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mise the portfolio’s functional and financial
value to the business.
Keywords: portfolio management,
corporate real estate management,
process, property management
INTRODUCTION
A corporate real estate (CRE) portfolio
can be viewed from three perspectives:
— as a financial asset (or liability) of the
corporation; — as a real estate market asset (or
liability); and
— as an operational asset that is a factor of
production.
A significant number of corporations deal
with each of these perspectives separately
and rarely seek to manage all of them
together for the greater good of the
organisation.
There is a similar tendency to manage
assets on a ‘one-off’ basis, usually to
facilitate operations or undertake trans-
actions. Once the asset base reaches a
certain critical mass, however, this in-
cremental approach fails to maximise the
portfolio’s functional and financial value
to the company. (The point at which this
criticality occurs will vary by organisation,
Barry Varcoe is responsible for strategic
development within Johnson Controls, Inc.
Integrated Facility Management. This includes
research & development, and leadership of the
International Performance Management Unit,
which collates and analyses working environ-
ment quality, performance and technical
knowledge. The unit was awarded the IDRC
Best Practices Award in the Decision Support
category in 1997.
Barry lives in England and is a Fellow of both
the Royal Institution of Chartered Surveyors
and the British Institute of Facilities Manage-
ment. He has many years’ experience in buildingeconomics, real estate and facilities manage-
ment.
A BSTRACT
The paper identifies the need for a portfolio
approach to the management of real estate
assets, and sets out its key components as a
‘macro’ level process. Portfolio management is
positioned within an overall model of the
corporate real estate function, from which a
definition is developed. The main generic
components of real estate portfolio management
are described, and the most significant findings
from a survey of current practices among a
group of corporate organisations are presented.
The paper concludes that in overall terms a
more robust approach to the portfolio manage-
ment of real estate assets is required to maxi-
A process for the portfolio management
of real estate assets
Barry Varcoe
Received (in revised form): 24th December, 1999
Mr Barry Varcoe, Director of Strategic Development, Johnson Controls, Inc., 2 TheBriars, Waterberry Drive, Waterlooville, Hants PO7 7YH, UK;Fax: 02392 230501; e-mail: [email protected]
Journal of Corporate Real Estate Volume 2 Num
Pag
Journal of Corporate Real Estat
Vol. 2 No. 2, 2000, pp. 113–12
Henry Stewart Publications,
1463-001X
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depending upon the resource and skill
levels available within the CRE team;
the scale, number, geographic spread and
diversity of the properties; and the overall
size of the portfolio.) Little has been doneto adapt portfolio-wide concepts to cor-
porate real estate because it is expensive
and time-consuming for any one or-
ganisation to do so. The subject is broad,
the analysis involved can become com-
plex, and if it is not done in an or-
derly and modular way it can be dif ficult
to develop and update. It is surpris-
ing that a ‘systems’ answer has not yet
been created, but perhaps the projected
size and specialist nature of the potential
market for such products and serviceshave tended to discourage those vendors
who consider it before they even start.
In response to this need a group
of leading corporate real estate or-
ganisations, service providers, industry
specialists and university researchers in the
USA formed the Corporate Real Estate
Portfolio Alliance.1 The goal of the
Alliance was jointly to develop a portfolio
management approach that links a cor-
poration’s real estate portfolio to its overallstrategy and financial performance. Com-
mencing in September 1998, the research
focused on a number of areas, including
finance and analysis, process and tech-
nology, performance measurement, and
strategy and occupancy needs. The work,
which was completed at the end of April
1999, was considered by the participants
to have achieved significant advances in
several of these areas.
This paper focuses on the findings of
the research with respect to the process of
portfolio management. It identifies the
need for a more robust approach to the
portfolio management of corporate real
estate, clarifies its scope and its place
within the overall real estate function, and
then proposes an overall process for its
main components and activities.
THE NEED FOR A PORTFOLIO
APPROACH
Since 1993 the changing opinions of
leading real estate practitioners have been
collated and documented by the An-nual Survey of Corporate Real Estate
Practices.2 The work has established
many strong trends regarding key issues
and practices. One of these relates to
the importance placed upon portfolio
management as a discipline. The survey,
which is completed using a self-adminis-
tered questionnaire, in one section asks
respondents to indicate (using a 1 – 5 scale
measuring least important to most impor-
tant) the knowledge and skills crucial to
corporate real estate management in thefuture, from a list of 34 options. Over the
entire seven-year period the perception
that real estate portfolio management
is one of the most crucial areas of
knowledge and skill for corporate real
estate management in the future has not
changed (Figure 1).
