Jones Lang LaSalle EMEA Research Blog

Posted by: Emma Jackson
Corporate Research
Jones Lang LaSalle EMEA Research

This debate has recently become a hot topic after Yahoo’s chief executive officer (CEO) Marissa Mayer announced a ban of employees working from home.

Since the global downturn began many companies opted to increase the use of flexible or remote working.  There were a range of drivers.  First, given the inability to offer increases in compensation and benefit, flexible working has been used as an ‘employer of choice’ strategy.  Second, it became a means to realise cost savings by lowering the amount of office space occupied.  Thirdly, such space reduction has also endorsed corporate social responsibility and environmental credentials.

So will Yahoo’s example signal a turning tide?    Overall, is flexible / remote working a good idea for business or not?  These are pros and cons to the debate, as I see them:

The benefits of flexible / remote working:

• Improves employee well-being, motivation and performance
• Reduces absence levels
• Retention: helps businesses keep parents on board, skilled and experienced staff etc
• Increases efficiency: by reducing office distractions and empowering employees to manage their time more effectively
• Cost saving: from a business perspective, savings can be made in terms of electricity and the general space needed for having an extra employee in the office. From an employee viewpoint, costs on the commute and possibly child care can be significantly less.

Potential downsides of flexible / remote working:

• Trust and accountability: some companies remain concerned that employees can take advantage of this arrangement.
• Security: working on remote computers can be a potential security threat for firms, as more data is passed around outside their control.
• Fear of disrupting normal flow of business
• Team spirit: flexible working suits individuals, but doesn’t always work for the team. If staff are away from the office more than they are in, it can be much harder to create a good team atmosphere.

Interestingly, age can also have a big impact on expectations, with research suggesting that Generation X and baby boomers have very different expectations to Generation Y when it comes to work. Generation Y expectations are much higher, they not only want to work in a location of their choosing but usually also work at the time they want.  They do not wish to be constrained by the traditional 9-5 and they also favour modern, high-quality office space. Why does that matter? Well, if they want to attract the best and retain the best, employers will need to think how they can adapt or accept that some of the best of Generation Y will not be interested in the careers they are offering.

Taking the above factors into consideration, I believe Yahoo may be missing a trick in suggesting a total ban. From what I have seen and read, flexible / remote working can be hugely beneficial to both companies and employees. What seems critical to me is whether a reasonable balance can be struck between home-working time versus office time. I think it allows motivated employees the possibility of a quiet and concentrated time (depending on home circumstances!) to produce high-quality work efficiently and companies stand to gain through retention of talent, reduced operating costs and higher productivity.

Of course it is important not to lose human connections between colleagues and workers.  So, for me, it’s all about getting the balance right. My view would be that staff expect a reasonable amount of flexibility from employers and that Yahoo’s new directive is somewhat outmoded.

Posted by: Emma Jackson
Corporate Research
Jones Lang LaSalle EMEA Research

If the economy were a colour, it would probably be a dreary grey, with just a few discernible brighter spots sprinkled in its midst. Over time of course, we have become accustomed to the economic doldrums, from which we are finding it difficult to emerge. CRE teams are no exception. Over the last 5 years, they have identified and delivered an impressive array of cost savings for many companies in relatively short time frames.  Unsurprisingly this has fuelled future expectations of what they can achieve going forwards and the pressure to cut or avoid costs wherever possible is now greater than ever.

And whilst cost cutting / avoidance is the order of the day for CRE teams, there is also a growing emphasis on increasing the productivity of workers and the workplace. Obviously rising productivity can boost corporate profits, something that is critical in a slower and lower growth environment.  Unsurprisingly therefore, productivity is writ large in CRE strategy. It is the leading modus operandi of the CRE team. CRE teams need to move above and beyond a limited focus on property costs and concentrate on aligning all corporate support functions behind wider strategic initiatives.  This issue was central to our own recent white paper, ‘A new dawn for workplace strategy?’

