Portfolio Strategy is Easy, Right?
If portfolio strategy is a conversation your team is having, let’s lay out a scenario and see if it resonates.
You are a real estate executive who just got an email from the CFO asking why our annual lease costs are up 5%. You scramble around gathering emails, spreadsheets, and previous and current lease agreements to show that — hey, I’m doing a good job here, costs could have gone up 10% if it were not for our diligence!
Yes, it would have been better if we had a portfolio strategy process and system to capture annual strategy details and report on plan versus actual, ensuring total transparency and the best part, no urgent emails asking “Why!!!”.
How do we get there though? Let me help you navigate this process.
What is Portfolio Strategy?
Portfolio strategy refers to the systematic and proactive approach of optimizing a collection of properties and assets to align with an organization’s overarching business goals and objectives.
It involves making informed decisions about:
- property leases
- acquisitions
- disposals
- and other real estate activities
It is necessary to:
- enhance overall operational efficiency
- maximize returns
- mitigate risks
- adapt to changing market conditions
Strategic portfolio management takes into account factors such as property type, location, market trends, tenant mix, and financial performance to create a cohesive and dynamic real estate strategy that contributes to the success of the business.
Not all portfolios are the same, and one of the main things you will need to consider is what works for YOUR specific goals.
Consider the Portfolio
I spent my first fifteen years out of college working on the manufacturing floor and in warehouses and distribution centers. One of my favorite clients was in the automotive industry. They had over 25,000 SKUs, everything from bolts, bulbs, and washers to batteries, bumpers, and wheelhouses. Over the course of several years, we designed five of their parts distribution centers at an average of about 500,000 SF per facility located in three separate US states and two provinces of Canada.
These facilities use a primary combination of automated small parts carousels, multi-level bin shelving pick modules, secure storage, floor stack, standard pallet rack, pallet flow rack, and heavy-duty cantilever rack. Looking at just the bin shelving, there were three different depths (12”, 18”, and 24”). In each of those depths there were 8-12 different configurations of the 36” wide by 96” tall shelving units.
Different target volumes and picking velocities are applied to each of the SKUs in this area. To minimize pick congestion (multiple people trying to get to the same area at the same time), you had to consider these things when determining the optimal pick path based on the average frequency of order combinations. I’m leaving a lot out so that is the simplified version, and it still seems pretty complicated because it was.
Strategic Portfolio Management in CRE
Fifteen years ago, I started in commercial real estate. While the activities occurring “inside the box” are still of paramount importance, we now considering the portfolio as a whole and how it can best serve business operations.
Industrial Assets
Generally speaking on the industrial asset class, organizations have engineering teams or consultants who specialize in optimizing those operations. Finding a piece of land on which to build a facility to house those operations, or even more challenging, an existing facility, is a different animal though, and that is where Fischer excels.
Office Assets
On the office side though? How hard can it be? People are generally the same, not as different as a blinker bulb versus a bumper. Get an office with some seats and you are all set. Yeah right. On the office side, you’ve got several subsets from:
- traditional/open seating
- shared
- activity-based/agile
- hot desking
- flex spaces
- collaboration areas
- quite zones/rooms
- breakout spaces
- wellness spaces
- hoteling
- and others
Take those into account with managing multi-generational workforces and it can get as complicated as some distribution operations.
Developing Your Portfolio Strategy
Whenever we look at a new portfolio, there are several things we first consider.
- Where are the locations?
- Why are the locations there?
- And how long will those locations be useful to the business?
During the process of obtaining answers to those questions, discuss business plans and strategy, which will inform potential areas for expansion or contraction.
Clients usually have good answers, but the information hasn’t been captured and can’t be viewed for the portfolio in aggregate making it tough to create an annual portfolio strategy. Enter process and data organization, two of our core competencies.
Understanding the Strategic Process
First, we must understand that portfolio strategy is an ongoing process. Some organizations may do it every year, while others every three to five years, and others never. If you do it and accept that it’s a cyclical process though, it’s worth it to establish a process and utilize a system to help facilitate that process.
There are five primary elements to consider:
- Alignment and Governance: Set the process and adjust as necessary in the next cycle.
- Strategic Planning: Scenario generation and business case development.
- Recommendations: Plan reviews, adjustments, and approvals.
- Plan Delivery: Implementation of transactions or other RE initiatives.
- Manage & Report: Track, report, monitor plan versus actual.
Alignment & Governance
The first pivotal phase is “Alignment & Governance”. This phase sets the cornerstone by defining the business and real estate goals and objectives, establishing a clear trajectory for the portfolio’s direction. Reevaluate assets in each cycle to determine their business classification as:
- Foundational: Assets essential for sustained business success. The company needs to control the asset in a specific location until they are no longer foundational. These are normally longer-term occupancies.
- Focused: Assets currently crucial to operations but may change over time due to business requirements.
