The Productivity Imperative 2013 Corporate Real Estate Trends for Banking and Financial Services
Perhaps more than any other industry, the financial services sector has been challenged by the simultaneous pressures of intense competition, increased regulation, and margin compression. Although profits are once again rising for some banks, it is clear that there are still many risks ahead. In this environment, an optimized corporate real estate platform is no longer an option, but a necessity. Jones Lang LaSalle s 2013 Global Corporate Real Estate (CRE) Survey received an outstanding response from real estate executives at 147 banks around the world. Their input confirmed the current challenges facing CRE executives in the financial services industry, and highlighted a series of opportunities for them to lead their organizations to a more profitable future. This paper identifies the elements of our global report that are top of mind in the financial services industry, and it details the most pressing issues facing bank CRE executives. Please refer to the list below, and JLL s Global Corporate Real Estate Trends Report for additional information. We ve found that there are four consistent challenges facing financial services real estate teams 1. Achieving personnel and portfolio efficiency 2. Meeting workplace productivity expectations 3. Interacting with procurement teams 4. Managing international expansion 2 2013 Corporate Real Estate Trends for Banking and Financial Services
Personnel and Portfolio Efficiency Large banks were the first movers in the initial outsourcing of the corporate real estate function in the late 1980s. Over time, the financial services industry has continued to drive innovations and expansions of the CRE outsourcing model. Two key trends are observed from our survey: First, large banks are clearly moving toward a centralized real estate management structure, with regional and global portfolio management now more common than a localized management structure. This leads to global outsourcing contracts that can maximize the savings for the entire enterprise. Second, middle market and regional banks are now rapidly recognizing the benefits of real estate outsourcing. Their outsourcing journey often begins with lease administration and transaction management, and then expands into facility management and project management. Changes in the external banking environment, such as bank consolidation and compliance pressure, have only encouraged this evolution of outsourcing. However, significant opportunities remain for progressive banks to optimize their portfolios and minimize their costs. Although the banking industry was an early pioneer in CRE outsourcing, other industries have caught up, and some have even surpassed the sector in real estate efficiency. As illustrated below, one measure of CRE efficiency is the ratio of CRE staff to total company employees. For all organizations in our sample set, the average employment ratio is one corporate real estate professional per 4,000 total company employees. The results indicate that the banking industry may be lagging other sectors and has significant room to improve. In fact, only the government sector employs more CRE professionals per FTE. Pharma/Life Sciences Consumer products Technology and Telecom Energy Banking and Financial Services Extremely Lean Efficient Staffing Inefficient Staffing Government 7,278 5,044 4,519 4,476 2,412 1,784 This appearance of inefficient staffing has many reasonable explanations. First, the ratio of CRE staff to total staff depends heavily on the size of an organization. As noted in the detailed analysis below, smaller banks tend to require a greater proportion of in-house CRE staffing to meet their needs. Larger banks appear to realize much more efficiency in the CRE team, and tend to outsource a greater percentage of non-core tasks. Banking Industry Average Number of total employees per one CRE employee: Mid-cap (Banks with fewer than 10,000 total employees) Large Banks (Between 10,000 and 100,000 total employees) Mega Banks (More than 100,000 total employees) 2412 585 2340 3937 Other factors affecting the staffing model are the varied activities and space needs in the banking sector, and the geographic dispersion of many retail banks. Certain portfolios in transition also require larger in-house staffing ratios to accommodate growth or consolidation. Regardless, many financial services companies have an opportunity to evaluate their CRE staffing model. Of course, the ultimate goal should not necessarily be the smallest CRE team, but the best model to achieve minimized portfolio costs and maximized bank profitability. Jones Lang LaSalle 3
Expectations Rising for Workplace Productivity Corporate real estate teams across all industries are under pressure to not only cut costs, but also to improve the quality and productivity of the work environment. These opposing demands are especially prevalent in the financial services industry, where there is clear pressure to improve the productivity of the workplace. Banking executives are increasingly aware that the quality of the work environment has a direct impact on their ability to service clients, drive profitability, and attract and retain top talent. As indicated below, the focus on workplace productivity in financial services even exceeds the high levels seen across other industries. Rising expectations on workplace productivity 81% 72% Financial Services All Industries Question: Is your CRE team under increased pressure to deliver workplace productivity? Leading banks are responding to this pressure by evaluating a range of work environments and acknowledging that CRE is now responsible for empowering employees wherever and whenever they work. On this note, the next three years are likely to be a period of significant transformation for banking offices and branches. Branches are expected to shrink in size globally, as an increasing number of retail transactions are conducted via ATM or mobile banking, rather than through a teller. For offices, the survey results confirm that workplace density and utilization are set to increase dramatically over the near term. Please see below for an illustration of the clear expectation of portfolio transformation over the next three years. Observed and expected changes in bank corporate real estate portfolios 67% 73% 79% 72% 68% 62% Increased 48% 42% Decreased 6% 4% 12% 7% 15% 9% 31% 36% Quantity Quality Utilization Density The last three years Next three years Increases in utilization and density can have benefits on two fronts. The cost savings possibilities are obvious, with less total space required per person and per business unit. However a secondary, but potentially much more impactful benefit of greater density is the increase in employee interaction. When traditional office floor plans are replaced with open layouts (and sufficient conference, concentration, and collaboration space), the result is a workplace that encourages innovation over insulation. The most profitable banks in our survey all view their portfolios as assets to be optimized, rather than expenses to be minimized. 4 2013 Corporate Real Estate Trends for Banking and Financial Services
