October 3, 2003—A survey issued recently by Jones Lang LaSalle reveals that corporate real estate executives are cautiously optimistic about the economy, but are still struggling to deal with a substantial inventory of excess space. Furthermore, new accounting rules regarding the impairment of excess space have created additional hurdles for CRE executives.
“While the past couple of years have been difficult for CRE executives, some important lessons have been learned,” said Richard McBlaine, President, Strategic Consulting, Jones Lang LaSalle. “The next real estate cycle should see CRE executives putting greater emphasis on the flexibility of their portfolios. At the same time, the new accounting rules governing the impairment of excess space should ultimately bring additional visibility to real estate markets.”
As a way to better understand how CRE executives are navigating the current environment and positioning themselves for the future, Jones Lang LaSalle conducted a survey of 75 leading CRE executives from a cross-section of primarily Fortune 100 companies.
More than a third (35 percent) of CRE executives report that their excess capacity is more than 15 percent of their current portfolio, while 60 percent claim levels above 10 percent. Based on consensus economic growth expectations, this could represent two to three years of supply.
Relatively high levels of excess space may be causing CRE executives to be somewhat cautious in projecting when they will finally return to the market for additional space. When asked in what time frame they foresaw a need for net additional space in their portfolio, respondents offered a mixed outlook.
Despite significant levels of excess space, the vast majority of respondents have impaired only a fraction of their surplus space. While more than 20 percent of respondents have impaired more than 50 percent of their excess space, almost half have impaired less than 10 percent.
According to Kenneth Rudy, Managing Director, Corporate Finance, Jones Lang LaSalle, the findings also indicate that substantial amounts of “shadow space” continues to exist in corporate portfolios. “Until companies finish impairing their space, the true impact on real estate markets may not be known, and the point at which the market reaches equilibrium may be farther out than previously anticipated. This current lack of transparency is one unfortunate—and presumably unintended—consequence of the new accounting rules,” he said.
“Eliminating surplus space” and “Consolidating/co-locating space” were cited as the strategies with the most potential for cost cutting by 44 percent and 23 percent of respondents, respectively. Manufacturing space was named the most challenging for disposition, while headquarters and general office space were cited as offering the biggest opportunities for savings.
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