Portfolio management has consistently
been one of the top three learning issues.
Furthermore, when the other two subjects
— strategic planning and a closer un-derstanding of the organisation’s business
— are considered, it can be seen that
they too are closely aligned to portfolio
management. The fact that these issues
have remained so important to learn about
in the future for seven years suggests that the
corporate real estate profession has not
made many advances in developing under-
standing in these areas. The comparative
scarcity of literature on the subject and the
infrequency of its discussion at the leading
industry conventions and seminars tend to
confirm this observation.
THE OVERALL CRE FUNCTION AND
PORTFOLIO MANAGEMENT
DEFINITION
In-depth analysis of CRE within the
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the Alliance for some of these activities are
set out in Table 1.
Once this asset perspective has been put
in place, going one step further provides
an aggregation for the overall portfolio,
which seeks to provide organisational
benefits above those achieved from the
management of assets individually. It is at
this strategic level that CRE is also bestplaced to look beyond its own activities
and consider their purpose — how best to
support the business of the corporation.
It also provides the logical interface
with other components of the corpora-
tion’s infrastructure, such as technology,
human resources and finance, an approach
being championed by the IDRC through
their Corporate Infrastructure Resource
management (CIR ) initiative.
This logical hierarchy of relationships
can be represented graphically, as shown
in Figure 2. In considering this structure
it is important to recognise that, although
it is based on the observation of current
practice, no one organisation is likely to
be performing all aspects in a robust way.
It therefore needs to be considered as a
model to be aspired to in the future,
Alliance member organisations enabled a
clear picture of corporate real estate, and of
the scope of portfolio management within
it, to emerge. Looked at logically, at its most
strategic CRE has a responsibility to its
organisation’s business to provide it with
effective, ef ficient and economic working
environments and other strategic real
properties. At its most tactical CRE has aresponsibility to deliver and operate those
working environments and other assets.
Somewhere in between those extremes lie
a myriad of functional activities, including
facility management, project management,
design and occupancy planning, property
management and property transactions.
There is also a need, however, to aggregate
the combined effect of those functional
activities into an overall asset-by-asset
perspective. This enables effective manage-
ment of the overall working environment
provided and its economic consequences,
and should allow management to achieve
significant organisational benefits above
those derived from the individual func-
tional activities (which, left to their own
devices, tend to be management and
information ‘silos’). The definitions used by
Figure 1 Annual
Survey of CRE
Practices
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Organisations business
Portfolio management
Strategic planning
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rather than the current state of the best
exemplars. (It should also be noted that
the model does not necessarily attempt to
represent how a CRE organisation should
be operationally structured.)This approach to understanding the
place and role of portfolio management
enabled a definition to be established.
After several iterations influenced by the
ongoing research activities, the following
established itself for the purposes of the
Alliance:
‘Corporate Real Estate Portfolio
Management: managing real properties
as a group in order to achieve greater
corporate benefits from them as
productive working environment as-
sets, financial assets and strategic assets,
above the benefits derived from
managing them individually.’
The most significant component of this
definition is arguably the last phrase —
requiring the portfolio management func-
tion to build on the other components of
CRE to deliver enhanced value to the
corporation.
PORTFOLIO MANAGEMENT
COMPONENTS
The interrogation and documentation of
the existing CRE practices within the
member organisations allowed the Al-
liance research team to identify the main
components and characteristics embraced
by portfolio management. These are rep-
resented graphically in Figure 3, which
identifies four logical phases:
— Inputs — which identify the ‘amount’
of the real estate portfolio (existing and
projected);
— Analysis — which considers the op-
tions available in providing it;
— Outcomes — which determine the
most beneficial options and establish
succinct ‘deliverables’;
A process for the portfolio management of real estate assets
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Table 1: Alliance definitions of CRE activities
Component De finition
Service delivery management The management and administration of resources engaged in thedelivery of specified service(s).
Facility management The practice of coordinating the physical workplace with the people
and work of the organisation. It integrates the principles of business
administration, architecture and the behavioural and engineering
sciences.
