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Emerald Group Publishing Limited
Copyright © 2009, Emerald Group Publishing Limited
Interview with Sandy Apgar by Debbie Hepton
Article Type: Talking heads From: Journal of Corporate Real Estate, Volume 11, Issue 4
Mahlon (Sandy) Apgar IV, is a pioneer in corporate real estate. As one executive wrote, “[Apgar] is the ‘Peter Drucker’ of real estate. He is a creative thinker, fluent presenter and penetrating writer. He has done more than anyone else to explain the many facets of real estate to policymakers, and to analyze property as a strategic asset and corporate resource.”
Apgar was educated at Dartmouth College, Oxford University and the Harvard Business School. He has been a partner of both McKinsey and the Boston Consulting Group (BCG), a senior official in the Clinton Administration, and founder of his own boutique advisory firm. He invented the Apgar Real Estate Score, his Harvard Business Review series on corporate real estate is a standard reference, and his university courses on real estate and entrepreneurship have been sell-outs. Here, Apgar talks with JCRE’s Debbie Hepton about his career, his innovations and his interests.
1. Why did you begin a career in real estate? What were your first roles?
I grew up with real estate. My family was rooted in the rolling hills and charming towns of New Jersey – parts of the state that many people never see but influenced my later interest in community development. My father was a land agent who pioneered the relocation of major companies – including AT&T and IBM – from New York City to the suburbs. As a boy, I would accompany him to look at farmland which he helped transform into the first generation of corporate campuses that are now commonplace. My dad helped me envision real estate as a community and corporate resource, not just an asset – a view that has always been central to my real estate consulting practice.
This appreciation of the land, and my emerging understanding of how users – particularly companies – think about their property and facilities, led me eventually to enroll in the Urban Studies Program at Dartmouth College. The Program was run jointly with the Massachusetts Institute of Technology (MIT) in Boston and it considerably broadened my horizons. I segued from real estate as a profession to the study of cities in all their forms and the many facets – architectural, sociological, economic, even philosophical – that make them work.
After Dartmouth, I spent three years in the Army, mainly in Germany. While it was a demanding time, I was able to travel through France, Germany, Scandinavia, and eventually the UK, experiencing the urban forms and lifestyles of European cities, absorbing their rich histories, enjoying both their vitality and their soothing forms.
This led me to Oxford – the quintessence of European urban history and character – to pursue an independent study of the British New Towns. I began with the 19th century policies that targeted inner-city disease and poverty, looked at Utopian and Garden City experiments such as Letchworth, Welwyn and Sunrise, and marveled at the post-World War II vision that produced the New Towns Act in 1946, the Town and Country Planning Act in 1947, and the government-sponsored New Town projects around London. During this research, I visited most of the nine New Towns and was impressed by their physical layouts, their mix of housing, jobs, transportation and community facilities, and their integration of public, private and volunteer organizations in providing local services. Consistent with the English tradition of village life, these were more than housing projects – they were true communities for middle- and working-class residents, designed to reduce overcrowding in central London by decentralizing the city through master-planned suburbs. The critical difference between urban development in the UK and the USA, as I saw it, was the role of government policy. As part of the UK’s post-War recovery, the new towns projects benefited from regional and local government plans that sought more comprehensive, larger-scale solutions to urban problems than the private homebuilding and real estate industries could then provide.
While Oxford was an enriching experience, culturally and educationally, I concluded about midway through the year that I would not pursue an urban planning career. While I respected the profession and admired some of its leading practitioners, it seemed too academic. So, I reasoned that cites in America – still my focus – are built mainly by private developers and that I needed to learn the business of development – that is, finance, marketing, real estate and other management functions. With no business experience and little family grounding, business school appeared to be the next logical step. I applied to several and chose Harvard for its reputation and focus on the case method. Thus, the decision was sealed to complete my research and, with many regrets, end my exquisite year in Oxford.
Coincidentally that spring, I also learned that Jim Rouse, a noted USA retail property developer, had announced his intent to develop a privately financed and managed new city for 100,000 people in Columbia, Maryland – the first of its kind in the USA. I wrote to him for a job and was thrilled when he invited me to join his team as a summer intern – for the opportunity as well as the income. So, in the summer of 1966, I joined The Rouse Company in Baltimore to learn the skills of retail market analysis and finance, and to work on the early plans for Columbia. By that time, I had covered the theory of real estate, planning and urban development, so I was ready to join the real world of business. Fortunately, I also was able to return the following summer as an assistant to Jim Rouse, helping his team to open Columbia in 1967. But that is another story!
2. What led you into consulting and to McKinsey? What was the scope of your practice in McKinsey? Why did you establish McKinsey’s operations in Saudi Arabia? What were the unusual conditions and key success factors in your role during that time?
As a Harvard Business School (HBS) student, I had chosen second-year courses in law, engineering and other Harvard departments, as well as business, and in MIT. I intended to return to The Rouse Company in a management-intern role and hoped that would lead eventually to a career. However, in my second year at HBS, I discovered management consulting. A number of classmates had spent their summer at McKinsey while I was at Rouse. From their stories and faculty discussions, consulting sounded fascinating. So, I interviewed with McKinsey, Booz-Allen, Arthur D. Little and several real estate consultants. Ironically, in light of my recent role, BCG had been founded only a few years before, and I did not interview there.
