TABLE OF CONTENTS

REPORT

2011STATE - OF-THE -I N DUSTRY

“ TR ENDING TOWA R D R ECOV ERY”

COR POR ATE R E A L E STATE

TABLE OF CONTENTS

Section i EXECUTIVE SUMMARY

Section ii 2011 STATE OF THE INDUSTRY

• introduction •AsiaPac Leads the Way • Global economy on the Mend • Leading Markets in the new Decade •current State of corporate Real estate (cRe) • Let’s Bridge that Gap •Gaining a Seat at the table • technology “to the Desktop” •So, What’s the “new normal?” •War for talent in cRe - Upskilling? •Work Force of the Future •What’s next?

Section iii INDUSTRY CLOSE-UP: THE FASB EFFECT

Section iV APPENDIX — RELATED CONTENT & LINKS

CoreNet Globa’s 2011 State-of-the-Industry report provides an outlook on global markets worldwide and corporate real estate as it relates to current trends and issues throughout the United States, Canada, EMEA, and Asia Pacific.

This year’s report reflects the views of numerous CoreNet Global members who were inter-viewed from across the globe as part of the research process for this report. Interviewees represent a wide range of industry experts including end users, service providers, consultants and advisers.

To all who helped, CoreNet Global extends sincere thanks for sharing valuable time and ex-pertise. Without the involvement of our members, this report would not have been possible.

“ T R E N DI NG TOWA R D R ECOV ERY ” 2011 STAT E - OF -T H E -I N DUST RY R E PORT

2011 CoreNet Global State-of-the-Industry ReporteXecUtiVe SUMMARY – 25 March 2011

© corenet Global 2011

We have successfully survived another challenging year within our sector, but this time the pendulum has shifted and expectations are high that brighter days are indeed ahead as we continue into 2011. the global economy is now almost 24 months into recovery, and most forecasts point to the growth momentum continuing, albeit at an uneven pace, as some re-gions and cities are recovering faster than others.

corenet Global’s 2011 State-of-the-industry Report covers events, trends and practices over thecourseof2010andintotheFirstQuarterof2011,aperioddefinedbymarkedeconomicimprovement.

Consideringthefast-changingnatureofthecurrentlandscape,thefindingsandobserva-tions contained within this report may take on different outcomes or appear to have shifted yet again in future weeks or months, as compared to the snapshot or baseline offered at this time.

this State-of-the-industry Report captures the duality of the moment: how corporate real es-tate (cRe) is playing the role of both value protector and value creator against the backdrop of this improving economy.

in our newly-published report posted for members only, the focus this year is on fresh input from corenet Global members regarding the global economic recovery, the state of cRe, technology and real estate, workplace innovation, the war for talent in cRe and other trends theyidentified.Somekeytakeawaysinclude:

- FASB 13: “This is going to be the Sarbanes Oxley for CRE – a real game changer because a lot more work will be required of CRE departments in order to comply with these standards since the accounting implications are very significant. The portfolio management and data implications are large and require more manpower to properly manage the day-to-day data that will arise from the new standards.”

- Global Recovery: “Growth and activity that started in 2010 is expected to continue and strengthen into 2011 in the world’s major leading markets. However, there is cause for alarm by some global economists, as the recent Middle East tensions, surge in interest rates, inflation, the sovereign debt issues in Europe and the recent natural disasters in Japan, Australia and New Zealand could possibly dampen the momentum that was started a few short months ago.”

- Support Growth but Reduce Costs: “CRE now has more visibility and pressure to perform due to the growth opportunity and pressure in Asia Pacific. Specifically, cost pressure, as well as growth ambitions and needs, are twin challenges CRE now faces.”

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EXECUTIVE SUMMARYSEC TION I

- Growth Mode Again?: “There is a great deal of pent-up demand now for projects that had been deferred the past few years. Capital that companies had been hoarding previously is now looking to be spent.”

- New, Emerging Markets: “There are new emerging markets companies are looking at now known as CIVETS [Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa]. These countries have the potential to be leading markets this decade and generate the same kind of results Brazil, Russia, India and China produced the past 10 years.”

- State of CRE, Positive Outcomes: “Even though the CRE industry has gone through a rocky road the past few years, there’s a silver lining for the CRE professional: there is now a crystallized mandate to drive savings and centralize the CRE function, an opportunity presents itself for a much stronger and strategic relationship with the C-suite, and upskilling as it relates to the skill sets the CRE professional will need as this role continues to evolve in the coming years.”

- Gaining a Seat at the Table: “As opposed to being a passive ‘order taker,’ CRE must transform itself into a proactive business partner because the CRE function has the potential to be a key strategic enabler and be the ‘glue’ and ‘mortar’ for the business it supports.”

- Technology in the Workplace: “Social networks will continue to be a common everyday feature and driver in the workplace, especially as Gen X, Y and the Millennials rise up through the ranks of power. As such, CRE must quickly adapt to their workplace needs and wants.”

- Workplace Mobility: “Employees are now spending less and less time at their desks, and the growing trend is indeed a shift toward working anywhere, anyplace and at anytime.”

AWS: “A smaller footprint equals reduced carbon footprint, heightened corporate responsibility and greater workplace flexibility.”

EXECUTIVE SUMMARYSEC TION I

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IntroductIonAs we begin a new year for corporate real estate (crE), the positives far outweigh the nega-tives when you compare where we are today with the past few years. Albeit at a slow and steady pace, hiring is starting up again and numerous economists are forecasting growth across most of the globe, although it will most likely be at an uneven pace. As a result, this should lead to a marked improvement in property fundamentals.

