Corporate Real Estate Risk Management

CRERM Corporate Real Estate Risk Management R.J. (Ruben) Bartelink April 2015 Corporate Real Estate Risk Management Colophon Corporate real estate risk management Graduation thesis for the requirement of the Master of Science (MSc.) degree at Eindhoven University of Technology Faculty of the Built Environment Department of Architecture, Building and Planning Chair of Real Estate Management and Development Student Name: R.J. (Ruben) Bartelink, BSc Student ID: 0659794 contact: [email protected] Graduation supervisors Dr. J.J.A.M. (jos) Smeets Chair of Real Estate Management and Development Eindhoven university of technology Dr. Ir. H.A.J.A. (Rianne) Appel-Meulenbroek Chair of Real Estate Management and Development Eindhoven university of technology Dr. Ir. P.E.W. (Pauline) van den Berg Chair of Real Estate Management and Development Eindhoven University of technology Dr. Ir. E. (Ellen) Gehner Risk management consultant AT Osborne Ing. C.J. (Kees) Rezelman Managing consultant corporate & public real estate AT Osborne Company AT Osborne B.V. J.F. Kennedylaan 100 3741EH Baarn Date April 2015 Copyright © 2014 R.J. Bartelink Cover design: AT Osborne B.V.: Martini ziekenhuis groningen Printed: Eindhoven University Press Facilities Corporate Real Estate Risk Management Preface This thesis is the final product for my Master Real Estate Management & Development at Eindhoven University of Technology. During the thesis I looked at the point where Corporate Real Estate Management (CREM) meets Corporate Risk Management (CRM). The exciting research field of Corporate Real Estate Risk Management (CRERM) does not yet belong to our master curriculum but is nevertheless very interesting. Eindhoven University of Technology and AT Osborne B.V. enabled and encouraged me to do research in a new field of expertise with lots of potential. These are very interesting and challenging times for CRE specialists. CRE is transitioning from its traditional role to a strategic corporate resource that can add bottom line value to an organization. The executive management acknowledges the potential of CRE and proper management of it. This together with the increased focus on risk management due to the recent crisis and terrorist attacks make managers and executives reevaluate their CRE portfolio and the risks involved. CREM divisions will have to deal with these changing circumstances but are at the same time in the position to take the profession of CREM to a higher level. The few scientific studies available about CRERM are purely theoretical and do not provide insights in CRE risk perception in practice. This thesis takes CRERM beyond its currently existing theoretical boundary and puts it into practice. The research identifies and ranks how CRE specialists perceive CRE risks related to job & company specific characteristics. Besides, it tests which risks are perceived significantly different by certain groups. It provides CRE specialists with the necessary input to identify and qualified CRE risks and provides an external CRE audit for their corporate risk management program. I would like to show my appreciation and say thanks to Rianne Appel-Meulenbroek and Pauline van den Berg as my supervisors from Eindhoven University of Technology for their constructive comments, critical notes and support throughout the process. I’m also very grateful to my supervisors at AT Osborne, especially Kees Rezelman and Ellen Gehner for their useful comments and a link to the practical field but also all other colleagues for critical notes and corrections. Furthermore, I would like to thank all the experts who participated in the interviews and survey who provided valuable input for this thesis. My special thanks in this context goes to CoreNet Global, a worldwide association for CRE and workplace professionals. They participated in the interviews, sent out the survey worldwide and invited me to present my research to the members of the Benelux chapter. Finally, I would like to say a special thanks to my family, girlfriend and close friends for their support and faith in me the past year. I would like to wish all readers of this thesis the same knowledge about CRERM as I have gained during my research. My contact details are stated in the colophon if you have any questions or require additional information. Ruben Bartelink Baarn, April 2015 V VI Corporate Real Estate Risk Management Executive summary Corporate Real Estate Risk Management (CRERM) is the management field where corporate risk management and Corporate Real Estate Management (CREM) intertwine. These two management fields have in the past century matured and developed into more strategic management fields. Until the nineties they co-existed within organizations without interacting. This changed during the economic boom of the nineties: Companies had to innovate and keep up with the economic growth in order to gain competitive advantages over their competition. Corporate real estate, new workplaces and workplace solutions needed to facilitate this growth. As a result corporate real estate became a direct source of potential risks (Gibson & Louargand, 2002). From 2000 onwards the profession of CRERM gained momentum because of two events. The first event was the terrorist attack on the WTC on September 11th, 2001. Companies became painfully aware how much they rely on their corporate real estate. CRE managers had to ensure that the company’s critical facilities would be restored to operational capacity as soon as possible, independent of the nature of the risk (Rosenbluth, 2011). The second event was the financial crisis of 2008. The crisis resulted in a period of cost reduction and many companies were tied to long lasting expensive rent contracts. At the same time cost reductions made the introduction of new workplace concepts, needed in order to stay competitive, more difficult because they require an investment. This imperative was a risk for the entire organization (CBRE, 2012). These two catalysts led to a widespread acknowledgement that CRE risk management strategies should be incorporated within the overall corporate risk profile. Corporate management should work together with CREM to integrate CRE asset management and CRE risk management into the firm’s overall mission and risk preference profile (Huffman, 2002). However it was unclear how the CRE functions adapted to the changed environment and which risks were most prominent in the eyes of CRE executives (CBRE, 2012). For this purpose more research about CRERM should be conducted. The research objective for this thesis was therefore defined as follows: Developing a risk ranking list which helps CRE specialists to identify the most important corporate real estate risks that can influence the shareholder value related to job & company specific characteristics. Corporate real estate risk management In order to develop a risk ranking and achieve the research objective it was relevant to first zoom out and to find out what CREM and corporate risk management is and how it adds value to an organization and therefore influences the shareholder value. Research question one and two were formulated for this purpose: What is corporate real estate management and how can it add value to a 1 corporation? The definition of CRE management was derived from Joroff’s (1992) definition of corporate real estate and Krumm’s (2001) definition of corporate real estate management. These two definitions combined provided a definition of CREM used in this thesis. Corporate real estate management is: “Aligning the land and buildings used for work space, infrastructure and investment to the needs of the core business process, to obtain maximum added value for the business and to contribute optimally to the overall performance of the organization in order to maximize the shareholder value.” CREM can add value to an organization by, amongst others, reducing CRE costs, VII increasing flexibility and increasing productivity. This helps to increase the shareholder value in two ways. It can increase the revenue or improve the profitability of the organization. What is corporate risk management and how can it add value to a 2 corporation? It was hard to give a single sentence definition that is entirely satisfactory in all contexts. The two separate definitions from McNeil (2005) and Merna &Al-Thani (2010) combined provided a definition which captures most elements of corporate risk management: “Any event or action that an organization takes to reduce the risks arising from business practice that may affect an organization’s ability to achieve its objectives and execute its strategies.” Corporate risk management adds value to the organization in two ways. First of all corporate risk management helps to make stakeholders aware of corporate risks, support management decisions and improves planning and business processes. Second, organizations that are actively involved with corporate risk management are on average valued higher by investors. This implies that corporate risk management contributes to the corporate goal of maximizing shareholders value. Combined these two preliminary research questions provided a basis for the third question: What is corporate real estate risk management and how can it add value to a 3 corporation? The definition of CRERM was derived from the two previous provided definitions of corporate real estate management and corporate risk management. Corporate real estate risk management is in this thesis defined as: “Corporate real estate risk management is any

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