The M&A Explosion and Real Estate

JACKSONVILLE, FL—Across the globe, mergers and acquisitions are on fire—in fact, the Wall Street Journal reports that activity is on pace this year to hit the highest level on record, even greater than the boom year of 2007. Additionally, the strong economy has led to rampant company growth in many sectors. And with that, there are many challenges that come with mergers, acquisitions and growth, particularly on the real estate side.

"For instance, a company may end up with excess space, discover redundancy in a certain market or have assets that don't fit in with its strategic vision," says Scott Henley, SVP of global corporate services with Newmark Grubb Phoenix Realty's office in Jacksonville, FL. "What it ultimately chooses to do with these properties will have a significant impact on its bottom line."

Other situations that may arise include having to close office locations or deciding where to base headquarters operations. One of the best examples is in the technology sector, where M&A activity has exploded. Recently, a well-known Fortune 500 firm hired NGKF in the lease of a new headquarters site, which effectively consolidated multiple spaces nearing lease expiration. The firm was able to negotiate a 15-year lease with an option to buy the property, which comprised multiple buildings, after five years. It was one of the largest recorded deals for office or R&D space in its market.

"The period after an M&A or during growth mode are ideal times to bring in real estate consultants to address a company's current real estate needs," Henley continued. "We have the experience and expertise to address current real estate needs, manage growth and integration and determine whether space is being used efficiently."

Real estate consultants have the ability to conduct real-time studies of space to document how it's used throughout the day. "Ultimately, these studies can be used to create maps to understand where space is underutilized and provide a client with its vacancy costs across the portfolio," Henley noted. "Often, there can be a disconnect between what space is perceived to be occupied and what is actually vacant." The information garnered can be used to create strategies and opportunities for savings associated with occupancy costs.

For instance, a company may choose to consolidate offices, increase or decrease its space during a lease renewal, or open a new location in a city where it has the opportunity to hire ideal talent at a better wage—not only reducing real estate costs, but also costs associated with human capital.

Among the roles of the corporate real estate advisor are helping companies determine:

• How space is utilized and how it can be used more efficiently, which can have a significant impact on a company's bottom line;

• The cost of labor in certain markets versus others;

• Who the competition is in a market and how to create an identity in a market where they're considering expansion;

• Future space requirements months or years out with multiple "what if" scenarios and space forecasting;

• Calculating future costs utilizing historical data; and

• Ways to integrate IT and other departments into the real estate strategy to avoid unnecessary expenditures.

Henley recalls one company that hired NGKF to provide single-source global real estate services in its goal to identify target costs savings of $15 million in five years. Through working with the client, the firm's corporate real estate executives were able to identify an opportunity to consolidate space that would save $5 million to $10 million, he says. Additionally, NGKF helped the client reduce risk by developing leaner processes, reducing redundancies and increasing customer satisfaction scores.

Companies should consistently look for opportunities to reduce real estate-related costs, which typically are 3% to 10% of company revenues. Many companies are unable to measure spend because many organizations are decentralized and the costs are carried in different budgets—and even centralized companies may not have control over real estate spend. By routinely benchmarking each property in a company's portfolio, there often are opportunities to realize 20% to 30% savings in total real estate spend.

For the client mentioned above, NGKF determined there was $9.3 million in annual spend overage across the company's largest locations (all over 25,000 square feet). It was able to reduce spend on vendor count and spread by $1.2 million—one step closer to the $15-million goal.

After a merger, acquisition or other growth activity, companies may find themselves faced with certain challenges—for instance, integrating real estate and technology into one platform. But if brought on before a deal closes, a corporate real estate advisor can help with scenario planning by providing a client best practices combined with modeling for future changes.

Among efficiencies that can be implemented during the premerger process include centralizing real estate information by making sure all lease agreements, financial terms, and lease transactions are in one place; improving the management of the client's real estate portfolio and operations by having key information available to everyone who needs it; and reducing real estate costs by analyzing property financial data and monitoring portfolio performance against key performance indicators and industry benchmarks.

"It's critical to have dedicated, knowledgeable real estate consultants on hand as a company grows or wants to make the best of the space it has," Henley says. "As shown in the case study above, the savings can be significant—that $15 million can be used to further the company's growth, meet stakeholders' expectations and position itself as a leader in its industry."

Scott Henley is SVP of global corporate services with Newmark Grubb Phoenix Realty Group in Jacksonville, FL. He may be contacted at shenley@phoenixrealty.net. The views expressed here are the author's own.