The benefits of integrating CRE with previously isolated support functions of HR, IT, facilities management and finance could certainly pay dividends when it comes to providing effective, productivity-enhancing working environments for high-end knowledge workers. So an integrated approach from support functions should provide corporates with a chance to gain real competitive advantage.

To my mind, worker and workplace productivity represents a stronger and more positive focus for CRE teams than tactical real estate plays aimed at reducing costs.  This is starting to shape the CRE agenda.  But in essence this will take CRE outside of a simple bricks and mortar consideration to become change managers and integrators of service functions within their businesses.  This is quite a change of positioning and will present some real risks and challenges.  But it will be a key means of retaining relevance and showing added value.

Suffice to say significant rewards await those who are committed enough and able to get it right, whilst laggards will inevitably be disadvantaged over time.

Posted by: Emma Jackson
Corporate Research
Jones Lang LaSalle EMEA Research

Obviously I was too young to remember the details of the 1970s energy crisis (of course!!).  This was the time when the world suddenly woke up to how dependent it was on the Middle East and OPEC.  But the time still resonated with me, possibly due to my dad’s pre-occupation with turning off lights in parts of the house when not in use!

Issues such as how far can  the UK insulate itself from international energy shocks and how much of a role renewable energy could play as an alternative to fossil fuels were first raised in the 1970s, but have retained their relevance in the context of debates about climate change and energy security.

Energy bills have risen dramatically in recent years as energy companies hike prices due to higher wholesale costs (underpinned by rising international prices for fossil fuels, particularly gas) and expectations are that further increases are in store.  

As energy prices rise disproportionately to other costs, the energy efficiency of corporate real estate portfolios is becoming a key consideration for CRE teams, particularly given the sustained focus on cost cutting or cost avoidance and broader CSR agendas.

So faced with rising costs what can businesses do?

The good news is that there are a number of relatively cost-effective measures businesses can implement to make efficiencies on and drive down the cost of occupancy. A few of these strategies include:

• Consider switching supplier to save on costs. Bit of a surprise this one – but The Energy Forecaster’s research shows 20% of UK businesses do not have the time or motivation to switch supplier, despite savings. Many are unaware of key information about their utility contracts.
• Occupiers should consider the energy rating for every new lease that is taken on and the standards being requested from project teams when instructing any refurbishment or redevelopment works. 
• Explore opportunities to negotiate with their landlord(s) for energy efficiency upgrades to the space.
• Take advantage of the Green Deal, expected to be launched for the commercial sector in late 2013, which will create a new financing framework that offers owners and occupiers of business and domestic property the opportunity to improve energy efficiency, while avoiding upfront costs.

Whilst I do not personally believe we will back to the blackouts of the 1970s and the 3 day week, I do think that controlling energy costs will be of major importance to corporate occupiers over the medium term and as such the issue will rapidly shape the behaviour and strategies of CRE teams.

Posted by: Lee Elliott
Corporate Research
Jones Lang LaSalle EMEA Research

So today’s the day.  After spending yesterday rediscovering the sheer sense of awe that the Golden Gate Bridge brings whenever it comes into view, I am in the (time) zone.  I am now ready to give my read on the current state and future prospects of the EMEA occupational markets to more than 250 CRE leaders as a panel speaker at the CoreNet NorCal (Northern California to the uninitiated) Global Market Review.

Before I take the stage, my first challenge is to find my way, unaccompanied and unscathed to the venue for today’s event. I have hired a car.  I have to confess that the notion of driving on the wrong (or if you prefer right) side of the road is making me anxious.  Common sense prevailed as the Avis representative tried to up-sell me a 5 litre Mustang.  More fun he said.  I’m sure it is.  Call me unadventurous, but I will sacrifice fun to reduce fear.  My 1.4 litre Kia Box (it’s not called a Box, but that is a far stronger reflection of what it is than the actual model name) will suffice.  Next stop, Electronic Arts in Redwood City.  Sat Nav estimates a 25 minute trip. 

As I enter downtown Redwood City I drive through an archway complete with the slogan “Climate Best By Government Test.”  It is a reflection of the findings of research undertaken by the US and German governments prior to WWI which saw the city tied with the Canary Islands and North Africa’s Med coast as having the world’s best climate.  Today is certainly pleasant and a lot warmer than a snow-bound London, but is by no means tropical. 