McKinsey was intrigued by the idea of establishing a real estate practice and I was intrigued by the notion of consulting – not necessarily as a career, but at least as the next step after business school. We joined forces with the vision of establishing a real estate practice. In addition, I had a joint appointment at Harvard for the following year: at HBS, as part of a research team engaged with the business community’s response after the 1968 riots in Newark, New Jersey; and at the Harvard Graduate School of Design, as co-developer and co-teacher of a joint MBA-MCP (Master of City Planning) course in community development.
Two years later, I married. My new wife, Anne, already had been accepted for graduate work at the London School of Economics, and after several months of dialogue with McKinsey in New York, I was able to relocate to McKinsey’s London office. While we intended to be there for “her” year, we stayed for nine!
The real estate practice I had begun to develop with others in New York was nascent but transferable, and the London base offered the opportunity to establish a new practice with three pillars. First, in corporate real estate, we advised McKinsey’s large corporate and institutional clients on issues such as plant locations, retail centers, headquarters offices and the like; the types of facilities to acquire or build; how to make the buy or lease decision; and how to shape the global footprint. At the time, this was novel because corporate real estate was seen as a transactional, deal by deal, project by project issue, not as a strategic challenge.
The second pillar of our McKinsey practice was the public sector, both national and local governments. Among notable engagements, we developed “urban guidelines” for the UK’s Department of the Environment, and served half a dozen local governments and housing authorities, as well as other agencies. Similarly in France, we served the French New Towns (“Villes Nouvelles”) directorate. We went further afield to Germany, where McKinsey had a major presence, to other countries in Europe, to Japan and to Hong Kong. The third pillar of the practice was property developers. We worked with some of the largest in the UK, such as Wates and Bovis, as well as US leaders, including Trammell Crow and Rouse.
With this new base, the early 1970s were an exciting and productive time both for McKinsey and for me personally. However, in 1974 the Arab oil embargo was imposed. I had recently been elected a partner and suddenly, as the “new boy” at the table, I found that my client base was quickly eroding. The resulting recession became quite deep. As we are apparently in an even deeper trough now, I can tell you that it was the first serious downturn I had lived and worked through. That meant I had to scramble for another platform related to, but not necessarily in, real estate. My search led to Saudi Arabia, reasoning that the flow of petrodollars then flooding the Middle East generally, and Saudi Arabia specifically, would create major development opportunities and pressures, though no doubt in a different form from that of the USA, UK, Europe and elsewhere I had studied or visited. I had no background, no track record and no real contacts in Saudi Arabia, but we had an unexpected client inquiry that no one else was interested enough to pursue, so I asked for a plane ticket and some expense money for a few months, went out to Dhahran and Riyadh, and knocked on doors and tents. It was a chaotic period, testing everyone’s agility and survival instincts as well as my consulting and relationship skills. We competed for and won a major opportunity to serve the Arabian American Oil Company (ARAMCO) consortium on the expansion and development of their communities to house the huge foreign workforce who were being recruited to operate the Kingdom’s massive infrastructure program.
Part of the challenge in practice development was to transfer Western knowledge and personal capabilities to a different, unique environment – a proud, nomadic culture, steeped in its religion and traditions, where cities and towns were about to be transformed. Today, much more is known about the Middle East generally and Saudi Arabia specifically, but at that time few Western businesspeople – and certainly more British than Americans – had much background in or knowledge of Saudi Arabia and its unique culture and deep history. By most standards, the conditions were primitive and the infrastructure was antiquated. But of course, that presented opportunities.
We were able to build the ARAMCO engagement into a sizeable practice with a broad scope over the following five years (1974 to 1979). We developed the Saudi national urbanization plan, defining the structure for a coherent urban and rural governance system, and we developed a blueprint for how the public and private sectors could work together on major developments. In addition to the government and ARAMCO, we served major Saudi banks, trading firms and construction companies on their growth strategies, organization and other management issues, and multinationals from the USA, Europe and Asia in a range of industries which were beginning to do business in Saudi Arabia and sought help in figuring out how to operate there both strategically and operationally.
3. You are the founder of Apgar & Company, a strategic advisory firm. Can you give us a brief overview of your company? How does your firm differentiate itself?
I started Apgar & Company in 1980, soon after returning from London to Washington. By then, I had spent 13 years at McKinsey – nearly ten of those divided between London and Saudi Arabia – and my entrepreneurial roots were beginning to surface. We began as a boutique consulting firm specializing in two sectors: corporate real estate (CRE) strategy, and “mega-project” planning for large multi-use owner/developers. McKinsey generously offered us access to one of our most important and earliest clients, so it was a smooth and friendly transition.
But to carve a niche in CRE strategy, then an oxymoron, we had to break new ground by applying strategic consulting concepts and analytical tools to CRE. We developed a number of techniques and methods, partly by adapting strategic business theory and doctrine, and partly by incorporating real estate-specific practices. We spent a good deal of time, effort, and expense on developing CRE-specific tools, and eventually an entire toolkit. So, we were differentiated first by our strategic perspective, which again at the time was unusual – even unique – among real estate consultants. Second, within that strategic perspective we forged a unique set of tools that were born of knowledge developed in other sectors, but fashioned for the specific issues facing both corporate managements (the users) and large developers (the producers) of real estate. We continue to focus on dissecting and clarifying the complexities, and solving the problems, which both types of clients face.