“Even though we must still work through significant financial, political and economic risks in 2011, we’re clearly back on track with a number of positive, long-term real estate trends,” says Angela Cain, CEO of CoreNet Global. “It’s a remarkably different feeling than this time last year. Last year, there was still fear of a double-dip recession and the recovery was unstable. Now, companies are more confident due in part to the solid economic growth that’s beginning to permeate across all economies. Businesses are investing again, and in the crE world we’re seeing a steady recovery in most leading markets.”

So, now that we’ve come through the worst economic downturn since the Great depression, it’s time to get our heads back on straight and determine exactly where crE is headed and how this industry will change and evolve as we embark on a new era. So please join us as corenet Global sorts through these signals and provides strategic direction going forward.

the proverbial mood among large companies across the globe is mostly positive. In fact, many are beginning to move into a growth and investment mode with companies in Asia taking the lead with the West following suit, as companies in all sectors provide the final market demand for demand and space.

AsiaPac Leads the Way in recovery and Growth

the global economy is on the mend, and that’s to be expected as expansion follows reces-sionary periods, and we are now tiptoeing into that phase. consumption is up, and there has been private sector job growth. Although weak, it’s been steady and stable. For the U.S., exports and imports are back to pre-recession levels, which again is a reflection of the demand. As such, there are a number of indicators that suggest the economy is mov-ing in the right direction.

“Even though we must still work through significant financial, political and economic

risks in 2011, we’re clearly back on track with a number of positive, long-term real estate

trends.”- Angela Cain, CoreNet Global

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A lot of growth is and will continue to be driven by the economies of china, India and even Brazil. they have become domi-nant markets and lead the real estate upswing, ahead of developed na-tions in Western Europe and the u.S., which are improving but at a much slower pace. Activity in the world’s major com-mercial real estate mar-kets is expected to con-tinue to strengthen dur-ing 2011, building upon the progress made in 2010.

there are, however, a few caveats that could slow or derail the recov-ery. A surge in interest rates; the sovereign debt issues in Europe; inflation; the most recent Middle East tensions; and natural disasters in Japan, Australia and new Zealand are concerns economists and research teams are tracking closely.

Overall economic growth is lead by Asia Pacific at 7 percent annually, followed by the Americas at 3 to 4 percent, and EMEA at 2 percent, according to Jones Lang LaSalle (JLL) research. As a result, most businesses feel optimistic about their prospects for the next few years.

driven by improving occupancy levels, the leasing market turned more in favor of landlords in the Fourth Quarter of 2010, and rents rose further in most markets. rents in the cBds of Hong Kong, Mumbai, Singapore and Tokyo continue to lead the region, respectively.

And on the development side, “Barring India, Asia remains on track with developers em-boldened by a stronger regional economy and improving occupancy levels for quality office space,” says Iain MacKenzie, International Director based in Singapore for JLL. “In India, of the 4.7 million sq. m (50.5 million square feet) of office space that was expected to become operational in the Tier I markets at the beginning of 2010, only 65 percent actually came online, with the remainder delayed to this year.”

“The global financial crisis raised the focus on costs in corporates, including real estate,” remarks John Forrest, CEO, Corporate Solutions Asia Pacific, also with JLL in Sin-gapore. “this means crE now has more visibility and pressure. combined with growth opportunity and pressure in Asia and Australia, crE has the twin challenges of grappling with cost pressure and growth ambitions and needs,” he remarks.

“today’s environment is causing every industry to adjust in order to succeed during these challenging times. crE is no exception,” notes Lee Utke, MCR, Senior Director, Global Corporate Real Estate for Whirlpool Corporation. “You have great assets that unfor-tunately met up with significant leasing challenges under fluctuating market conditions depending on where you are doing business around the world.”

“The global financial crisis raised the focus on costs in corporates, including real estate. This means CRE now

has more visibility and pressure.”

- John Forrest, Jones Lang LaSalle

AsiaPac Leads the Way

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Global Economy on the Mend

“this is a story of the haves and have-nots, and this is primarily due to job growth,” notes Craig Robinson, MBA, President, Corporate Services for Cassidy Turley. “those global cities where we see the strongest job growth will in turn provide the strongest real estate recovery.”

Deep-pocketed real-estate investors are taking note of signs of stability in the office market and making bets in cities where office buildings were hit hard by the recession.

But as businesses gain confidence about their growth prospects amid a strengthening economy, mar-kets across the globe are seeing signs of improvement.

“the industry has turned a corner and is getting back into a growth mode, albeit at a slow and steady pace,” adds Larry Ebert, Execu-tive Vice President and National Head of Project Management for Grubb & Ellis. “there is a great deal of pent-up demand for projects that have been deferred; there’s capital that corporations have been hoarding, and they’re starting to spend that now.”

What shape best describes the glob-al economic recovery? Is it a “u,” is it “V”? the consistent takeaway from our interviews with real estate experts around the world: It’s a mixed bag. One good-news find-ing is that we appear to be out of danger of a “W”-shaped recovery. tier I cities are clearly outperform-ing tier II and III cities, and there was consensus that EMEA and north America are trailing Asia Pacific.

“This is a story of the haves and have-nots, and this is primarily due to job growth.”

- Craig Robinson, Cassidy Turley Global CBD Office Market Cycle 4th Quarter 2010

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The “cloud has been lifted” from Asia Pacific real estate markets, with the fiscal outlook for most of the Asian countries more promising than that for Europe or the united States.

