Corporate Real Estate: Value Release Constrained Due to Cost Focus and Lack of Supply

Chris Read
The supplier market is constrained, with significant downwards cost pressure. Faithful+Gould understands the client need to reorganise to achieve further improvements.

Business needs are similar across organisations who are occupiers of property — leveraging knowledge and being agile is key in supporting our clients through the supply chain approach.

Critical Influences and Trends

For suppliers, manufacturing, retail and major corporate occupiers are attractive markets as they secure long-term income where other markets slow due to a high level of pace change in the way we use property; driven by digital needs or user practice changes. However larger national contractors are protecting themselves by diversifying into the professional services space.

In the CRE market, clients with larger portfolio spends are reducing their existing framework agreements and securing fewer supplier relationships with longer term contracts, leaving the losers with large volumes of spend to replace, often achieved through exploiting new or 'one off' activity.

...the market must react to meet the new demand.

Successive tendering and supplier aggregation is releasing 6-12% on 2015 prices, with predictions that prices will start to inflate as the market stabilises from 2018. With significantly reduced margins and market fluctuations, existing framework models will come under pressure in the future.

Clients are seeking differentiated facilities, leading to prototyping (destination sales, unique manufacturing, agile spaces etc.), whereas aggregation of services globally is exposing risk through lack of localised design and innovation.

The appetite for new ways to engage suppliers, structure supply chains or design solutions to unlock continuous improvement is accelerating and the market must react to meet the new demand.

Opportunities

Clients with a defined investment plan could drive significant benefit through component-level alliance partnering and changing their focus from price to value. This may require investment and upskilling in the supply chain.

Developing a supplier partnering model with robust process is crucial to achieving value rather than temporary price advantages. Closeness to the supply chain will also shield from market inflation.

Selecting professional services with the capability to recognise and deliver high value opportunities, rather than commodity services, will enable mutual gain and customised service provisions.

Risks

The ability for the supply chain and consultancies to react to changing client demands, driven by the property end user, will depend on more flexible and agile service provision and an 'A-Team' capability, creating potential talent shortfall.

Maintaining current margins will therefore become more difficult...

Currency fluctuations with global businesses / procurement and finance will affect component and equipment prices. Maintaining current margins will therefore become more difficult, particularly in relation to M&E.

Organisational designs still require stakeholder interaction where margins are squeezed and management overhead is reduced. This leads to loss of confidence in service, particularly with outsourced models.

The adoption of a global 'one size fits all' model will restrict local market differentiation and lead to diluted approaches.

Is the construction industry ready for the challenge?