Much of this markets heat I suspect derives from its roll-call of tech-companies who have made Redwood home.  As well as Electronic Arts, the city also boosts Oracle, EverNote, BroadVision and PDI/Dreamworks as resident powerhouses.  Back in the late 1990s, this place was also home to games giant SEGA before they relocated to San Francisco.  Both EA and SEGA are at the media or content end of the TMT spectrum.  It’s a space that is both competitive and fast moving.  As if to prove the point, this very week Atari (well known to anyone reading this aged over 30) filed for bankruptcy here in the US.  

This connection with climate and change is pertinent.  A year from my debut at this event, the central thrust of my argument is that EMEA, whilst no means basking in pure sunlight, has started to emerge from the dark clouds of recent years.  My argument in simple bullets goes as follows: 

• Confidence remains fragile and has held back occupiers in the market
• The economic situation is equally fragile but is showing encouraging signs of improvement given strong intervention from European institutions during H2 2012
• Conditions are set for improving corporate confidence and activity with momentum gathering from H2 2013.
•  This activity will increasingly be focused on driving occupational and portfolio transformation
•  This will quickly erode limited quality supply in EMEA’s real estate markets and this will be accentuated by a slower supply side response than witnessed during traditional cycles
• This in turn will lead occupiers to be exposed to increased costs – either rising headline rents associated with the dearth of quality supply or the run costs of taking compromised space
• All of this will focus ever more attention on investing in and implementing new workplace programmes and strategies 

Most in the audience acknowledged the evidence and welcomed the outlook.  One fellow panel-member however took a more bearish view into their regional overview arguing that event risk in EMEA was at least as twice as high as a year ago.  It led to a good debate.  But I remain convinced that while there are some further grey clouds that need to dissipate, a positive change in climate is upcoming and will drive corporate occupiers to new strategies and activities.

Posted by: Lee Elliott
Corporate Research
Jones Lang LaSalle EMEA Research

One of the most amusing stories to emerge during my time in the States has been that of the US based worker who outsourced his own job to a worker based offshore in China.  The individual – ingenious and disingenuous in equal measure – delivered all his tasks through a third party at a fifth of his salary (let me tell you that guy ain’t dumb), freeing up his own time to focus on web-clicking and the like (maybe getting a blister on his thumb).   Of course the story didn’t end well for the individual as he quickly received his pink slip (he’s now watching MTV).  

While the story was highly amusing, it is increasingly at odds with the nature and rationale for corporate shoring activities.  This dynamic was covered in the reprise of our 2008 paper ‘Onshore, Offshore, Nearshore: Unsure?’ and has also been the focus of a special supplement this week in The Economist.  The theme is relevant right now.  As such it has never been far from any of the conversations I have had with occupiers here. 

In summarizing these discussions, 6 points are worth highlighting:

-          The cost arbitrage that enabled the above worker to do what he did and has similarly fuelled multiple decades of off-shoring activity is rapidly eroding.  Wage inflation in the core off-shoring markets of China and India has been running at 15-20% per annum for the last decade.  Furthermore, as the middle classes in these markets expand, social and political aspirations are driving movement towards a service and consumer-based economy.  Labour cost arbitrage is no longer the clinching factor of a shoring decision for the majority.

-          The ability of alternative off-shore markets – such as Vietnam, Indonesia and the Philippines – to fill the void is being called into question as they are more limited in terms of scale, efficiency or supply chains and, indeed, as the tasks being considered for off-shoring become more complex.

-          Many corporates, having pursued aggressive shoring strategies, are now realizing that they went too far, too quickly and are being impacted by what The Economist neatly termed the ‘disadvantage of distance’.  This is particularly true given: strong rises in shipping costs; the risks to supply chains posed by war and natural disasters; and the disconnect between on-shore R&D and off-shore production.