“Many, if not most, Asian economies have rebounded to pre-recession levels, and real estate markets, although slower, are headed toward some semblance of normalcy,” says Forrest of JLL. “the distress that was so widely predicted a year ago for most of the region’s largest markets has by and large failed to materialize.” He adds that driven by improving occupancy levels, the leasing market turned more in favor of landlords in the Fourth Quarter of 2010, and rents rose further in most markets. Rents in the CBDs of Hong Kong, Mumbai, Singapore and tokyo continue to lead the region.

Overall, Forrest and MacKenzie believe Asia is showing the most growth in terms of the real estate industry when compared with other global markets. “the region’s economic expan-sion should be the key driver to help propel crE investments and developments across the region. the real estate market is back, fund raising is strong in Asia, local banks are providing financing, and capital is everywhere,” notes MacKenzie.

In the u.S., within the past year, job growth and net absorption have resumed, although at a slow, steady pace. These positive signs have begun to permeate the office leasing market as tenants are beginning to look toward future expansion. the majority of major markets across the u.S. are seeing positive trends in their rental cycle with either slowing declines or accelerated growth. Leading markets include Washington, d.c., Boston, new York, dallas, denver and charlotte.

Global Economy on the Mend

Asia Pacific Grade A Rental Chart 4th Quarter 2010

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In EMEA, as Simon King, MBA, Chartered FCSI MRICS, Partner, Joint Head of Europe, Middle East & Africa of New-mark Knight Frank ex-plains, “the key to all this is the debt markets because there is an enormous amount of debt that needs to be refinanced in the next few years in Europe. And unemployment is very fragile at the moment. there are periods where things look quite strong, but then the environments get weak. As such, it’s very fickle at the mo-ment. Europe looks to be stagnant and will continue to be so until they get their hands around the European union.”

Signs of a true recovery have therefore been seen in just a few core cities – markets that sovereign wealth funds and institutions know and understand: London, Paris and the five main German cities (Berlin, Munich, Frankfurt, Ham-burg and cologne). King says that while there is still obviously interest in the u.K. – as well as France and Germany – two other interesting places for investors are Sweden and Poland, countries that have withstood the economic downturn better than other European states.

“Sweden is interesting and is on most pan-European investors’ shopping list,” he says. “It has one of the highest global gross domestic product growth rates, and its occupational mar-ket was affected to a lesser extent than many of the core countries.”

Poland, meanwhile, has benefited from being the only member of the European union to avoid outright recession.

“Across Australia and new Zealand, and of course America, it was fundamentally about making sure companies stay in business,” says Robert Bull, General Manager, Property Group for Air Zealand. “What do we do to ensure that we’re in a reasonable position to respond when things start to recover was the mantra of many.”

“The key to all this is the debt markets because there is an

enormous amount of debt that needs to be refinanced in the next few years in Europe.”

- Simon King, Newmark Knight

Frank

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the uncertainty continues to broaden the window of opportunity for those that have a need to reposition themselves. “We’ve been in crisis mode for a few years now, and I’ve always said you never want to miss a crisis,” adds Peter Affleck, Executive General Manager, Real Estate for Suncorp Business Services. “And turn that crisis into an opportunity.”

Affleck and Bull both attest that in general, Australia and New Zealand are both quite healthy in relation to the global economy. there have been periods where it has been up and down, particularly in the mining industry, which underpins a large portion of Australia’s wealth. Affleck explains once the mining industry “kicks off,” everything else follows suit. But overall, the direction of the economy is quite healthy. In fact, the tragedy of the recent floods and earthquake actually breeds new work across construction and other industries.

Leading Markets in the New Decade

Given this trend of economic growth, firms are aggressively looking for expansion in developing countries even as they invest modestly in Europe and the u.S. the biggest opportunities are in India and china. As such, these major sophisticated countries, that contain some 40 percent of the world’s population, now have a seat at the table in world economic and political affairs.

With their roughly 10 percent growth rates, economic clout and relevance, china and India have grown substantially over the past five years. However, the shock caused by the re-cession and global financial crisis of the past few years covered up the progress they were making, economically and politically. And as the recession becomes more a thing of the past, these countries are taking a new and more confident stance and look at the world from a different lens, from the position of their own success and bright outlook.

In the next 10 years, India will actually exceed the population of china. As such, India has become the emerging two-headed dragon. And Brazil is a very quiet giant right now. It has the equivalent GdP of every other country combined in South America.

Simon O’Reilly, Partner, Client Solutions, Cushman & Wakefield, LLP, adds that while the markets of Eastern Europe, russia, India, china and Brazil are still attractive, they’re now stabilized mature markets. He says, “We now have new emerging markets known as cIVEtS [colombia, Indonesia, Vietnam, Egypt, turkey and South Africa]. these are the new markets corporations are looking at.”

And he expects cIVEtS to be among the world’s hottest markets in the decade to come. “they have the potential to generate the same kind of windfall wealth as the BrIc [Brazil, russia, India and china] markets did over the last 10 years.”

“We now have new emerging markets known as CIVETS

[Colombia, Indonesia, Vietnam, Egypt, Turkey

and South Africa]. These are the new

markets corporations are looking at.”

