medical School and/or MIT that could accommodate up to 350,000 square feet. The analytics pro- duced ultimately lead Merck to sign a long-term land lease with Emmanuel College Endowment Campus. The site sits immediately adjacent to both the Harvard Medical School and Beth Israel Hospital. The transaction closed at 30 percent below market rate, and gave Merck the ability to acquire ad- ditional development rights of up to 400,000 square feet on the site, should the company want to expand. While Merck's data and cooperation were invaluable to creating an action- able intelligence strategy, Sawdey not- ed third-party data was also welcome, as it simply added more layers of in- formation to the equation. "We used third-party, or external, data for market favorability," he not- ed. "You can look at the leases expir- ing in a fve-year window. You can see what that commercial real estate frm thinks will happen in the future. You can see whether the market will favor the tenant or landlord. You don't just want to think about lease expirations, but you want to think two to three years out and determine if this is a core facility." The answer to that question was no in regards to a 67,000-square-foot lab and ofce facility Merck had oc- cupied in the San Francisco submar- ket of Mission Bay in late 2011. The company had occupied the facility for about fve years after acquiring Sirna Therapeutics in late 2006. Merck had hoped to double its Sirna footprint at the facility at one point in time, but was never able to fully oc- cupy the 67,000 square feet. It closed its Mission Bay research center, elimi- nated 50 jobs from the site and relocat- ed another 10 jobs to other facilities as part of its global workforce reduction strategy. The reductions were made in an efort to save the company $4.6 bil- lion annually by 2015. "Once you have all this data in place, you can take the conversation from cost to what's going on from a strategy point of view and how this money can be used," Sawdey said. "Use it to mea- sure and benchmark success, to make more informed decisions. To put your scenario modeling and strategic plan- ning in place. It improves communica- tion, it fosters strategic, portfolio-based fnancial discussions with key lines of business throughout an organization." Sawdey and his co-presenter, Meghan Ward, national director of transactions advisory services for JLL, emphasized the process of integrat- ing a disruptive innovation like a data validation tracker into a frm can be, well, disruptive to employees. With time and patience, it can pay of, how- ever. The team noted it took about 18 to 24 months for the two compa- nies (and the Merck employees who provided data) to feel confdent they were collecting a strong amount of ac- curate data. The pair also stressed the impor- tance of metrics – and how they can change over time. Some of the metrics Merck valued were its current rental rates, suggested current market rental rates, and whether the frm was pay- ing more or less than those suggested market rates. The team also produced fve-year forecasts on major cities and secondary markets to determine if a specifc region was expected to favor the landlord or tenant in the future, known as a favorability index. "Market forecasts don't drive busi- ness decisions," Ward warned. "Hon- oring the needs of a business is tanta- mount to anything. But if you know for a fact the business will stay in a site for the next fve years, then with this knowledge, you can say 'when should we renew this lease?'" Clayton Hayden, Merck's director of strategy and analysis, had his own take on the data validation tracker. "This tool can align with our com- pany and future HR decisions on facility-driven discussions," he said. "It can afect our 'workplace of the future' type design, and what we can do to attract and retain Millennials. It can also control what kinds of ameni- ties we're going to have, which then leads to the discussion of are we ofer- ing free cofee or not? That discussion takes more time than any." n From left to right: Clayton Hayden, Merck's director of strategy and analysis, and JLL's Meghan Ward and David Sawdey. management of properties when exchanging into DST properties. These properties are professionally managed by asset managers called sponsor companies. DST clients love being free to travel and spend time with kids and grandkids, as opposed to handling the daily has- sles that come with managing apart- ments and commercial properties. Dwight Kay, CEO and Founder, Kay Properties and Investments in Palos Verdes Estates, Calif. DST 1031 Exchanges continued from page 22

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