-          The above is leading to a redistribution of corporate activity with ‘re-shoring’ on the rise – particularly, though not exclusively, with a manufacturing focus.  Google, GE, Caterpillar and Ford have all brought production back stateside or are choosing to increase capacity here ahead of overseas markets.  Equally, in the service sector many traditionally perceived non-core functions are taking on a new strategic importance (e.g. data management) and are less likely to be pushed huge distances away from base.

-          The rationale supporting new activity flowing into traditional or emerging shoring markets is now market penetration rather than cost advantage.  Corporates will increasingly align their operational models to the geography of market opportunity.  It is all about taking root in new marketplaces.  This will also allow increased customization of products and services to meet with local market expectations – extending the longevity and profitability of sales.

-          The shoring phenomenon is not a developed to developing dynamic – there is growing evidence that corporates from the BRICs and beyond are now placing activity within developed economies (e.g. Tata Group are now making Range Rover’s outside of Liverpool).

It is clear from my discussions over the last few days that the changing dynamics of shoring are as germane to the West Coast and the TMT sector as they are elsewhere.  Consideration of the most efficient, cost-effective and productive operational model is an essential task given the low growth economic environment and the need to seek out any possible competitive advantage.  For a company to do so is a good and necessary practice.  For a worker to do so would, however, appear to remain a step too far for those in the boardroom.

* with apologies to Dire Straits

Posted by: Lee Elliott
Corporate Research
Jones Lang LaSalle EMEA Research

It’s 2.30 am.  I cannot sleep.  My body thinks it is approaching lunch-time.  My head has no clue what is happening and my brain is struggling to process even basic information (no change there I hear you all say).  I should be dreaming. Instead I am thinking about a dream.   The American dream.  The notion of the American dream runs through the centre of social, economic or political debate here.  It was at the very forefront of the Presidential Election.  It was utilised by commentators trying (somehow) to come to terms with the tragic events at Sandy Hook prior to Christmas.  It was central to much of the copy that I read on my flight across the Atlantic. 

For those of us who grew-up outside of the USA, the notion of the American dream was brought to life culturally through the films, literature and music of the twentieth century –the American century.  It has developed into a set of ideals that you can recognise but might struggle to adequately define.  It is about freedom.  The opportunity to carve out personal prosperity and success through hard work.  It is about a meritocracy that promotes an upwards social mobility that is not constrained by class or the circumstances of birth.  James Truslow Adams attempted a definition in his 1931 work Epic of America namely: “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”.  Looking around the affluent Nob Hill area of San Francisco on arrival yesterday there was plentiful evidence that the dream is alive and working well for many.  Three blocks closer to Market Street however and the dream appears to wane as desperate poverty and panhandling become rife.

This is interesting because there is arguably no place more representative of the American dream than California – a place where dreams are realised and fortunes are made.  And this is by no means a new phenomenon.  When gold was first discovered in the state in 1849, hundreds of thousands were drawn in seeking an overnight fortune.  Some succeeded bringing into being an alternative California Dream of instant success and riches, something that historians suggested spread across the entire landmass of the USA in the years after the gold rush.  This was fundamentally different to the puritan dream advocated by Benjamin Franklin of building modest fortunes year by year.  The California dream was instead about instant realisation and accumulation often via sheer audacity and good fortune.

Of course the tech sector is the modern equivalent of that gold rush.  And what a rush it has been.  Since the 1950s, Silicon Valley has been at the forefront of national and global technological innovation.   It has brought significant wealth.  In a 2011 survey, CapGemini found that San Francisco had close to 150,000 millionaires (4% of its population). Further down the valley, the self-proclaimed City Centre of Silicon Valley, San Jose, is home to a further 90,000 millionaires (6% of its population). 

By any measure the wealth creation is impressive.  It has led the Silicon Valley to be feted as a model for economic development across the world over.  The companies that first established and then made it big in the Valley – the household names of the tech sector such as Apple, Google, LinkedIn, Facebook, Twitter and so on – are the new powerhouses in a global economy shorn of high finance.  Locations across EMEA and beyond are trying to tap into the elixir of success that drives the Valley and use it to fulfil their own dreams.