- Simon O’Reilly, Cushman & Wakefield

Leading Markets in the New Decade

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real estate

dashboard

2011 the leader 80 m a r c h / a p r i l

4th Quarter 2010

source: cbre Global research and consulting office lease rates are gross; industrial lease rates are NNN North america industrial sites reflect availability (not vacancy) rates all stats reflect overall market (cbd and suburban) unless otherwise noted New York office includes midtown and downtown New York industrial reflects New Jersey Northern stats (no industrial market in NYc) Washington, d.c. industrial reflects maryland suburban and Virginia Northern markets; Washington, d.c. office reflects cbd only mumbai office rent and vacancy rate reflects Nariman point cbd tokyo prime office rent reflects central 5 wards hong Kong office rent and vacancy rate reflect central cbd paris, hong Kong, beijing, shanghai, and australia/New Zealand industrial data reflects Grade a warehouse

tokyo industrial rents and vacancy rate reflect warehouse facilities singapore industrial rents reflect the average rent of warehouse facilities australia/New Zealand vacancy is total for all grades; vacancy and absorption data is estimate only Note: analysis provided reflects complexity of data requirements and divergent country standards/customs and is not standardized within the industry. please consult with your local real estate services provider for further interpretation/recommendations. * defined as net absorption over occupied square footage in previous period ** office lease rates are prime; exception is North america (average asking), and singapore and hong Kong (Grade a)

Leasing Rates (USD/SF/year)Office** Industrial Office Industrial Office Industrial

North America Chicago $26.03 $3.91 19.9% 11.1% 0.18% 0.08%Los Angeles $30.57 $6.60 17.6% 7.7% -0.14% 0.13%New York $52.15 $6.42 8.6% 10.5% 0.40% 0.09%Toronto $33.77 $4.74 9.1% 6.6% 0.36% 0.46%Washington D.C $51.19 $8.80 9.7% 16.3% 0.48% -0.43%

EuropeAmsterdam $41.01 $8.70 17.1% n/a 1.04% n/aFrankfurt $56.67 $8.80 18.4% n/a 0.58% n/aLondon $132.36 $18.91 5.5% n/a 0.39% n/aMoscow $83.61 $10.22 16.8% n/a 1.74% n/aParis $99.41 $11.18 6.8% n/a 0.22% n/a

AsiaBeijing $39.28 $4.86 14.2% n/a 4.06% n/aHong Kong $171.55 $9.65 3.1% n/a -0.10% n/aMumbai $80.09 n/a 10.0% n/a 0.70% n/aShanghai $37.09 $4.69 9.2% n/a 2.70% n/aSingapore $77.66 $13.33 2.7% n/a 0.10% n/aTokyo $128.84 $22.78 4.9% n/a 1.82% n/a

Australia/New ZealandMelbourne $52.54 $7.59 6.3% n/a 2.35% n/aSydney $70.77 $11.91 8.3% n/a 1.90% n/aAuckland $34.30 $8.40 13.8% 4.5% 1.90% 0.79%

Vacancy Rates Net Absorption (%)*

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current State of crE

“We are very optimistic about the state of the crE and workplace industry,” remarks rob-inson of cassidy turley. “Although we’ve experienced economic woes the past few years, I would suggest there’s a silver lining for the crE professional.”

Positive Outcomes for CRE

• Crystallized mandate to drive savings and centralize the CRE function

• the opportunity for a much closer and strategic relationship with the c-suite within the enterprise • Business alignment and a seat at the table – stronger relationships between crE and businesses it supports

• upskilling in terms of the skill sets that crE leaders have and will need as the crE function evolves and becomes more strategic

this all represents a positive shift in crE and the workplace industry.

“the industry is certainly alive and well,” adds Bull of Air new Zealand.

the strength of the crE function has been growing based on improved knowledge and experience for a number of years now. “Staying ahead of trends in markets, workplace design and environmental solutions are all part of the tools we possess,” says Denis DeCamp, Manager, Corporate Real Estate for AkzoNobel. In today’s landscape, there’s clearly a strategic opportunity for CRE to reach out, touch and influence the core business drivers for companies. In years past, what would have been considered non-core attributes or off limits to crE departments, today mean an opportunity to not only lower optimized oc-cupancy costs, but also have the ability to optimize the business model from a productivity standpoint for employees and affect the recruiting process for new young talent.

utke of Whirlpool corporation explains that these variables all tie back into the strategic nature of the business. “We can’t afford to get lost in the day-to-day rhetoric and forget that tactical decisions still need to get made on a timely basis. therefore, we need to continue to focus on what’s going to drive the broader success and provide a road map, per se, that shows where you want to take the company and how you can get the company to a higher level of performance. that will absolutely get the attention of senior management.”

Affleck adds, “Quite frankly, being lost in the day-to-day responsibilities is really an outcome of poor leadership and poor planning because that is a strategic road map itself. It’s as simple as that. If crE strategically plans and shares ownership of the business, that will allow us to come to the table and inform the c-suite early on.”

For Ebert with Grubb & Ellis, the focus should be not only about operational efficiency, but on how real estate and the workplace enable people to be more productive.

Current State of CRE

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“We need to continue to push the boundaries to ensure that all working environments are truly integrated with technology and people considerations,” says Colin King, MBA, FRICS, MCIOB, MAPM, MCR, Vice President Worldwide Real Estate & Workplace for GlaxoSmithKline, previously with nokia. “Even though we have talked about crE being integrated with It and Hr for some time, it is rare to see processes that have been inte-grated in an end-to-end way that have this built around a common vision for the end user.”

From a crE perspective, he believes that all solutions will need to be part of an agile portfolio, which allows the business to be flexible and react quickly to changing business requirements and competitive pressures. “clearly link crE solutions to the growth and profitability of the business, because if executed correctly they will clearly enhance team performance,” he adds.

Locational Strategy Planning Indicators

Locations need to be strategically planned in order to:

• Bring together key activities and capabilities, not just to fit organizational structures that are subject to change.

• Optimize cost/benefit – where is the best place to invest? Value, not cost, should be the overriding consideration in location decisions. • Address talent supply considerations – what kind of skills does the company need to ensure our future success, and where will we find the people who have them?

