In a recent column, one of my colleagues, senior managing director John Gallagher, advised, in part, the need for corporate real estate departments to address their constituents' desire for flexibility. John says corporations are demanding more flexibility such as shorter lease terms and flex space. So, let's talk about what is driving the need for flexibility today at the macro level.

If you've ever driven east from Amarillo to Oklahoma City, you know the road is flat and you can see for miles. However, as you progress through Oklahoma City and then to the turnpike to Tulsa, the gentle up and down of the highway creates the illusion that the horizon is nearer until you crest the next little hill.

In business, the horizons come faster than they do in Texas or Oklahoma, which creates a dilemma for the CRE professional. How do you plan for long-term occupancy when long-term occupancy according to your customer may be three years? Quite simply, business cycles that used to be 10 years long became five years in the 90s and have shortened to three years (or less) in today's economy. In some industries even three is a stretch.

Rising interest rates, rising inflation and rising oil prices are contributing to the shorter terms. Sharp increases in oil prices (the kind we're all experiencing) can cause an increasing inflation rate. Inflation increases the cost of production of goods and services and puts pressure on a company's distribution network to cut costs of delivery to maintain or increase consumer demand for the product. For the CRE professional, the inefficiency created by these related forces results in an inefficient portfolio where managing excess overhead space or over-capacity in manufacturing or distribution can be a nightmare

Let's keep to our Southwestern theme. Once in our history, homesteaders and settlers migrated west through Oklahoma and Texas in search of prosperity. Many companies today are pioneering similarly with real estate investments in foreign lands by expanding into India, Russia and other countries. But what market exists for disposition of an asset when you are the market? Most companies must incorporate an extremely disciplined exit strategy and be willing to pay handsomely for it because the alternative is holding the bag with a specific-use asset and no buyers.

Within certain industries, such as healthcare, energy, or chemical manufacturing, politics plays a key role in the development of a short-term mindset. Politicians can be either fast friends or bitter foes (and often both) within a single political cycle. Managing flexibility in the context of political change can be an exercise in frustration. Imagine the cost and time commitment to ramp up or down depending on legislation. Sometimes in the haste to ramp up, more thought and money is given to an on-going lobbying effort than the possibility that devising a real estate or business exit strategy might be more important.

Don't expect time horizons for planning cycles to lengthen anytime soon and don't expect to see a lot of long-term leases. Expect to see continued global expansion with managed exit scenarios become part of the standard corporate real estate business plan. Expect to see economic forces drive real estate consolidation opportunities and innovative workplace strategies. Expect oil prices to impact distribution, which in turn will impact spending. Expect politicians to stay exactly the same. Expect it all over the crest of the next hill.

Based in Anaheim, CA, Vik Bangia (vik.bangia@cbre.com) is a managing director in CB Richard Ellis' global corporate services organization. Views expressed here are the author's solely.

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