But two things strike me.  First, and most obviously, one has to question the extent to which a 50 year plus operating environment can be recreated.  Furthermore, having worked in inward investment for a few years, I am yet to be convinced that the large majority of companies established in the Valley are themselves transferable at a significant scale. Sure many have made a foray into the EMEA marketplace, particularly in London and Dublin, and some such as Google are creating enormous facilities, but these appear to be the exception rather than the rule. As such there is probably not enough to go around. 

Secondly, and perhaps more problematically, some commentators here in the US are beginning to suggest that the Valley and Bay Area is beginning to lose some of its sparkle.  There is even mention of a bubble.  This should be a warning to those in Europe seeking to create tech clusters in the mirror image of the Valley.  All may not be what it appears from the other side of the pond.  Two recent articles point to the recent waning of the tech sector dream. 

First, writing in the United Airlines in-flight magazine, Mark McClusky, a special projects editor for Wired magazine, pointed to an acute shortage of the epic ambition characteristic of both the California dream and the Valley areas most famous son , Steve Jobs.  McCluksy argues, compellingly, that innovation in the area has become incremental and focused on accessorising rather than breaking new ground.  This McCluskey argues cannot be sustainable as it leads to more solutions to small problems than there are small problems.  It is shifting the nature of innovation from the world-changing and defining visions of Jobs or Page, towards those focused on getting rich quick – technological prospecting if you will.

This point is built upon by Peter Delevett writing on SiliconValley.com who highlights an emerging shortfall in the economic model underpinning innovation in the Valley.  He notes that more start-ups have emerged in this part of California than at any time since the dot-com era due to the reducing costs of building an internet based company and an explosion of ‘angel’ investors.  He also points however to an on-going consolidation in the venture capital (VC) sector which is generating a smaller source of large cash infusions for these start-up firms.  Those that secured initial seed funding (up to $1.5 million), estimated at some 4,000 over the last three years, far outnumbers those that have gone on to obtain further, what is known as Series A, funding ($3-5 million).   This has led CB Insights to suggest that 1,000 start-up firms will be orphaned over the next 18 months, many of them in California.  VC investors will be cutting more start-ups adrift as a new funding crunch plays out in the Valley. Furthermore the investors will likely retrench from their current position of spreading their initial investments widely across the market in order to hit on the next big thing.  A new model may be emerging.

So there may be trouble ahead.  The innovative capability that has characterised this area for more than half a century could be under-threat, ironically from a huge influx of capital that sought to buy-in early to the next big thing but is now unable to back the next step. Those who still firmly believe in the power of the American dream will point to an inherent ability to escape out of this hole.  Those seeking the transfer of the tech sector to Europe and the steady flow of big new things from the west coast might want however to start thinking about a plan b. 

Of course, I am as ever an optimist (it’s the Charlton Athletic supporter in me).  Dreams do often come true.  I say this as America prepares itself for a public holiday next Monday in deference to perhaps its greatest dreamer, Martin Luther King.  Oh, and it just so happens to be the day when the first black President of the United States gets inaugurated for a second term in office.

Posted by: Lee Elliott
Corporate Research
Jones Lang LaSalle EMEA Research

My first blog of 2013.  A new year that brings renewed energy, enthusiasm and indeed some new responsibilities as the Head of EMEA Research.  But a year that also presents some similar analytical challenges and opportunities to present this analysis. Plus ca Change as our French team might say. 

And so it is that I am sitting on a 747 for the next 10 hours bound for San Francisco and a Global Market Review hosted by the active CoreNet NorCal Chapter.  I confess that despite this wonderful opportunity, which I thoroughly enjoyed 12 months ago, I am presently perturbed.  My careful pre-trip planning and seat allocation has been thrown a curve ball when British Airways decided to change the plane at the 11^th hour.  My cherished aisle seat, which at 6’ 2” I regard as a necessity in economy (cost control continues to be a theme for as all in 2013 ladies and gentlemen) has been taken away.  I am now the meat in a sandwich and the bread is of bloomer style, if you get my drift.  So the next 10 hours is about trying to put my current discomfort to the back of my mind and focus on the messages I am seeking to deliver and the beauty of my destination.