Let’s Bridge that Gap

While there’s historically been the perception that for every two steps forward crE makes, it notoriously takes three steps back – that’s not always the case, especially when it comes to crE aligning with the overall corporate strategy in today’s world. So, how can a company’s real estate align with its overall core, corporate strategy? We asked this question and got a dichotomy of answers.

“that’s been the number one question for crE for years now,” notes Bull of Air new Zea-land. “Well, you’ve got to take the lead and immerse yourself in the business and get to the heart of the business, and if you want to be heard you must talk the language. And to be strategic, it’s not just the one-off play, but how does this add enduring value to the business?”

cassidy turley’s robinson remarks, “It’s the human factor – proving that crE is organi-zationally aligned, meaning the maturity of the CRM function. Alignment does not always dictate the crE mandate. You can be a great support function to the business unit by being closely aligned and in tune with their needs, but as the mandate shifts to being more of a strategic advisor to the business unit, that is driven not only by organizational alignment but by the personal leadership of the crE function.”

“We need to continue to push the boundaries

to ensure that all working environments

are truly integrated with technology

and people considerations.”

- Colin King, GlaxoSmithKline

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Michael Zamora, MCR, Senior Manager, AsiaPacific and Japan Regions for Cisco explains, “For some corporations there is a gap. Minimizing the gap starts with the CRE group, also known within cisco as Workplace resources. cisco started aligning with the business groups years ago. our goal is to minimize or eliminate gaps.”

one way to close or at least minimize the gap is by working with the business groups at two different levels, he said. At a local level, cisco’s crE works with the local/regional business groups to understand specific needs. In addition, there are Client Relationship Managers (CRMs) who align with the global business leaders. The global alignment occurs through regular conversations and formally through the Quarterly Business review process.

“If crE focuses on understanding and interpreting business strategy and translating that to crE strategy and leveraging the market (i.e. service provider partners/suppliers) for operational delivery and tactical execution, it stands to be in perfect symmetry with that business,” says King of newmark Knight Frank.

“In addition to speaking and understanding the language of the business, a critical success factor in achieving this alignment is the inclusion of crE by the business. We are seeing an increasing focus by CRE of the development of robust Business Relationship Manage-ment (BRM) models in an effort to achieve this,” notes Affleck for Suncorp. “The business won’t inform us unless we get their confidence. CRE does not need to be one of the last to know about change, but quite frankly, we should be one of the first.”

And knowing the business is far more important than knowing real estate, notes decamp of Akzonobel.

King of GlaxoSmithKline points out that today different customer groups have diverse and rapidly changing needs, and crE professionals need to truly integrate with decision mak-ers at all levels in order to fully understand them and create successful workplace solutions together.

And Sven Pole, Senior Vice President of CB Richard Ellis, Global Corporate Solu-tions, adds that at times, crE departments don’t invest in business relationship managers that can operate at the highest levels within the key business units of the company. Instead, they send space planners or other junior people who are unable to get to the table to help form the overall strategic agenda – one that should consider real estate as an asset and aid in implementing and sizing up a strategy or business opportunity.

“I believe we’ve proven over the past year or so, that we can be effective first responders in a crisis, and the leadership we should continue to develop and evolve is how do we in-crease our sphere of influence, our strategic alignment within the organization when there is no crisis or burning mandate,” notes robinson. “the only thing we know for certain is the past is no indication of the future.”

He also adds that the world of the service provider is also changing in response and in anticipation of the significant changes occurring in the CRE function, as it has much greater demands to be more practical, strategic and innovative. As such, it’s a natural expectation for crE to look to its closest partners to facilitate and enable them to be successful in this new regard.

“The business won’t inform us unless we get their confidence. CRE does not need to be

one of the last to know about change, but quite

frankly, we should be one of the first.”

- Peter Affleck, Suncorp

Let’s Bridge that Gap

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“So the difficult, yet exciting aspect of the world of the new service provider is that you have clients on a continuum. As we continue to drive savings, mitigate risk and provide flexibility in their business models, they will also expect us to proactively bring innovation and antici-pate change versus only helping them respond to it. And these require even different skill sets of today’s service provider than in the past,” explains robinson.

Gaining a Seat at the table

the challenge falls on crE departments to interject themselves into their client’s work streams. By identifying those that are driving the strategic planning for the company, crE professionals can then encourage the c-suite to recognize that real estate is a strategic component of the business and crE needs to be at the table when the strategic discus-sions are taking place. real estate affects the company on so many levels, including talent and recruitment. A conscious effort has to be made to push it into the stream, otherwise crE can get lost.

“It behooves us to be more articulate in explaining the ways in which crE can positively impact the business unit, and we won’t do that by using the language of crE, but rather using the language of the business and having leaders who are much more in tune at translating and interpreting business unit strategy into the real estate implication,” says Matthew Fanoe, Vice President of Real Estate for Coca-Cola Refreshments USA, Inc.

“crE has to understand what its value is to the business,” says Zamora. “With the recent global economic situation, business groups are being asked by their corporate headquar-ters to get the most out of their resources. this request is also being asked of global crE organizations. As facilities costs are the second- or third-largest expense for a corporation, it is natural to look to this area. this is where crE can add extra value to the corporation.”

Zamora goes on to explain that instead of crE being a passive “order taker,” it needs to transform itself into a proactive business partner. “crE is one of the key strategic enabler groups and has the ability in this role to be the glue or mortar, using a real estate analogy. Serving as a business partner, crE helps bring the strategy together for the business groups and support groups (HR, IT, finance, sustainability, tax, legal, etc.).”

“CRE has to understand what its value is to the business. With the recent global economic situation, business groups are being asked by

their corporate headquarters to get the most out their resources.”

