In the News: The Eckerian Perspective

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Why Your CFO Must Drive Commercial Real Estate Decisions

It’s common for companies to hire either outside consultants or a real estate director to manage their commercial real estate decisions, but this often ends in disaster, especially if they are not properly guided. While yes, real estate directors may have specialized knowledge about the real estate market, it’s critical that someone who is knowledgeable of both the financial capabilities of your company, and privy to the current and future demands of your brand growth and human capital requirements to lead the process. The best person for the job? Your Chief Financial Officer.

The choice of where to house your brand is highly risky, and not just financially. Here at Howard Ecker, we make sure to find office spaces that not only meet the technical requirements of our clients, but also the emotional needs of their staff. Your office is a reflection of what kind of brand your company is. Don’t believe this? Walk into any startup space or coworking office, and observe the open layout, large windows and colorful decorations. Consider also the level of noise, public transportation availability and even proximity to attractive professionals (such as VC firms). Now look at a major bank headquarter, or law firm, and note the differences.

Because of their intimate knowledge of your brand operations, company culture and employee needs, in addition to their understanding of your company’s financial needs and future plans, your CFO is uniquely and perfectly suited to drive your commercial real estate activities. I’m not saying that they should be acting alone; by all means, allow them to recruit staff to assist, which may or may not include real estate directors. However, the CFO and the CEO should be the ones to have the final say, not a specialist. Just as you wouldn’t let someone else pick out your personal home, don’t let a stranger pick out the physical embodiment of your brand.

By putting your CFO in the driver’s seat for commercial real estate decisions, you’ll be putting the most knowledgeable and capable person in charge of mitigating three main business risks associated with real estate investment:

Building Risk

Building risk isn’t about the quality of the building, but the quality of the owner. An ‘A’ building is really a building that’s owned by an ‘A’ owner. A common misconception is that newer buildings are always better, but the truth is really that after even a few months, the best buildings are going to be the ones that are maintained beautifully. If the owner is not diligent in operations, you’re soon going to find that you have many more problems than you bargained for. There are great buildings all over the world that are very old, but are much better environments to grow a business in than new structures that are neglected – just compare Rockefeller Center or the Transamerica Pyramid to that new high rise in your neighborhood that always has an elevator being repaired.

How does your CFO help here? Let’s be honest – whether you hire a third party advisor or a real estate director, that person is under pressure to find you real estate soon. The reality of a situation in which a person has a singular goal is that they’ll cut corners in order to achieve it. It’s much more likely that someone who is only concerned with hitting a handful of specific metrics will cut corners – such as researching owners’ histories, vetting brokers for honesty as well as speed, asking for references from current tenants, and “dropping by” to do unannounced evaluations of the space. Your CFO is committed to the more important goal of ensuring you business is prosperous and able to grow, which means they won’t lose sight of the bigger picture in favor of hitting short term KPIs.

Business Risk

Business risk is something that no one really has control over, but we try to forecast what the future holds. It’s the possibility of an industry shake up that you have little or no control over. For example, the rise of Uber has disrupted much more than just the transportation industry – it’s served as a proof point for the gig economy. That’s affected thousands of businesses in a number of ways, from changing timeline expectations to creating new possibilities for integration and interaction with gig economy workers and customers. As CFO, this means that you’re in a situation where you’re juggling several fluctuating budgets at once – from new hires to office space to new supply chains. In the context of commercial real estate, this means factoring in how flexible your new investment will be; how well can it accommodate changes?

Your CFO, while still not psychic, is deeply immersed in your industry, by way of financial shifts. If anyone has a beat on what trends are, it’s the person who is watching where customers and investors are putting their money. A real estate director won’t notice that your competitor’s stocks are rising uncharacteristically quickly, or that a startup that aims to disrupt your supply chain just got a big round of funding – but your CFO will.

Market Risk

Lastly, there’s market risk, which nobody can control. For example, the top floor of the Sears Tower in Chicago was the most expensive office space in Chicago on September 10th of 2001. On September 11th, they couldn’t give it away. Nobody could have forecasted than change; yet unknown risks must be factored in as you consider investing in commercial real estate or finding a new lease. Your CFO will need to evaluate exactly what your budget is, including whether or not your business can survive the value of the new space dropping in value dramatically. Is this a space where your brand can stay until the market recovers? Is the investment so great that its loss would cause a financial catastrophe?

Your CFO has a simple role to play in mitigating this risk, but it’s the most important: they know the most about exactly how much financial damage your company can take and survive.

 

Commercial real estate investments, whether that means making a purchase or signing a new lease, is a huge decision that will impact not only your company’s finances, but also your staff’s morale, your brand reputation and your hiring capabilities. By putting your CFO in charge of the decision, you ensure that the investment is really in your brand’s best interest – not just today, but for years to come.