Responsibility for and performance of corporate real estate functions A comparison of European and North American companies 16th Annual European Real Estate Society Conference, in Stockholm, Sweden, June 24-27, 2009 Steffen Hartmann/Andreas Pfnür | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 1

Background situation and motivation  An increasing number of non-property companies has recognized that their real estate holdings possess enormous value, but also requires immense expenditures.  In this context, one important issue facing non-property-companies is how to effectively manage real estate assets.  Besides many coordination instruments (e.g. intra-organizational market mechanisms, standardization, etc.) used to organize CREM, two further essential organizational questions arise in this regard: (1)Who should be responsible for particular real estate functions within the company? (2)How should the respective services be performed?  Although many companies seek similar goals with regard to their real estate assets and CRE managers are faced with similar challenges, different models concerning the responsibility for real estate functions and their performance seem to exist in practice.  To date, little research has been carried out to determine these different types of responsibility for real estate functions and their performance as well as the causes for their occurrence | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 2

Aims of the study  Analyzing the allocation of responsibility for particular real estate functions within the companies.  Identifying different characteristics of the current performance of real estate tasks.  Analyzing the future performance of real estate tasks.  Determining factors which influence the occurrence of different models in practice | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 3

Research design – concept and basic conditions  A questionnaire survey was chosen as the method of data collection in North America (conducted by a partner in the U.S.)  In Europe, data was collected by Computer Assisted Telephone Interviews (CATI) by a professional marketing firm  Target companies were major enterprises from the Banking, Energy, Telecommunication, and Transport & Logistics industries  The senior executive in charge (Head of CREM, Director of CREM, SVP CREM) responded to the questionnaire and was interviewed respectively  Interviews ranged from 13 minutes to 56 minutes with an average duration of 24 minutes  187 European and 225 U.S. companies were invited to participate in the study  74 European and 38 U.S. CREM executives took part in the survey, which equates to a response rate of 40% and 17%, respectively | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 4

Research design – participant companies | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 5 Size of total personnel Total revenues of participant companies Portfolio composition Ownership rates

Real estate functions along the real estate life cycle | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 6 For survey questions pertaining to the provision of each function, respondents chose from five options:

Degree of concentrating real estate responsibility in a separate CREM department is slightly higher in North American companies | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 7  What are the typical models that exist in practice concerning the responsibility for CREM functions?  Aim: identification of different types by using cluster analysis  Degree of responsibility- concentration of the more sophisticated functions (PM, Leasing, Space Planning, Acquisition & Disposition) is higher than for operational functions.  Operational functions were under responsibility of business units using the property in about 40% - 50% of the interviewed companies.

Five different types of CREM responsibility could be identified  Highly concentrated CREM responsibility  Full-service CREM | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 8  Responsibility is focused on operational functions (FM services), Portfolio management, and space planning & site selection

Five different types of CREM responsibility could be identified  Similar to Cluster 1 except of responsibility for development and CFM | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 9  Low concentrated CREM responsibility  CREM seems to have only an advisory function without responsibility

Five different types of CREM responsibility could be identified  CREM responsibility is focused on the more sophisticated functions  No responsibility for operational functions | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 10  Full-service CREM is the most frequent type of CREM responsibility in North America

Current performance of real estate functions | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 11

Current performance of real estate functions | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 12

Current performance of real estate functions | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 13

Current performance of real estate functions | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 14

Outsourcing intensity is higher in European companies than at North American CREM groups | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 15  Mainly operational functions were outsourced, especially TFM and IFM

The higher the degree of responsibility for CREM functions the higher the outsourcing intensity | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 16 1  Highest outsourcing intensity compared to all other types of responsibility 2  High outsourcing intensity  Less outsourcing of development functions compared to type 1 3  High outsourcing intensity for TFM and IFM  No outsourcing of development and CFM functions 4  Lowest outsourcing intensity compared to all other types 5  Low to medium outsourcing intensity  Types 4, 5 and 3 (for CFM): In case that there was no responsibility by CREM department for certain operational functions, these functions were less outsourced

Sourcing trends: The future performance of functions will be provided in the same manner as today | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 17

Achievements of CREM in the last ten years | Hartmann/Pfnür | TU Darmstadt | ERES 2008 | 18  CRE managers perception concerning the realized achievements seemed to be almost identical across all types of responsibility with low advantages for the types 1 and

Conclusion  It was shown that the degree of bundling CREM functions is generally higher in North American companies compared to their European counterparts.  Five typical models which describe the extent of CREM responsibility for certain real estate functions and their performance have been identified: a)At U.S. CREM groups the two models with a relatively high level of responsibility were most common (types1 and 3). b)In European companies all five models could be found with an almost similar frequency.  External performance was mainly common for operational functions (CFM, IFM, TFM) a)Outsourcing intensity was higher in European companies compared to North American CREM groups. b)The higher the degree of responsibility for CREM functions the higher the outsourcing intensity  All five types of CREM responsibility led to cost reduction, increased user satisfaction and increased portfolio flexibility in almost the same extent over last ten years | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 19

Conclusion  Strong and significant associations between the responsibility for corporate real estate functions as well as their performance and other variables like industry segment, number of employees, ownership rate, and portfolio composition could not be identified.  The absence of those associations along with the fact that all five identified types resulted in cost reduction, increase in user satisfaction and portfolio flexibility leads to the assumption, that there is not a best practice model for the responsibility for and performance of CREM functions.  Further research:  Analysis of a broader CREM model with more organizational factors based on considerations of gestalt-theory / configuration-theory  In contrast to the contingency approach which postulates that there must be a fit between the situational factors of a company and each organizational variable to be effective and efficient, the gestalt-theory acts on the assumption, that a close fit must exist between all organizational variables.  “[…] the gestalt or configuration of an organization is likely to be a more potent determinant of its effectiveness than any of the individual components of this configuration.” (Khandwalla 1973)  Aim for future research: Identification of gestalts / configurations | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 20

| Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 21 Thanks for your attention!

Excursion: Gestalt-theory | Backup | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 22 Efficency  Cost reduction  Increase in user satisfaction  Increase in portfolio flexibility  Increase in real estate values  … Configuration 1 Configuration 2/3 Corporate dynamic: (1=low; 2=medium; 3=high) Portfolio structure: (1=mainly office; 2=mainly logistics; 3=mainly production) Company size: (1=low; 2=medium; 3=high) Responsibility: (1=low; 2=medium; 3=high) Organizational Variables

Portfolio composition | Backup | Hartmann/Pfnür | TU Darmstadt | ERES 2009 | 23