The Interaction with Procurement and Shared Services Banks around the world have indicated that there are two groups which have grown significantly in size and influence over the past two years within their organizations: Compliance and Procurement. From a real estate perspective, compliance teams must be accommodated in dedicated space, but their more significant impact on CRE has been to increase the influence of procurement specialists on buying related to facilities. Procurement teams now have a significant impact on real estate decisions at almost half of our surveyed banks. As indicated below, procurement has a greater influence on CRE in banks than any other industry. This influence of procurement can pose challenges, but also great opportunities for CRE teams that are willing to educate and learn from their partners. Procurement professionals often introduce best practices and standardization plans that are lacking from the traditional real estate toolkit. Conversely, CRE executives must draw clear boundaries with their counterparts in procurement to clarify the areas where workplace priorities and subject matter expertise take precedent over minimized short-term costs. Percent of respondents indicating that procurement is involved on a permanent basis. 48% 40% 34% 34% 31% 30% Financial Services Energy, Government, Consumer Products, Life Sciences and Industrial The interaction with procurement teams is only one notable area of growth. As the workplace experience grows in importance for employee productivity and retention, CRE collaboration with HR and IT is a necessity rather than an option. The most successful bank CRE teams are engaged on a daily basis with their peers in these disciplines to ensure that their real estate is providing for the connected and collaborative environment that is required for success. Jones Lang LaSalle 5
The Challenge of International Expansion Connectivity and collaboration are also critical for banks evaluating their best opportunities for growth. Although recent growth patterns have been slowing, the emerging markets of the world remain as the greatest opportunities for financial services to expand. Formal banking reaches only 37% of the population in emerging markets*, implying that there is significant revenue opportunity. On the expense side, emerging markets present the chance to source and execute critical operations in regions with lower labor and real estate costs. While great, the combined benefits of emerging markets are not without risk. As global finance is increasingly interconnected, the economic growth rates of one country can be impacted by the political and economic swings of another. Furthermore, the lack of information transparency in many emerging markets can make real estate decisions and implementation very difficult. As shown in the maps below, our survey indicates that banks plan significant portfolio growth in emerging markets. However, many of these same markets lack a reliable information infrastructure for seamless decisions. Map 1: Net portfolio growth anticipated over the next three years Country Rest of region Negative Net Portfolio Growth (20%-10%) Negative Net Portfolio Growth (10%-1%) Stability (0% Net Growth) 1%-10% Net Portfolio Growth 11%-30% Net Portfolio Growth 30% + Net Portfolio Growth The areas of greatest opportunity for bank portfolio growth are also areas where real estate transparency is most challenging. Map 2: Global real estate transparency 2012 Highly Transparent Transparent Semi-Transparent Low Transparency Opaque Not covered *Reference: McKinsey Global Institute 6 Global Corporate Real Estate Survey 2013 Source: Global Real Estate Transparency Index, Jones Lang LaSalle, 2012
Conclusion As expansion remains challenging, efficiency is no longer a choice for those managing real estate in the financial services sector. Significant risks lie ahead for bank CREs who fail to capitalize on opportunities to improve the performance of their real estate. The following levers should be considered as ways to mitigate the risks facing bank CREs: Do not face these growing challenges alone. Leverage the skills, capacity, and best practices of your partners and suppliers to truly optimize your portfolio. Shift non-core operations to external providers so that you can focus on managing your internal stakeholders and strategically engage your partners. Engage with your internal counterparts as well. Embrace the relationship between CRE and procurement and take the rise of the procurement and compliance organizations as an opportunity to share best practices and establish clear rules of engagement. Objectively evaluate your current tracking methods. Do you have all of the data you need to demonstrate the impact of your CRE team on the bottom line of the bank? Is your portfolio sufficiently nimble to accommodate the rapidly changing demands of your business units? Calibrate your portfolio with care. Once your property data is aggregated, it is time for action. Consolidation of office space and branches must be conducted with cost reduction but also employee productivity in mind. Similarly, expansion into new markets requires an approach that balances optimistic business unit forecasts with realistic real estate implications. Although the banking environment is constantly shifting, there are incredible opportunities for CRE executives in the financial services sector. Savings obtained through portfolio productivity have a direct impact on bank profitability and investor confidence in these volatile times. With a continued focus on cost reduction, platform efficiency, and employee productivity, the most progressive banks will emerge stronger than ever before. For Additional Reports http://gcre.joneslanglasallesites.com/en COPYRIGHT JONES LANG LASALLE 2013. All rights reserved. Jones Lang LaSalle 7
About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of USD 3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet. Its investment management business, LaSalle Investment Management, has USD 47.0 billion of real estate assets under management. About Jones Lang LaSalle Corporate Solutions A leader in the real estate outsourcing field, Jones Lang LaSalle s Corporate Solutions business helps corporations improve productivity in the cost, efficiency and performance of their national, regional or global real estate portfolios by creating outsourcing partnerships to manage and execute a range of corporate real estate services. This service delivery capability helps corporations improve business performance, particularly as companies turn to the outsourcing of their real estate activity as a way to manage expenses and enhance profitability. Acknowledgements Jones Lang LaSalle gratefully acknowledges the assistance of those CRE professionals who participated in this survey, and Kadence International, our market research partner. We welcome any feedback on the published results to continue to improve future editions and make them as meaningful as possible for our readers. If you have any comments or would like to participate in future surveys, please email insightteam@jll.com. Visit www.jll.com/globalcretrends to explore the global trends in more detail. See how CRE executives based in your region responded and compare your answers with the global survey results. www.jll.com