Functionality Being suitable for a particular use or function.3 (Note: in using this
definition it was recognised that functionality had application to all
aspects of CRE, but when analysing the key relationships its role in
linking use, design and asset management was seen to be the most
significant.)
Property management The management and administration of individual legal interests in
property(s), both from an occupier and landlord perspective.
Asset management The management of individual building assets to maintain their
ongoing operational and financial value.
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new knowledge to enable and further
CRE and portfolio management ob-
jectives (ie how to do things better);
— Policy/guidelines/standards — the
rules by which the portfolio manage-
ment and overall real estate function
will operate;
— Financial analysis — analysing all
financial impacts the portfolio can
potentially have on the organisation;
— Risk analysis — assessing the risk ex-
posures and risk attitudes so that the
portfolio that is best for the organisa-
tion in overall terms is pursued;
— Comparisons, modelling and scenario
planning — bringing together all of
the informational components to un-
— Management — which makes sure that
the ‘deliverables’ are achieved in the
most effective and ef ficient manner.
Within each of the phases there are
several individual components, the main
purposes of which are as follows:
— (Long-term) demand forecasting —
identifying the needs of the occupying
organisation;
— Portfolio inventory — a register of all
of the buildings within the portfolio,
together with key information regard-
ing their size, legal status and use (i.e.
what is currently available);
— Research — the structured pursuit of
Figure 2 A model
of corporate real
estate
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derstand better the gaps between whatis or can be available and what is or
may be required, and how best to
proceed to close those real or potential
gaps;
— Improvement initiatives — the iden-
tification and planning of pan-
portfolio initiatives of improvement,
not related to specific assets;
— Change planning — the identifica-
tion and planning of necessary changes
within the portfolio with respect to
individual or groups (or all) of assets;
— Budgetary management — financial
planning which shows in detail how
much money is available, how it is
to be spent and for what purpose
(derived from improvement initiatives
and change planning) within a certain
prescribed time-frame;
— Performance measures — the expres-sion of goals or achievements using
numbers, to motivate behaviour lead-
ing to improvement;
— Chargeback/allocations — the prac-
tice of charging users of the
portfolio’s working environments for
the resources that they consume.
CURRENT PRACTICE
The identification of the major individual
components of portfolio management
provided a basis for a more objective
assessment of current practice. Each was
expanded into a list of characteristics or
practices, which were compiled into a
questionnaire format. Each member CRE
organisation then completed the question-
naire to indicate the degree of sophistica-
Figure 3 Portfolio
management:
phases and
components
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— Capital returns analysis
— Exit strategies
— Improvement initiatives
The deficiencies in these areas were
mostly associated with the complete
absence of the activity, or its practice only
in isolated cases using ad hoc and
incomplete models. This is perhaps not
surprising, as the list contains most, if not
all, of the components that represent thegreatest complexity from a specialisation
and modelling point of view. Most are a
response to the more complex world of
business: an attempt to gain an im-
proved insight into the ‘futures’ that may
transpire, and the decisions that provide
the best outcomes and flexibility across
the most likely of them. They therefore
take time and knowledge to accomplish
properly, especially the first time they are
attempted. In today’s time and resource
compressed world there is therefore a
constant temptation to miss such activities
out, even if they offer significant potential
benefits, and instead to carry on existing
practices that arguably amount to no
more than educated guesses based on one
‘future’ extrapolated from the past.
In addition to the components of
tion and use each component had within
their normal activities. They identified for
each characteristic:
— whether it was carried out or not; and,
if ‘ yes’,
— whether it was a formal process or an
ad hoc action; and
— whether it was deployed across the
entire portfolio, to selected groups
within the portfolio (eg individualbusiness groups, regions or countries)
or just to individual buildings.
The survey clearly identified the com-
ponents of portfolio management that
were the strongest and the most mature
and also (perhaps more significantly) those
that were weakest and most in need of
improvement. At the overall phase level,
‘inputs’ and ‘management’ were much
stronger and more robust than ‘outcomes’
and ‘analysis’, the latter being the weakest
by a significant margin. This can be seen
from the following list of the weakest
individual components:
— Comparisons, modelling and scenario
planning
— Risk analysis
Figure 4 Portfolio
management
process overview
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portfolio management, the survey also
collected similar information about other
aspects of CRE that have an important
interface with portfolio management.