4. In 1997, you patented a corporate real estate evaluation system known as the “Apgar Real Estate Score”. Can you explain what this scoring system is? What where the drivers/circumstances that led to the creation of this system? And could you take us through an example where it has been applied?
The idea for the Score originated from a distant relation of my father’s, Dr. Virginia Apgar, a pediatric anesthesiologist who devised a test called the “Apgar Score” which is now universally applied to newborn babies. The purpose of that score is to evaluate babies’ health within moments of birth, and it has drastically reduced infant mortality throughout the world. The Score uses the Apgar name as a mnemonic for the five attributes indicating a newborn’s condition – Appearance, Pulse, Grimace, Activity, Respiration.
A client who was both chief executive of a major financial services firm and a father was familiar with the Apgar Score. After a contentious meeting in which the board had to make difficult decisions about their corporate headquarters and a large portfolio of retail branches, he pulled me aside and said, “You ought to develop the real estate equivalent of the Apgar baby score.” That was the origin of the notion that we could do for real estate what the score for newborns had done since the 1950s – creating a universal, easily understood standard.
We began developing the Apgar Real Estate Score with the premise that had supported our CRE practice: every organization – including corporations, governments and non-profits – has a portfolio of sites, facilities, leases, other legal and financial commitments, and sometimes land, all of which are typically managed on a site by site or project by project basis. For chief executives, board members, CFOs and other leaders, a portfolio view, enhanced by indicators and measures showing the portfolio’s condition, is critical to the kinds of decisions our clients face and the process by which they should manage. So, we took each letter of the Apgar name and converted it to real estate terminology: A for amount (e.g., square feet, acreage), P for price (e.g., rent, sale value), G for grade (e.g., building class, standards), A for area (e.g., market and submarket), and R for risk (e.g., debt, environmental). As with the baby score, each letter is graded on a two-point scale, so the highest-performing portfolio would score 10. Also like the baby score, we hypothesized a threshold from research and client experience: a score of six or below would signal that the portfolio had problems in at least two of the elements. For each of the five attributes, management, with consulting support, chooses among metrics or indicators that are unique to its portfolio. So, there is an interactive role between management and consultants in choosing metrics and customizing the evaluation methodology. This differentiates the Real Estate Score from the baby score because the baby score’s metrics are universally applied to all babies. In the Real Estate Score “library”, there are more than 100 metrics. The choice of which to use in a given company or situation is unique to that organization. The Score has been applied to most types of corporate real estate portfolios with headquarters and back offices, warehouse and distribution facilities, retail bank branches, and so on. It has led senior leaders to reexamine their costly infrastructure, enabled CRE executives to justify priorities for action, and given investors insights to both the latent and potential values and the inherent risks in their properties.
5. You have pioneered a number of other new paradigms and techniques in corporate real estate. Please tell us about “The 3Ls”, “Space/Functions/Time”, “Space Budgeting”, “Commitment Planning”,“Lease Aging Profile”, “Flexibility Curve”, and “Alternative Workplace”
“The 3Ls” stand for Location, Layout and Leasing. We developed this during the first five or six years of the Apgar consulting practice for executives who are not real estate professionals but make fundamental strategic and operational decisions that affect their organization’s real estate assets and portfolio.
“Location, location, location” is the old adage about real estate, but location is only one of the major factors to consider. We have found that location drives roughly 60 percent to two-thirds of the fixed occupancy cost-base of the typical large organization with multiple locations. Trade-off choices such as a downtown or suburban site, or a primary versus secondary location within a given market, are often compartmentalized or “siloed” in large organizations. The location decision is made by an operating executive without the benefit of the real estate perspective, or conversely is made by real estate specialists without full understanding of the strategic and operational implications.
The second “L”, Layout, is a catch-all term for the choice of a building type (e.g., mid-rise office), the geometry and design of the building (e.g., rectangle, half-moon), and the interior build-out (e.g., partitioning, furniture, fixtures and equipment). In a large headquarters building, campus complex, or distribution center, layout issues and trade-offs are significant in cost and operational consequences, representing about one-third of the fixed cost base.
The third “L”, Leasing, is also an umbrella term that covers all aspects of the financing transaction for both owned and leased property. The counter-intuitive aspect of this “L” is that leasing is often where executives begin consideration of CRE issues. They either ignore the other two “Ls” or subordinate their impact in financial decisions. Instead, we look at all three “Ls” holistically, reflecting the fact that location and layout choices are more consequential than leasing in determining the underlying fixed cost base of real estate.
“Space/Functions/Time” adds two dimensions to the “3Ls”. We incorporate the 3Ls in the term Space, which we use to describe not only the organization’s real property but also non-corporate spaces that workers and other stakeholders use to perform their mission. Functions define the corporate activities that use the organization’s Space. Time is the period during which the Functions use the Space. Synthesizing these three dimensions of decision making, we look for major trade-offs that often are compartmentalized in the organization and, thus, can be sub-optimized. Part of our value as consultants is to conceptualize and analyze all such decisions within a strategic context, size their impact on cost, productivity, profitability and other measures, and rank order solutions for action.
