Feb. 7, 2018
By: Bruce Rutherford, International Director, JLL Global Energy Practice Group
This is the first in a three-part series examining common real estate pitfalls energy companies should avoid. JLL’s Global Energy Practice Group will share market insights and real estate expertise with energy companies at the 2018 NAPE Summit, Feb. 8-9, in Houston. Visit us at booth 3111.
Even though real estate is extremely important to an energy company, as it is a fundamental support for operations, operating real estate often does not get the attention it should receive. Misguided or neglected real estate management can cause expensive problems for the typical energy company. There are three common real estate pitfalls that have adverse effects on the operations and profitability of the typical energy company.
Common real estate pitfall #1: No centralized control
Companies need centralized real estate control just as they need a centralized accounting system or a centralized approach for technology. A lack of centralized control for real estate results in real estate being managed in ad hoc fashion, which does not support the company’s overall financial and operating objectives. Without centralized control, it is too easy for a business unit to do something at odds with the company’s overall plans and objectives. In some cases, the actions of business unit executives and non real estate professionals can be fundamentally wrong and create serious problems for the larger entity.
- For example, an energy company business unit executive once bought land for an operational facility not realizing the property could not be zoned for the intended function.
- In another case, business unit executives without real estate experience built an operational facility that did not meet building codes and, therefore, could not open. Renovations necessary to correct the problem and support operations were costly; but without those renovations, the company would have otherwise wasted tens of millions of dollars on a useless building.
- In yet another case, a business unit of one company entered into a new long-term lease not realizing its leadership had planned to acquire another business that would render the facility unnecessary. The lease, which could have been avoided completely, ended up costing the company tens of millions of dollars in disposition costs.
Such large mistakes, and even smaller ones, can have a dramatic impact on the profitability of the enterprise. They can hamper revenues by slowing speed to market of operations or products, enabling competitors to fill the gap.
Corporate leaders can ask some simple diagnostic questions to determine whether their organizations have adequate centralized portfolio control:
- Is there one person or group in the company charged with overseeing real estate activities, and do they have the authority to control real estate?
- Do business units include a real estate component in their planning process, and are those plans shared across the organization to make sure plans are aligned with one another?
Stop by booth 3111 at NAPE to discuss your answers to these questions with one of our energy industry real estate experts.
About the Author
Bruce Rutherford is an International Director within JLL Houston’s Office Tenant Representation group and is also the global leader for JLL’s Energy Practice Group. With more than 33 years of experience, he has applied his expertise in tenant representation and commercial real estate consulting to numerous industries including insurance, banking, law, energy, energy services, and telecom.