Unsurprisingly all of the more tactical
individual management functions, such as
facility and property management, were
identified as being mature, but among
these asset management was compara-
tively weak, which is significant given its
important role as a ‘feeder ’ of information
to portfolio management. The ‘silo’ effect
of the individual management functions
was clearly influential in preventing the
complete and holistic management of
assets.
A PORTFOLIO MANAGEMENT
PROCESS
Given the scope, complexity and
variability of the portfolio management
function within CRE (let alone the
similar characteristics of corporations
overall), it is probable that there is no one
overall process that can be consistently
applied. There is nevertheless a value in
attempting to understand more about the
logical relationships involved, and to see
how the functional components pre-
viously identified can be combined into
practical activities.
The research proceeded to focus on this
issue, commencing with a strategic view
Figure 5 A CRE
portfolio
management
process
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entails and how all of its potential com-
ponents and activities can interrelate. At
least from that basis the inevitable short-
cuts and compromises are taken from a
position of comparative knowledge.Other parts of the Alliance research
began to demonstrate the significant
operational and financial benefits that
portfolio management can deliver to
CRE teams and their organisations. By
considering the definition and process
ideas introduced by the CRE Portfolio
Alliance, as outlined in this paper, it is
hoped that more professionals in CRE
will be able to start closing the gap
between potential and performance, and
as a result will thereby be able to deliver enhanced value to their organisations
from this vital facet of real estate.
REFERENCES
(1) The Corporate Real Estate Portfolio
Alliance is a consortium of 11 corporate
real estate organisations, and researchers
with various areas of expertise from
universities, industry groups and
corporate real estate service providers.
The member organisations comprise
BellSouth Telecommunications, Inc.,
Boeing Realty Corporation, Fidelity
Investments, Florida Power & Light,
Microsoft Corporation, Pacific Gas &
Electric Co., State Farm Insurance Co.,
Sun Microsystems Inc., US General
Services Administration, US West, Inc.,
Washington Mutual, Inc. The researcher
members comprise Tom Bomba, Andrew
Light and Sven Pole of The McMahan
Group; Wade Fransson of CB Richard
Ellis; Barry Varcoe of Johnson Controls,Inc.; Kevin Deeble of TriNet Corporate
Realty Trust; Gerald Davis and Francoise
Szigeti of International Centre for
Facilities; Dr Joseph Gyourko and Dr
Yongheng Deng of Zell/Lurie Real
Estate Centre at Wharton; Dr Martha A.
O’Mara of Harvard Graduate School of
Design; and John McMahan of UC
of the problem. This resulted in the
expansion of the four component phases
into five main process phases, with the
reshaping and expansion of the two in-
itial ‘analysis’ and ‘outcomes’ phases intothree. These are shown in Figure 4. The
portfolio needs are forecast and defined,
overall goals and strategies are defined, the
options are analysed and understood, the
best option(s) are selected and planned
for implementation, and the whole is
monitored from a performance perspec-
tive to stimulate improvement and check
progress. Another difference at this level
is the lack of any management of the
actual delivery, this being the role of the
various functional activities.With this overall structure in place,
the original portfolio management com-
ponents were then combined into logical
groups of activity and their interrelation-
ships were identified. This resulted in a
more detailed ‘macro’ level process for
portfolio management, which is shown in
Figure 5. With this established, the chal-
lenge for the corporate members of the
Alliance has been to compare its com-
ponents, activities and relationships withthe analysis of their own current perfor-
mance, and from that to identify the
most significant and high-risk deficiencies.
With the capability gaps thus prioritised,
resources can then be planned to rectify
them, either internally or through third
parties.
CONCLUSION
It is unlikely that any one CRE team,
when undertaking its portfolio manage-
ment responsibilities, will follow such a
process as that introduced here from start
to finish. Almost inevitably events will
overtake action and compromises will be
made and short-cuts will be taken. It is
important to understand, however, what
the function of portfolio management
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Berkeley Fisher Center for Real Estate.
(2) Annual Survey of Corporate Real Estate
Practices, University of Reading and
Johnson Controls, Inc.
(3) ASTM Standards on Whole Building
Functionality and Serviceability, ASTM
(1996).
Barry Varcoe, Johnson Controls, Inc. and
CRE Portfolio Alliance 1999.
A process for the portfolio management of real estate assets