“Space Budgeting” is the real estate equivalent of zero-based financial budgeting. Instead of starting with the company’s current footprint of owned and leased properties, we start with zero and ask, “If you re-build the CRE portfolio from zero, as a new business would, what will it look like?” This, for both businesses and governments in competitive, fast-paced, rapidly changing environments, will almost always yield a different answer from purely incremental change. For organizations with large legacy portfolios, we also ask, “What would the footprint be if we shrink it by 10 or 20 percent?” and, for each facility type, “Do we need the space at all?”
“Lease Aging Profile” shows the full costs, total space, and renewal or termination dates for leases a company has already committed. By arraying the entire lease portfolio in these three dimensions, business executives and CRE managers can foresee their opportunities for restructuring the portfolio through consolidation, renegotiation and disposition, with minimal disruption. In one firm with hundreds of retail branches, we found that over 90 percent of its leases would come due within four years. This offered a singular opportunity for major cost reduction and productivity improvement programs incorporating many of the Apgar real estate tools.
“Commitment Planning” is the application of strategic planning to real estate issues, particularly in large-scale developments where, instead of starting with the vision of the development, we start by dissecting the increments that create the strategy and staging their execution in order to reduce the risk exposure and front-end commitments. For example, developing a section versus the entire campus, or part of the building while leaving the remainder unfinished, may require a small engineering and construction unit cost premium over a full build-out, but they reduce the capital required, the market risks of weak sales, and the operating costs of excess infrastructure.
The “Flexibility Curve” shows the relative values of the time that organizations have available to plan CRE actions, the pace of executing those actions, and the amounts of space affected by the changes. The many ways to create flexibility – acquiring options for additional space, shorter leases with more frequent negotiated renewals and terminations, designing for re-use and subdivision, to name a few – have different prices and risks which must be aligned with the basic business model. If rapid changes and high uncertainty are expected, the curve will show that additional upfront costs – the “flexibility premium” – are small relative to the hidden long-term costs of having too much space or the wrong type of space.
The “Alternative Workplace” (AW), a term we coined in the early 1990s, defines the spectrum of options an organization can choose when it adopts non-traditional office formats that combine changes in both culture (such as desk-sharing) and location (the home office). Because these new forms are unconventional, an AW strategy requires rethinking the purpose and nature of work and the role of facilities in accommodating work. My HBR article on the AW, subtitled “Changing Where and How People Work”, (Apgar, 1998) highlights the intent to shift or shrink the organization’s footprint, embrace new patterns of work and culture, and adopt new enabling technologies.
The AW paradigm covers four main formats with many variations, roughly in order of their impact on reducing overall occupancy costs and the difficulty of executing the change. First, shared-desk arrangements include the “free-address”, where individuals are assigned to a facility but not to a workspace, and can roam the facility to find drop-in workstations or encounter colleagues, especially “road warriors” who do not have permanent deskspace; and “hoteling”, where individuals are assigned to one or more facilities for specific time periods, supported by a hotel-like reservation system for both individual workspaces and team or conference space, assigned by the hour or for several days; concierge services for admin and travel support; and lockable mobile storage units, called “puppies”, containing the individuals’ files and valuables. One corollary to the shared-desk system is the open-plan design where the heavily-partitioned spaces of traditional office layouts are re-demised to tear down the walls and open up the officescape. Free-addressing, which is less costly to implement, yields greater savings because it does not require much, if any, physical change. Hoteling requires a larger investment in technology, but this can be integrated with overall spending in IT upgrades to help absorb the incremental cost. Either approach to desk-sharing may produce greater employee satisfaction if it is paired with management improvements such as a flexible work-schedule program.
The second format, satellite offices, breaks up large centralized facilities, often located in urban centers, into a “hub-and-spoke” network of simpler, less costly workspaces that are located closer to concentrations of employee homes (reducing commuting time); and are interoperable with the main office or operations center and on-site technological support at the central location. Satellites may be company-owned or leased, or contracted with shared-office providers (e.g., Regus and local firms) which have created their own networks to help organizations outsource this function.
Third, telecommuting is work performed electronically wherever and whenever the worker chooses. This innovation, enabled by the revolution in office and communications technologies, has steadily increased to cover millions of US workers who spend at least part of their time working from homes, hotels, cars and other locations outside their assigned worksites. Telecommuting generally supplements the traditional workplace rather than replaces it, but some companies such as IBM form entire business units for telecommuters.
Finally, home officing (HO) is slowly replacing the traditional workplace in analytical, case-based and transactional corporate functions (e.g., accounting, online customer-service), and in some entire business units (e.g., Cisco, Jet Blue’s virtual call center). Obviously, the HO is not for everyone. But with the support of robust technology – the key factor in making HOs work – executives are often surprised by how many activities can be performed in and from the home. In the AW workshops I conduct, I first show executives the full list of their organization’s functions – usually in the range of 60 to 70 – and ask how many of these they think could be “HO’d”. In the first round, their consensus ranges from ten to fifteen percent. After limited staffwork, combining client professionals and consultants, we reconvene with the team’s data and analytics, and the number climbs to one-third or more. Implementing a full HO program requires top down leadership, at least one business unit champion, and a personal benefit package (e.g., a stipend for HO furniture, broadband access, monitor and docking station) that clearly exceeds the standard workplace.
The AW can yield cost savings of 50 to 70 percent (or even more) and substantial productivity benefits. These results are far greater than traditional CRE cost reduction strategies, largely because the AW shifts part of the fixed occupancy cost from company owned or leased properties to other providers and users, and allows employees to capture substantial amounts of time and convenience for their personal use.