Possibly the only delight, despite the middle seat, of such a long flight is the opportunity to catch-up on some reading.  I have come well stocked.  The Economist, the complimentary Financial Times, an electronic version of Forbes Magazine, Michael Lewis’ read of the crisis in Europe ‘Boomerang’ (last year it was the Lewis inspired movie Moneyball that preoccupied me, this time it’s a little more serious but no less entertaining) and to broaden focus a little, the latest edition of the Harvard Business Review.  A lot to cover.  A lot of interpretation to synthesise and consider.  A lot to worry about. 

This array of material, each dealing with the issues with consummate skill (none more so than Lewis) have one commonality.  They all highlight the structural changes required politically, economically and corporately before we can talk with greater certainty about growth (of any magnitude).  I will deal with some of these issues more fully over the coming days in both my formal presentations and this blog.  But in summary the issues would seem to be:

• The on-going fragility of Europe and particularly how effective recent policy interventions can be in stimulating demand and freeing up capital for investment.  This leads to a related debate about what might constitute a plan B. 
•  The questioning of the health of the American dream, the role of the US in global affairs and economics, the fiscal cliff and the political polarisation that is generating gridlock and brinkmanship.  The cliff may have been avoided just as the footing was giving way, but this is likely to be a temporary respite, with agreement on spending plans and the debt ceiling still required.
• The changes that corporations are waking up to in terms of new organisational structures; a renewed focus around core activities; and the challenges of responding to new patterns of demand (most notable in a week where the UK has seen yet more high profile victims within the retail sector).

Each are themes that form not just the background reading of my flight but the backdrop to the next 7 days.  As I once again enter into the heart of the global tech-sector I want to understand how focused the sector and corporate America more broadly is on the issues facing Europe.  I want to explore the way these same business view their prospects in driving both the American and global economy.  Finally, I want to identify the ways in which some of the most significant names in Corporate America are facing up to the structural challenge, how they are adjusting business models and what this ultimately means for real estate.  It should be a fascinating few days, once I crow-bar myself out of this middle seat.

Posted by: Emma Jackson
Corporate Research
Jones Lang LaSalle EMEA Research

Personally I am looking forward to a slightly decadent, irresponsible perhaps, but definitely liberating spend in the January sales and maybe beyond.  My house is finally sold (after a year on the market), my possessions are heading into storage (as I have nowhere to go!) and this is culminating in an unfamiliar sense of freedom – with the prospect of no mortgage or bills to pay (at least for a few months anyway). How satisfying to cancel those direct debits.

My circumstances are obviously far from typical though.   According to a recent Bank of England survey, British households have reined in spending for fear they will be unable to repay debts or gain access to credit.  It appears the majority will be looking to curb spending.

As a corporate researcher I recognise that this cautious attitude to spending is also prevalent amongst large UK corporates.  Confidence in 2012 was certainly not great, with many companies sitting on vast cash reserves – reflecting low M&A levels and risk aversion / fence sitting when it came to real estate spending.  The paradox is that many of these corporates are cash-rich – but will not start to spend until the cash-poor consumers begin spending.  So, for the time being the situation is finely balanced.

In the last few months there has been some evidence to suggest that the tide may be starting to turn.   A number of 2012 year end surveys such as the European Commissions Confidence Index,  Baker Tilly’s Outlook 2013 survey, and CMI’s Expectations for 2013 have all indicated improvements in UK corporate confidence.  There seems to be a consensus that business prospects will be better over the course of 2013, although many still harbour concerns over the government’s austerity policies.

Although encouraging, I think this is just a baby step. Signs of weakness in the economy still remain. Significant uplifts in corporate confidence would be required before corporate reserves start to be invested in both the real estate portfolio and in building new capacity or through increased M&A activity. So, whereas my personal spending will be firmly focused on the first quarter,  I am predicting it will take considerably longer for UK corporates to break the risk aversion mindset of the past few years with momentum steadily building as 2013 progresses.