Michael Zamora, Cisco

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one way this is accomplished at cisco is through a global initiative called Global Site Strategy (GSS). GSS provides mid- to long-term scenario-based plans for 80 percent of its portfolio that aligns with local needs and with the global objectives of the company. on a regular basis, crE will review these site strategies with the business during the Quarterly Review Process to assess if any modifications are needed.

“At some companies, It is not seen as strategic and forward thinking as real estate, so it’s essential we get them on board with our future workplace strategy,” comments Affleck for Suncorp.

“there is an emotional aspect as well. Very rarely is it a technical discussion. But, we as crE leaders need to be change managers and take the lead,” notes robinson. “this economy has given us unprecedented access to the c-suite. As a result, we’re able to provide strategic services, labor analytics, and the business is open to the roll out of new ideas and programs.”

the inherent need to listen before speaking cannot be understated. the opportunity to sit in and understand where the business wants to be and learn what those challenges are is paramount. then, it’s up to the crE team to formulate concepts that help achieve those goals. Whirlpool corporation’s utke explains that it’s critical the business sees a go-to per-son who understands the business first and can then translate that into real estate versus a real estate person trying to translate real estate back to the business.

“A business unit could care less about how much it costs per-square-foot, except on the bottom line,” he adds. “they want to know what does that space do to help them succeed in their business? cost per-unit, per-head or per-seat will start getting their interest.”

For more information about how CRE can more closely align with a firm’s business strategy and its office preferences, please see the presentation by Georgia State University and CoreNet Global entitled “Office Occupier’s Preferences & Needs”

technology to the “desktop”

Where is the crE industry headed in this respect, and how is it overcoming this challenge as it strives to stay one step ahead of technology and the multi-generational work force? All agreed that new technology is going to be a real game changer in the next decade and that the workplace will be driven by technology and mobility.

“the technology challenge is changing rapidly. Leading companies are reawakening to the fact that often, innovation happens through spontaneous interactions,” notes Pole. “crE is continually working to determine how space can support that interaction, while at the same time enhancing culture and furthering productivity across the work force.”

Forrest of JLL adds, “Social networks will increasingly become a common everyday feature in the way we work, particularly as Generation X, Y and the Millennials ascend through the ranks of power. In some regards, mobility and the ‘agile’ workplace is still in its infancy, and take up will vary due to differing cost ratios, cultural differences and technology speed and adoption.”

“The technology challenge is changing

rapidly. Leading companies are reawakening to

the fact that often, innovation happens

through spontaneous interactions.”

- Sven Pole, CB Richard Ellis

Technology to the “Desktop”

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Key Office Environment Enablers to Support Multiple Generations in the Workplace:

• Ensuring the workplace is inviting, productive, collaborative

• create a space where people like to come to work, like each other and love the work that they do • Swarming is supported (bringing together a diverse group of people to solve specific challenges) – breaking out of organizational and social group barriers

• Office locations that are vibrant, diverse, centrally located sites with good access to nearby amenities and public transport

GlaxoSmithKline’s King adds, “We use technology as a tool because of what it allows us to do – it’s only useful when it’s the easiest and most common-sense solution, a connector not a barrier.”

Zamora explains that it’s important to continually look at technology as a means of increas-ing employee productivity and addressing the changing work force requirements.

“cisco’s telepresence (Hd video and audio conferencing) is an example of technology that we actively use to enable employees to have virtual meetings without having to travel,” he notes. “WebEx is another audio and video technology we use that allows employees to share computer screens for conference calls. WebEx also has the ability to call the em-ployee back to minimize any long-distance cost. Its chat feature enables us to have instant, short communications with each other. WebEx also has an iPhone app, which allows for the same experience on your iPhone as on your desktop.”

these technologies, along with longer established wireless and VoiP technologies that are pervasive throughout Cisco’s office environment, allow employees to be productive wherever their work environment may be.

“There are still way too many uncontrolled variables, and it’s hard to be scientific and not justifiable in the numbers,” says DeCamp of AkzoNobel. “The measurement for us in de-termining if we have a flexible workplace is if our employees are using the workplace we have in an effective way. Is this going up or down? We’re finding that the amount of time an employee spends at their desk is actually down, and the growing trend is a definite shift toward working remotely, especially in the u.S. real estate, therefore, needs to be at the table when an It strategy is discussed for alternative workplace strategies (AWS).”

technology is really about investment, explains Fanoe. And that can be the hard part for some people because it is not cheap. “Incorporating telepresence systems, virtual meeting rooms and SMART Boards, those are the new technologies in the workplace. And to take it to the next level, companies need to invest money in technology because it’s not just the senior executives who have access to all the mobility devices. It’s driving deeper into the organization where mid- to lower-level managers now have access to handheld devices and laptops.”

“Incorporating telepresence

systems, virtual meeting rooms and

SMART Boards, those are the new

technologies in the workplace. And to take it to the next level, companies

need to invest money in technology because it’s not just

the senior executives who have access to all the mobility

devices.”

- Matthew Fanoe, Coca-Cola

Refreshments USA, Inc.

Technology to the “Desktop”

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Bull of Air new Zealand adds that the more mature worker does realize it’s a different work-ing environment, and if they’re going to be a part of today’s workplace, he/she realizes they most likely will have to change how they communicate and work.

the workplace and sustainability – two separate but interconnected themes. Smart and sustainable buildings also play a pivotal role as innovation can come from sustainability.

Sustainability and energy management have indeed climbed the corporate ladder, as many countries and companies around the world have demonstrated their renewed commitment toward addressing the role they play in the emission of greenhouse gases that accelerate climate change. And many are reinventing themselves as they continually strive to reduce their carbon footprint.