Since the HBR article appeared, many companies have experimented with AW solutions to achieve employee as well as corporate benefits. But the recession has put a spotlight on telework and homeworking as alternatives to live meetings and conferences, with consequent reductions in travel and conference budgets. Continuing advances in communications and computing capabilities, combined with continuing pressures on costs, are likely to bring the AW into the mainstream for most companies and accelerate the transformation of CRE from managing corporate property to strategizing the corporate workplace.
6. In 1998, you were appointed by President Bill Clinton as Assistant Secretary of the Army for Installations and Environment with global responsibility for the Army’s real estate, housing and facilities. How did such an opportunity come about? What were the challenges of this role? Does dealing with real estate for the Army differ greatly from those of private firms, or are there still the same underlying issues to consider?
Throughout my career, I was always interested in public service. This stemmed from my family, who were service-oriented; from my early education; and from my interest in cities, urban policy and public policy. However, I had not had the time, flexibility or resources to make such a move until the mid-1990s when a combination of personal factors and the success of our consulting practice opened my schedule and provided the resources to consider this step.
After President Clinton’s re-election in 1996, I approached two friends in the Administration. One, a contemporary from Oxford, was then Under Secretary of the Navy. He knew of my professional career and thought I might make a contribution, specifically in the areas of military installations and housing. The other, who had been a real estate developer and a client, was then Deputy Chief of Staff in the White House. They helped orchestrate a strategy to guide my shift from an independent professional with no political track record to a Presidential appointee. Early in the process, it was important to identify specific roles for which I was qualified. Because of my earlier Army service, and the tremendous respect I had for the institution and the opportunities it had given me as a junior officer in the mid-1960s, I wanted to give back to the Army. As it happened, the role to which I was eventually appointed was opening up because its incumbent was moving up.
So, there was a role, there was interest and there was opportunity – but it still took two years and a rather circuitous route to the appointment. I entered office in June 1998, which gave me only 30 months until the end of President Clinton’s term – a short time to accomplish much within the massive Pentagon organization. However, in my confirmation hearing, the Senate Armed Services Committee gave me a mandate to “fix Army housing”. By then, the US Army’s family housing was suffering an unfunded $6 billion renovation and maintenance backlog and a $1 billion bill to improve 70,000 substandard houses and meet a 10,000-unit deficit. The situation had reached a flash point because soldier recruiting and retention were impaired by the deteriorating conditions. It was not simply a matter of “throwing more money at the problem” or gearing up a larger housing construction program – both expected responses to the problems which would not have addressed community needs. Because the Senators’ mandate was a goal, not a prescription, I could approach it with a fresh, objective outlook and, for a time, ignore the limitations of conventional wisdom. As a result, I could return to my grounding in the British New Towns, the Columbia model, and other exemplars of community development for inspiration.
I began by organizing a task force of Pentagon experts and industry specialists to examine the issues. The team included lawyers and career officials who understood government contracting and whom I chose for their reputations as “free thinkers”. About 50 people were engaged in this challenge for several months. Together, we concluded that the system was indeed “broken” and that incremental change and temporary fixes would not work. By December 1998, we had developed a plan to “privatize” military housing, based on novel legislation that Congress had enacted which gave the military unique new authorities for market-oriented housing solutions. In reality, we did not sell the assets to private investors as the British military had done earlier – a true privatization or divestment of both the assets and the responsibility for managing and maintaining them. Instead, we established the framework for ongoing “partnerships” between the Army and private real estate developers and investors. The partnerships were based on long-term ground leases: the Army would continue to own the land, the developers would lease their sites for 50 years, and the Army and developers would jointly plan the development and management program, including construction, operations and long-term sustainment. While ground leases are common in Britain, they were rare in the USA (occurring mainly in Hawaii).
Our design provided for the Army to lease out its land in large sites through one agreement for each pre-selected military base where the housing conditions required improvement. We chose developers and financial partners to compete for each project based on their track records and qualifications, rather than seeking bids against Army or government specifications. These experienced development groups then spent up to six months teamed with the local Army commander and staff preparing the “Community Development and Management Plan” (CDMP) for financing, construction and operations of the 50-year projects. They organized partnership structures, similar to conventional business partnerships, with the Army as landholder and employer. The soldiers sign lease agreements and are treated as tenants, albeit with special considerations because of their military status and on-post locations. The CDMP includes new construction and renovation, demolition of houses that cannot be renovated or re-built, and related community facilities and services. The desired outcome is to produce thriving military family communities, not simply houses.
My responsibilities went beyond housing to include the Army’s global real estate portfolio – over one billion square feet, 160,000 buildings, 14 million acres of land, and the full scope of uses on Army installations. We streamlined procedures for about 70,000 historic properties in a joint effort with the National Trust for Historic Preservation, reformed the contracting system for managing real estate and facilities, and applied similar concepts and methodologies to those we had developed for global corporations in the Apgar practice as well as industry “best business practices”.
7. In 2002, you established and led the Boston Consulting Group’s (BCG) Infrastructure and Real Estate practice, working with multi-functional teams across industries on competitive strategy, M&A, due diligence, restructuring, organization, cost reduction, operations, outsourcing and process improvements. Do you have any tips for ensuring successful cooperation between multi-functional teams? If possible, can you provide us with any anecdotes or stories on best practices to increase cooperation between multi functional teams?
