No one can predict the future. Only in real estate, with its reliance on long term plans, is this a remotely controversial statement. Some may throw up their hands at this stark assessment, assuming the discussion ends here. But despite an inability to know what will happen tomorrow, this conversation is just getting started.
In 2006, a report by the Boston Consulting Group stated, “The quick pace of change and the high cost of faulty predictions dictate that companies build more flexibility into their real estate portfolios and decision processes.”
The report stated that if an organization were to ignore the message of “strategy over tactics,” it could face
Though it’s been over a decade since BCG’s report, the uncertainty remains. Still, many industries—including pharmaceuticals, finance and tech—have long used agility to solve for disruption. And others, like CBRE, are joining them to find solutions that allow for that change.
According to Marshall O’Moore, director of CBRE’s Agile Advisory group, instead of backing down, we must accept that there is much uncertainty about the future and take a statistician’s approach to solve for that uncertainty.
Solving for X
One of the most important facets of real estate is getting the size right, as it is the strongest determinant of real estate cost. This is predicated on occupancy, or head count, and can be determined by using predictive analytics, an amalgamation of statistical techniques that helps forecast the future based on current and historical facts.
According to O’Moore, figuring out how to build an agile portfolio involves a dual process, which combines historical data with management insight.
First, establish what you can know about the future.
“We don’t ask management how much they are going to grow, because the truth is that they don’t know,” says O’Moore. “We ask them directly about the things that are going to change their growth, like automation and AI, launching new business lines and the way they may be affected by an economic downturn.”
Second, O’Moore says, solve for every possible outcome, so that "I don’t know" is acceptable.
“We can all be wrong about the future, but the trick is not to build a solution that only works if we just to happen to have been right,” says O’Moore. “By supplementing management insight with historical data, we take it upon ourselves to transform a client’s business understanding of what the future looks like into a headcount projection.”
Calculating the Future
To help tenants select the best solution for their space needs, CBRE created CALC, an online tool that compares the value of traditional leasing to coworking. CALC makes the premium for inflexibility a dollar figure, like free rent or tenant improvement. While CALC is limited to locations with fewer than 100 people, the methodology scales up all the way to the portfolio level.
With historical headcount data, industry growth data and business estimates, CALC tests thousands of scenarios wherein a company is growing and contracting against potential lease solutions. These include shared office spaces, pay-as-you-go models and traditional leases, from two-year to 10-year offerings.
The goal, O’Moore says, is to build a scalable system that clients can access and understand.
“We built CALC to let clients play around with some very advanced and powerful ways of looking at agile space, with a simplified headcount forecast,” says O’Moore. “When we work on a larger scale, we give clients a full report of the hypotheses tested, the problems solved for and the steps taken to arrive at our recommended solution. The real estate solution is driven by the headcount forecast, which is driven by the underlying business forces that our clients are navigating. We can show that connection.”
And, O’Moore says, thanks to programs like CALC, tenants can finally see the value of flexibility instead of just the price.
“Part of the design and the responsiveness is that we want CALC to help people develop not only an answer, but an intuition for how the inputs change that answer,” says O’Moore.