“Identify core/platform buildings and leverage those assets for future planning,” notes Fa-noe. “this provides a big strength with new technological advances and a clear vision in achieving nimbleness in the workplace. We need to create workplaces that meet the needs of the future work force.”

He adds, “there still seems to be some kind of inertia around deploying greater technology solutions in the workplace, and it’s a huge enabler as we continue to get our hands around it.”

And let’s not forget that with these continued changes in workplace mobility and AWS, leases will most likely be “future proofed.”

For more information about innovation in the workspace, please see the white paper by Steelcase and CoreNet Global entitled “How the Workplace Fosters Innovation”

So, What’s the “new normal?”

change is going to continually be the new normal, and “change happens fast,” as robinson so eloquently put it.

organizations place great importance on the workplace. Also, the workspace being used as a tool to attract and retain talent is increasingly understood and embraced by the c-suite. “As a result, we see crE having a very meaningful role in the organization. companies that embrace initiatives like sustainability and organizational flexibility also understand the role in which crE can drive and certainly support those positions,” says Bull.

“one of the great things happening right now is the entire concept of workplace because it’s more than just physical space,” says Ebert of Grubb & Ellis. “More companies are em-

“One of the great things happening right now is the entire concept of workplace because it’s more

than just physical space. More companies are embracing mobility and looking at the workplace

as a way to leverage talent to a competitive advantage.”

Larry Ebert, Grubb & Ellis

So, What’s the “New Normal?”

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bracing mobility and looking at the workspace as a way to leverage talent to a competitive advantage.”

the workplace isn’t just one place anymore. “We’re now taking a step back from traditional use and thinking virtual. At cisco, depending on your job type and responsibilities, we pro-vide employees with a laptop, and other mobile needs in an effort to let you work remotely. We have found it to be very successful so far,” says Zamora. He goes on to explain that Generation Y is the bearing point of where you want the workplace and space to be going forward.

“It’s a mixed bag on the workplace solution side of it, and I think it varies by company, but the trend is definitely moving toward AWS, and that translates into a smaller footprint, which is good for a variety of reasons – reduced carbon footprint for your portfolio, corporate responsibility and greater workplace flexibility for your employees,” notes Fanoe.

DeCamp believes it all goes back to corporate culture to define what the workplace culture actually means. “All of us are led, in some ways, by our company practice. For example, we’re a manufacturing firm so we’re driven by that type of mindset.”

“there are cultural differences and we acknowledge that, but I do think you need to have a vision and think about what customers and users are going to demand in regard to changes in the workspace because it will come, and the ability to connect and be more collaborative and virtual will be the norm in the next five years,” adds King of GlaxoSmithKline.

He believes that “Innovation is a contact sport. therefore, our job as crE professionals is to create a workplace environment where people can touch, talk, communicate, collaborate and engage.”

utke explains, “We’re spending a great deal of time trying to understand generational preferences in the workplace. In fact, we’re developing a new office campus and design-ing it to be more flexible and adaptable in an effort to accommodate work force needs and communication preferences for future generations. Are we going to hit all the sweet spots? Probably not, but that’s the mindset we’re taking.”

He explains that in 15 to 20 years, the Millennials and Generation Y will represent a larger share of the workforce, so crE better identify design concepts that can adapt to changing work styles and new mobility tools to avoid premature obsolescence. And in regard to the war for talent, that will give companies a leg up on attracting the best of the best. crE has to prepare and adapt for that future workplace transformation.

“the key, however, is to not assume your one solution is the right solution for the long term, so we need to develop facilities that are easily adaptable,” utke notes.

“the biggest mistake we can make now is not getting the younger generation more involved in the workplace of the future early on,” adds Affleck. “We’ve got to continually stay ahead of the workplace ‘game,’ if you will. Nowadays, people don’t like being tied down to a fixed cord.”

“We’re spending a great deal of time

trying to understand generational

preferences in the workplace. In fact, we’re developing a new office campus and designing it to

be more flexible and adaptable in an effort

to accommodate work force needs

and communication preferences for

future generations. Are we going to hit all the sweet spots?

Probably not, but that’s the mindset

we’re taking.”

- Lee Utke Whirlpool Corporation

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War for talent in crE – upskilling?

So what about this notion of there being a “war for talent” out there and whether or not finding quality people is an issue for the CRE industry? King of Newmark Knight Frank says yes. “the talent mindset must be reinforced with accountability for the strength of the talent pool at all levels. the most aggressive companies are always on the prowl for talent, bad market or not. they have a keen sense of who they are looking for and do their looking in new ways and in new places. they bring in talent at all levels of the organiza-tion, even senior levels.”

As the crE function continues to evolve in corporations, so do requisite skill sets. “As corporations move along this continuum, and go from being an internal service provider to being more a strategic advisor to the business units, those skill sets will have to evolve,” says robinson. “now, whether or not this requires an organization to go ‘outside’ and bring in new talent, or groom and develop existing talent, is going to be different in each case. What is true though is crE must solve this evolving skill set requirement.”

robinson notes that he’s seen crE leaders come from other parts of the organization (i.e. procurement, finance, legal and HR). “In many ways, there’s an opportunity to recast the job description of the crE leader in such a way where non-traditional candidates from both inside and outside of a company become great targets.”

As odd as it may sound for some, having a real estate background may not always be a good indicator of a successful crE leader. Going forward, skill sets that will be required to manage the workplace effectively will be about managing relationships, translating corporate strategy into crE strategy and managing a network of internal and external resources.

“these are skill sets independent of the real estate understanding itself that can be sourced from a number of different areas of the work force,” says Affleck.