First, a word about the origin of my relationship with BCG. When my term as Assistant Secretary of the Army expired in January 2001, I took some time to think through what to do next. I taught a course in entrepreneurship at Princeton, did some speaking and writing, and had much valuable family time. I considered reviving the Apgar corporate real estate consulting practice. But I concluded that a larger platform would be feasible given the market conditions and the interest in improving the management of corporate and institutional real estate which had grown appreciably by then. The Apgar team had also developed a bank of intellectual capital and a toolkit of methods and techniques that could be applied on a larger scale.
Accordingly, I opened discussions with several major consulting firms, including BCG. BCG was by then second in size and prominence among the “big three” management consulting firms, and about the same size as McKinsey had been when I joined it. While BCG covered virtually every management function with a large global practice, it did not have a formal real estate practice. Among all the firms, BCG’s culture was the most comfortable to me and its prospects were bright. We had extensive discussions over several months and I formally joined BCG as a partner and director in 2002. As part of the agreement, I licensed the Apgar intellectual property, including the corporate real estate evaluation system patent and other tools and techniques, to BCG.
We launched the BCG Infrastructure and Real Estate (IRE) practice with three principles: The first was to work within the existing BCG structure. That meant seeding consulting teams with real estate expertise and experience, rather than developing a separate real estate practice. The second principle, emphasizing cooperation and collaboration, was to fuse techniques developed in the Apgar practice with the concepts and tools that BCG had pioneered, and incorporate them into each operational team, thus building cooperation across functional, geographical and disciplinary lines. The third principle was to engage individual consultants early in their careers, through a “real estate interest group” and other forums, so they could develop personal skills, reputations, references and knowledge, to benefit them not only within BCG but throughout their professional lives.
One element in the business models of leading consulting firms is that most graduate school recruits foresee other long-term careers. Roughly one third to 40 percent of new consultants in major firms depart by design after two to three years. Despite the high attrition rate, which could diminish teamwork, cooperation is central to the firms’ ethos and these three principles help to forge the kind of collaboration and cooperation that clients value.
There are also specific techniques, close working relationships and working environments that encourage and reward managers for teamwork as a criterion of their performance, not simply for technical competence and progress. The compensation incentives that reward both partners and consultants for teamwork and for collaboration are proprietary to each firm, but specific methods are used to create incentives for cooperation. There is also the reverse reward to suppress “stars”. These cultures do not reward people with high egos or celebrity as one finds in some other professions. Self-promotion is frowned upon, and although there are individuals with external reputations and even brands, the firms work diligently to encourage teamwork and to diminish individual stardom.
8. Following your retirement in 2006, you have been senior advisor on real estate to BCG. What does this role entail? What do you enjoy most about this role?
What I most enjoy is more control over my time! As an advisor, I do not have formal client and team management responsibilities. I counsel individual client executives as part of the overall BCG relationship, conduct workshops on corporate and institutional real estate issues, and coach consulting and client teams. Typically I spend about a day a week – sometimes more – on projects, such as the strategy for a major portfolio restructuring or approach to occupancy cost reduction or due diligence for a complex acquisition. The consulting teams perform the data collection and analyses, which I may help to guide. My role is mainly to apply experience and judgment born of my years in and around corporations and government. I add perspective from my industry activities, draw analogies from client cases and independent research, and review the teams’ work-in-progress. During my career, I have served over 150 client organizations, involving several thousand executives, on some 500 projects and portfolios. This enables me to quickly look at situation analyses and offer views on what works, what does not work and why, as well as to challenge the teams’ thinking and sometimes suggest counter-intuitive strategies for tackling complex problems.
9. Your career has spanned 40 years. What do you think have been the most notable changes in how companies deal with real estate and facilities during that time?
There are two notable changes, both encapsulated by “3 Is”. First, “Information, Information, Information” has swelled our real estate knowledge base and transformed how we analyze it. The amount and quality of information about corporate facilities enables us to address basic issues such as the role of the workplace and facilities’ performance in supporting business operations, their impact on the balance sheet and P&L, their value in corporate productivity, and their potential for increasing employee satisfaction. All of these changes reflect the principle of the Apgar Real Estate Score: to better inform real estate decision makers through objective metrics of total real estate performance.
The other fundamental change is described by the 3Is of “Ideas, Insight and Impact”, adapted from BCG’s mantra. Companies now look at real estate in a much broader, holistic way which is more integrated with corporate strategy and becomes part of their missions and as well as their economics. Leading organizations fashion explicit links between the physical aspect (bricks and mortar), the financial aspect (leases and securities), and the mission and strategy of the enterprise. This applies to companies – large and small, structured and entrepreneurial; to governments, NGOs and non-profits.
The corollary to the expansion of knowledge is accountability. As with so many functions in public policy and corporate strategy, real estate is not an independent, static aspect of business, but a central lever for boards and senior executives to manage, from determining how much real estate the enterprise should own or lease, what impact it should have on the mission, what it should cost relative to revenues and other expenses, who should be accountable for it, and what role the board and senior leadership should play in policies, oversight and decisions. Historically, decisions about real estate were delegated, often far down the line, or pushed out to brokers and first-level property managers. Now they are on the senior leadership agenda. Increasingly in my work with boards and senior executives, I challenge them to increase their own accountability for the real estate function and for major property commitments in board-level decisions.