- Functional: Assets that support many different operational functions. They have more flexibility with size and location such as short-term leases supporting projects or seasonal peak capacity requirements.
- Adaptable: Assets primarily serving operational needs through third-party facilities. This could include co-working spaces, daily-use conference centers, and employee remote work instances.
The “Alignment & Governance” phase continues with formulating comprehensive evaluation criteria to systematically assess each component. Strategic planning wouldn’t be complete without considering time horizons, risk tolerance, and resources (internal and external).
In parallel, information and data collection mechanisms are established, ensuring that the decision-making process is well-informed and grounded in accurate insights. The bottom line, “Alignment & Governance” serves as the architectural framework upon which a robust and successful portfolio strategy and ongoing process is built.
Strategic Planning
The “Strategic Planning” phase involves looking at the world of possibilities. Identify opportunities by examining each asset type in the context of its business classification, whether it is owned, leased, subleased, has various lease options, expansion/contraction capabilities, and so on.
Potential real estate actions (renew, renew downsize, renew upsize, relocate at expiration, blend and extend, sale-leaseback, sublease, dispose, do nothing, etc.) are pinpointed and assessed. Followed by scenario development, outlining various potential strategies, sometimes creating multiple scenarios for a single property.
Thorough market analysis is a part of scenario development, delving into market trends, supply-demand dynamics, labor availability, and competition, providing solid input data for decision-making models. The business cases are then developed, constructing a comprehensive case outlining potential risks, benefits, financial projections, and feasibility.
Recommendations
The “Recommendations” phase, is where the synthesized information from the previous phases is transformed into actionable insights. We present these insights along with their associated business cases to the decision makers. This is the stage where investment decisions are made to support the organization’s strategic objectives. Our goal as a real estate service provider is to get a “Yes” or “No” on each of the proposals.
Occasionally unexpected criteria are used such as where an executive leader just purchased a new vacation home, but I digress. Subsequently, the most promising business cases are refined, and a set of strategic plans emerge. These plans serve as a roadmap for the next steps, guiding asset allocation and shaping the ultimate direction of the portfolio.
Plan Delivery
Moving into the “Plan Delivery” phase, the focus shifts from strategy to implementation. We translate the recommendations from the previous phase into detailed action plans for specific transactions and initiatives, which may include workplace strategies and data collection efforts.
These action plans encompass various aspects, including:
- property acquisition or disposition
- lease negotiations
- design build projects
- and any necessary operational adjustments
Ultimately, resources are allocated, timelines are established, and responsibilities are assigned. Effective communication and collaboration between different stakeholders becomes crucial to ensure the smooth implementation of the plans.
Depending on volume, bi-weekly or even weekly progress / review sessions are highly recommended. These sessions are used to monitor progress against the established timelines and milestones, identify any potential issues, and establish plans to resolve or mitigate those issues so the execution stays on track.
Manage & Report
The final phase of the cyclical portfolio planning process is “Manage & Report.” Once the plans are in motion, it’s imperative to closely manage the ongoing activities in near real-time and track performance against the predefined goals and objectives. We establish regular reporting mechanisms to ensure transparent and accurate updates are provided to key stakeholders.
Performance metrics are monitored to assess whether the implemented strategies are yielding the anticipated outcomes. This phase involves continuous vigilance, adaptation, and course correction as needed.
Effective management identifies any deviations from the plan early and takes corrective actions to realign activities with the established objectives. This ongoing management and reporting loop completes the cycle and provides valuable insights for refining and enhancing the portfolio planning process in subsequent cycles.
Conclusion
In conclusion, my journey spanning thirty years from the manufacturing floor to the realm of commercial real estate has highlighted the interplay between operational intricacies and real estate strategy. The experiences gained from designing and optimizing distribution centers for a diverse array of products underscored the significance of efficient utilization and management of physical spaces.
Transitioning to the world of commercial real estate, I recognized that while the mechanics inside a facility are pivotal, a comprehensive portfolio strategy elevates the game to a holistic level. It encompasses alignment with business objectives, strategic planning, well-informed recommendations, diligent execution, and vigilant management.
The complex nature of real estate assets, from industrial warehouses to manufacturing plants to labs to retail to office spaces and others, requires a detailed process to support the cyclical nature of portfolio planning. Navigating this process of portfolio planning demands a combination of data collection and analytics, strategic foresight, out-of-the-box thinking, hard work, and efficient execution.
Effective commercial real estate portfolio planning involves much more than merely finding properties; it’s about crafting an orchestrated symphony of physical spaces that resonate harmoniously with the overarching business strategic goals.
Is it easy? No, but it is very rewarding and impactful when done well. Approach it methodically. Revisit it cyclically. Measure and share the results regularly. In the ever-evolving landscape of commercial real estate, a thoughtful and methodical portfolio planning approach can be the compass guiding your journey toward success and sustainability.
Reach out to request a FREE Demo with Fischer Solutions today!