Unlocking the Hidden Treasures in Excess Corporate Properties
Corporate America may have $175 billion in book-value real estate sitting around doing nothing; the actual market value of those assets is anyone's guess. That's the conclusion of a recently completed study by Lowe Enterprises, Inc.
The company's Corporate Services division, located in Brentwood, California, undertook the study with the help of six students from The University of California at Irvine Graduate School of Management.
"We wanted to define the overall market on the corporate services side," said Alan J. Beaudette, senior vice president at Lowe Corporate Services. "We wanted to study Fortune 500 companies to determine how big Corporate America's real estate portfolio was. The problem was, there were no statistics available. Brokers track available space and buildings owned by developers. They do not track buildings owned by corporations. Corporate America does not have a good idea of what real estate it owns, either."
Beaudette offered an example of a Fortune 50 company that wanted to know how much real estate it owned. The company had no central repository or database of real estate holdings. Each business unit had bits and pieces but no data in a consolidated format. The corporate real estate group finally went to the finance department to find out where the company was paying property taxes. The process has been going on for six to nine months and it has not yet determined the extent of the real estate it owns.
Lowe and the graduate students set about totaling up corporate real estate holdings in another way. The students went to the balance sheets of 380 of the Fortune 500 companies, and they extrapolated the data for the rest. They looked at the totals for property, plant and equipment. Through this approach, they estimated that Corporate America had $4.2 trillion in property, plant and equipment on the balance sheet. They were able to separate out equipment, estimating that 32 percent of this total -- or $1.3 trillion -- represented real estate, specifically. Through further research, the group determined that 13 percent of the $1.3 trillion represented excess capacity. That totals $175 billion being held at book value.
"It is no surprise," said Beaudette, "that Corporate America has excess capacity. The challenge is, how can a corporation unlock that value in the most effective way? This real estate is held at book value because the corporation in many cases has owned it for 10 to 40 or even 50 years. Some of this is on the books at a value of $1."
Unlocking that value means different things, depending on the real estate. If it is an underused property in a high-traffic area, it could positively affect the bottom line of the company. If there are environmental issues on the land, however, it could mean opening a Pandora's Box.
"It is getting tougher to find high-quality sites for development, and I will tell you that Corporate America is full of under-used real estate assets that are in tremendous locations," said Beaudette. "A company may have an industrial site on the books that is in a location that could support a higher and better use--office or residential. The challenge is to help the corporation deal with the environmental and the entitlement issues to truly maximize the value of a given real estate asset."
'Clustering' Helps Lower Corporate Real Estate Costs
With all of the workforce reductions of recent years, companies have gone to extraordinary lengths to lower operating costs by closing and mothballing facilities and finding other means to cut expenses.
One of the most interesting trends, according to Darin L. Buchalter, partner, Ernst & Young Advisory Services, San Francisco office, is the concept of "clustering."
"The technology and biotechnology worlds have started to look at a sharing of operational costs and also a sharing of intellectual properties where the businesses are symbiotic," said Buchalter. "The concept that I call clustering is a sound one where there are symbiotic ventures that are all working together for some common product or some common market. What you are really doing is joint housing a vertical, or a supply, chain. There are many communication and infrastructure efficiencies you can create."
He cited the assembly business as an example. One company might design the technology but another one builds it, packages it and sends it to market. Why not co-locate both companies to add efficiencies, enhance communications and lower real estate costs?
"Some of the things we see are just related to start-up ventures," said Buchalter. "The new business development section of a particular company will seed or house its investment start-up company. If there is extra space, it is in everyone's interest to keep operating costs low for that new venture."
He said that clustering occurs at the level of new ventures, seed companies, general business partnerships--like the third-party logistics companies--and symbiotic organizations. A lot depends on the space--it is easier to cluster R&D space than office space.
Buchalter sees biotech companies moving in this direction. He said that biotechnology is capital intensive. "Some things are highly proprietary and cannot be shared, but there are things that both biotechnology ventures could share, like chemical storage, shipping and receiving, and holding of material," he observed.
For Warehouses: Bigger Is Better
Size counts. This has been proven once again in recent years by the continued industrial construction boom. According to Torto Wheaton Research, Boston, Massachusetts, new industrial space continues to be built because older, smaller space is becoming functionally obsolete for some of the largest users of warehouse space. The need to increase efficiency is prompting the construction of behemoth new warehouses.
There has been a marked increase in recent years in the construction of warehouses of at least 250,000 square feet. A warehouse this size allows companies to take full advantage of new logistics technology. Further, there are also changing trends in the site selection, according to Torto Wheaton, with companies favoring distribution centers located in areas that minimize transportation costs by having access to interstate highways, seaports, air and rail.
Exceptional Industrial Projects: Beyond the Box. Trends and case studies on cutting-edge industrial projects. To order, go to http://store.naiop.org or call NAIOP's Publications Department at (800) 666-6780.
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By Ron Derven, co-editor of Development magazine