10. The quick pace of change and the high cost of faulty predictions mean that companies need to build more flexibility into their real estate portfolios. How can they do this? What tools do they need to increase flexibility?
Companies should manage two main levers of flexibility: financial and physical. To achieve financial flexibility, shorter lease terms with more frequent renewal, expansion, termination and purchase options have changed the way companies view and execute their leases. But there is a premium to be paid for flexibility – it is costly to achieve a shorter lease term with more frequent exit clauses, and to negotiate terms allowing expansions and contractions, making it counter-intuitive to most executives. The analogy is options pricing in corporate finance, where similar principles prevail (although with real estate-specific differences). Some of the companies that are most skilful at this look hard at the tradeoff between paying more for the lease up front and the length and structure of the lease term. They also watch the use and utilization of space to match cost with productivity, compared to the traditional approach of looking for the space, negotiating the lease, reviewing it in five years, and, often, remaining in place. In the meantime, market conditions and company needs may have changed and the space is no longer needed or must be reconfigured. The tendency in traditional businesses is simply to add space incrementally, rather than to match current and anticipated requirements by reconfiguration.
To summarize, the information, metrics and analytical tools enable quick examination before leases are set to expire or extend, whether to seize the opportunity of termination or renewal dates by exiting the lease, whether to roll over the lease with a different mix of amount, price, grade and the other Apgar Score factors, and whether to shift from leasing to ownership (or the reverse), adding the impact of headcount and human resource considerations on their choices of locations and building types.
Physical changes are literally easier to see, but they usually are harder to implement because, almost inevitably, they are disruptive. The pain of re-demising the space to allow greater density, breaking down walls, creating team space and adopting other features may not be worth the gain compared with relocating to achieve the same results.
I have been working with a large company that is reconsidering its footprint in New York City, re-examining the reasons to be downtown versus the suburbs, evaluating more distant sites, and even addressing its alternative workplace potential. Their process is driven by a major lease expiration in two years, and they see the heavy discounts now available in nearly all locations and property types. With today’s market conditions, there is significant opportunity to perform major surgery for this restructuring, which in “normal” times would be very difficult, even impossible, to achieve.
11. What inspired you to become a part-time professor during your career? What have you taught in your courses at Harvard, Oxford, Princeton and Yale?
Throughout school, I was motivated by teachers who inspired my love of learning and stimulated a spirit of inquiry. Yet I was also discouraged by some teachers who were not as engaging or as interested in their students, or who were focused solely on their research. Consequently, at Dartmouth, Oxford and HBS, I occasionally thought about teaching as a career. The Socratic dialogue, the case method, peer-and-professor interaction in the classroom, and mentoring outside class were especially appealing. But in those days, I could not see a path to reach my personal and professional goals (including a family) through teaching, and I was not a researcher by instinct or discipline. When I discovered management consulting, one of its most attractive features was, and still remains, the team-based workstyle, case-based analytics and practical focus that in many ways emulate the business school environment.
My first opportunity to teach arose during my second year at HBS. One of my professors, intrigued by a presentation I gave on New Towns, invited me to write a case note on the USA and British new towns experiments. I also wrote a case about a business leader in the energy industry who was then developing company-owned communities for coal miners in West Virginia. With the support of mentors at HBS and the late Professor William Nash at the Harvard Graduate School of Design, I co-developed and co-taught the first course on community development for MBA and Master of City Planning students during the term following my graduation in 1968. We modeled this on HBS courses, involving casework, class discussions with visiting developers, planning studios and team projects.
Scroll forward 33 years to 2001. After leaving the Pentagon, I approached Princeton with the idea of designing and teaching a new undergraduate course combining real estate and entrepreneurship. I had no syllabus or recent track record as a teacher, but fortunately the combination of my business and government experience appealed to the distinguished historian, Professor Sean Wilentz, who directs Princeton’s Program in American Studies which co-sponsored my appointment with the Woodrow Wilson School of Public and International Affairs. I entitled the course, “Entrepreneurship in America: The Changing Roles of Public and Private Enterprise”, wrote or supervised new cases with their sponsors, “borrowed” cases from HBS, incorporated readings on entrepreneurship and leadership from Ben Franklin to Ernest Shackleton and Jim Rouse, invited executives who were profiled in the cases to co-teach the classes, and generally made the sessions full and fast-paced. The course and case development were demanding but stimulating. Designed as a seminar, it was over-subscribed. So, to expand the topic’s reach and complement the course, I also organized a “Forum on Entrepreneurship”, open to the public, with five noted Princeton alumni-entrepreneurs who presented their enterprises and discussed the lessons of both successful and failed start-ups. The side benefit of this memorable term was weekly dinners with our older son and daughter who were Princeton seniors that year.
In 2004, the RICS invited me to address UK business school deans in a landmark conference on the challenge of integrating property into their curricula. Building on their enthusiasm, and drawing on the same theme, I proposed the concept of an MBA real estate course to the then-Dean of Oxford’s Said Business School, Anthony Hopwood. From my long engagement with Oxford as a member of Magdalen’s Investment Committee and through other roles, I had observed that this ancient University, though holding substantial investment properties and using dozens of operational facilities, did not have a formal real estate course. Said was then less than a decade old, so it seemed like an excellent place to apply new ideas. Dean Hopwood’s first instinct was to test the market for this topic before committing to a full course. After some dialogue around options for a “course market test”, I proposed an “Oxford Real Estate Summit” as a low-cost, low-risk way to draw Oxford alumni from many areas and property-related disciplines, showcase “hot topics” then pursued by the Said and University faculties, enable students to participate with distinguished alumni through panels and breakout sessions, and assess the level of interest in proceeding further. The first Summit in 2006 exceeded the Dean’s expectations, and demonstrated the potential course demand that he sought. To follow up, he invited me to design and teach the first Oxford MBA Real Estate course in Trinity Term (Spring), 2007. I built the curriculum around three principles: a comprehensive platform for “property in all its forms”; a rubric embracing “users” (organizations that occupy space for operations) and “producers” (developers, financiers, managers, and service providers who create the space); and a combination of lecture- and case-methods in which the executives involved in the case situations were engaged in the case development and in class participation. We produced new cases on Value Retail’s Bicester Center, IBM Corporation’s UK corporate real estate portfolio, State Street Corporation’s Canary Wharf headquarters project, and the Grosvenor Group’s consideration of real estate derivatives. The course, which I intended as a 15-person seminar, was oversubscribed and had to be repositioned as a full 60-person class - no mean feat for this non-academic! The corollary to the weekly course format was that Anne and I relocated to Oxford for the Term, renting a beautiful, top floor flat that overlooked a canal behind the 11th century “Oxford Castle”, five minutes walk to Said and 15 minutes to Magdalen. We enjoyed the richness of town, university and college life, making Oxford a defining experience for us - and we hope to return some day.
Buoyed by the Oxford experience, I co-taught “Real Property” at the Yale School of Management in 2008. Our youngest son was then a junior at Yale College, and the “Princeton precedent” (weekly visits with him as a complement to conducting the classes) remained a strong motivator! Yale already had several real estate finance courses, but fortunately there was also room for my strategic and corporate real estate focus. The lead professor agreed to include two new topics and cases on State Street’s Eastern Massachusetts corporate real estate strategy and the Army’s RCI housing public-private partnership program, as well as my cases on IBM and Bicester. As before, I enlisted guest executives to participate in the classes, and hosted lunches after each class so students could engage with the guests - a hallmark of my courses which students have said they especially value. During the term, the student Real Estate Club arranged a special session, open to all MBAs, and invited me to share our consulting toolkit of real estate analytics followed by a stimulating discussion about the industry’s future and the challenges they will face as general managers and real estate professionals.
Looking ahead, my next teaching stop may be Dartmouth’s Tuck School of Business. Our daughter will be in the Tuck MBA Program from 2009-2011, and my experienced-based, case-oriented, corporate real estate focus could complement their current courses. Nothing is yet firm on this, so stay tuned until we “meet” again.
A final note on my affinity for teachers and teaching. About 25 years ago, Anne and I established an awards program to recognize outstanding, non-tenured teachers early in their careers when they are least rewarded and most vulnerable to financial pressures and alternative careers. The awards are now given annually in colleges, schools and other organizations. While the focus on teaching excellence is common to all, the award is tailored to each institution’s organization, culture and reward system. We both value great teaching and share in the joy of meeting the recipients and learning about their projects.
12. What are the biggest challenges facing real estate executives today?
In answering this, I will use the framework I developed for my MBA courses to differentiate executives in business real estate – that is, those who use real estate to support business activities – from executives in the real estate business – that is, developers, financiers and others who produce the facilities business uses.
The business executives face major challenges in strategy, organization and information. First, the strategic imperatives that once guided real estate decisions have been eroded by the prevalence of complex financial engineering and the ubiquity of office and personal technologies. It is, quite simply, not so simple to make the right real estate decisions anymore. Second, too few CREEs are empowered to participate in corporate strategy or hold a seat at the boardroom table. Consequently, their ability to effect change amid competing stakeholders is impeded and their role is limited to executing transactions. Third, real estate executives’ access to economic and market information is limited only by their imaginations and budgets. But, they rarely are hard-wired into the very corporate databases they should have to make informed judgments – specifically, HR, finance and operations. Therefore, they either sub-optimize based on faulty assumptions about these functions or spend inordinate, often ineffective, time teasing out opinions when facts should prevail.
In the real estate business, executives are challenged by short-term pressures while managing long-term assets. The seismic shift from privately owned entrepreneurial firms to public REITs and institutional investors, so pronounced in the USA over the past decade, has changed their management focus from creating value in the underlying properties to engineering results for financial statements. Some of the “best” real estate producers and managers have become corporate finance practitioners, over-leveraged their companies, and are now undergoing massive restructuring. As one of my classes concluded after a case on real estate derivatives, “they are trying to become finance wizards but are no longer in the real estate business”. Additionally, the time required to achieve results transcends the business and real estate cycles. And, the increased role of government at all levels – as regulators, advocates and even investors – may not be recognized in the value creation process.
In closing, I re-emphasize that corporate real estate is more than facilities to house operations and assets to strengthen the balance sheet. With intelligent, far-seeing leadership, it can become a potent resource for any organization’s people, enabling them to be happier and more productive; for its managers and investors, enabling them to achieve strategic goals; and for the community, which has a stake in the functions and form of every facility in its midst.
This interview was conducted on February 19, 2009.
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