Fanoe also adds that talent within an organization should not be ignored. He explains that many companies leave a tremendous amount of human potential untapped because its people are inadequately developed. Effectively conceived stretch jobs, coupled with informal feedback, coaching and mentoring, are enormous developmental levers.

Ebert believes one of the key differentiators is creating an environment where employees want to come to work, a place where they feel supported and can work effectively and efficiently. “One of the key value propositions for CRE is to create a workplace that gives an organization a competitive advantage to that top talent.”

“there’s been a bit of cherry picking and poaching that’s starting to occur again to get the kind of talent that firms are after,” notes King of Newmark Knight Frank.

Fanoe on the talent crunch in the current job market: “My view is that the economy has definitely made it easier to find quality people, and the amount of quality people that come out and apply for given positions is really quite incredible right now.”

Part of the reason the workplace is evolving is largely driven by the new and next genera-tion of workers. to entice and attract new employees, companies are now creating more

War for Talent in CRE - Upskilling?

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open, upwardly mobile, collaborative workspaces that are unassigned, building larger break rooms and café areas and other on-site amenities.

And what companies are allowing their employees to do personally at work is rapidly be-coming a much bigger question today. “If you look at the war for talent going forward, the younger generation will want to blur the line, so to speak, more than we’ve traditionally al-lowed,” Fanoe predicts. “More and more, it’s becoming a real challenge for companies to determine how to balance and measure productivity in that type of environment. Where do you draw that line? only time will tell.”

It’s safe to say most companies still have fairly tight restrictions because there is a concern about productivity and staying focused when you allow too much social freedom. “there are some real hard questions on this subject that will have to be addressed. At this point, it’s still evolving. ultimately though, it varies by company,” adds Fanoe.

He explains that a company’s mindset centered around corporate responsibility is also high on the radar. It’s critical that a company have a strong program, as it’s a key selling point for new recruits but also a way to keep your existing employee base engaged.

Increased productivity has become commonplace across the u.S. and the globe for that matter. Service firms and manufacturers alike cut their staff sharply in the recession as sales plunged, and they found ways to do more with less. now that the recovery is heating up, hiring is expected to increase during 2011, but many economists say the global market-place as a whole won’t recover the jobs lost until 2014-2015 at the earliest. Why, you ask?

Partly because businesses are continuing to benefit from efficiencies they were able to achieve during the downturn. Many combined two or three jobs into one, while others re-placed workers with new technology, cut out unnecessary steps or simply squeezed more out of existing employees.

“the economic pressures of the global downturn forced companies to take a fresh look at everything they were doing, and thus come up with a new model,” says MacKenzie of JLL. “there’s a generation of leaders that have survived and come through this crisis and are going to manage and lead this way for the foreseeable future.”

He adds, “Hiring will come back, but the job growth will likely be centered among the highly skilled because top talent is always a scarce commodity, and there’s always talent even when unemployment is down.”

And there are companies that are actually using the workplace to attract, retain and beat their competition (i.e. Google, capital one, cisco and royal Bank of Scotland, to name a few). Ebert adds that Google is a good example of a place where they’ve taken real estate and turned it from a physical operating asset into a place that supports the culture and the business goals of the organization, giving them a competitive advantage.

“My view is that the economy has definitely made it

easier to find quality people, and the

amount of quality people that come out and apply for given positions is really

quite incredible right now.”

- Matthew Fanoe, Coca-Cola

Refreshments USA, Inc.

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technology is being used now as a key selling point when attracting young, new talent for some companies. In fact, this next generation of talent is expecting companies to be utilizing the latest technologies, Zamora explains. “Leading, cutting-edge companies are now providing technology for the employees so they want to come to work there. More and more companies are giving their employees flexibility, and the Gen X and Y employees love this freedom. they can work the way they want and for a company that appreciates and respects their work style.”

What’s certain is the knowledge worker will continue to be in demand, and as crE execu-tives continually act as stewards of the workplace, they will play an increasingly visible role in attracting and retaining talent.

the war for talent is heating up, and as utke explains, “At the end of the day, talent is your key differentiator.”

For more information about “Upskilling” and the continued Evolution of the CRE depart-ment in today’s landscape, please see the white paper by CB Richard Ellis and CoreNet Global entitled “The Evolution of CRE - “Upskilling the Downsized CRE Organization”

Work Force of the Future

the crE industry will continue to broaden its scope within companies because in this day and age it’s more than just leases and buildings – crE departments touch more than that. “As items like workplace management, procurement of capital, and sustainability continue to evolve, it provides us the opportunity to deliver a much larger platform of services back to our company, and therefore we have to have a broader array of skill sets on our team than in years past,” adds utke.

decamp explains that one area that is continually missed is that the roles of internal crE and service providers are becoming more aligned and similar. “Yesterday’s facil-ity’s manager is today’s sourced facility manager. Yet, we treat the two groups as though there is a chinese wall between them. We should be focusing on responsibilities or titles rather than sourced or not.”

Although crE has become a more complicated delivery mechanism as it bleeds into new touch points, it provides the industry with a much greater opportunity to influence a com-pany’s performance going forward. “this is where the industry is changing dramatically,” notes utke. “You’re always going to need negotiation and lease administration expertise, but for the young crE professional to succeed in today’s landscape, they must have a much more rounded and broader perspective of the world.”

When asked about the talent coming out of universities today, utke explained that there’s a real vacuum of CRE-related talent coming out of schools, as a lot of MBA programs tend to focus largely on investments and rEIts (real Estate Investment trusts).

“there are some superb programs out there, but from a crE side, I’d like to have someone who has a broader perspective of what drives performance because success is defined differently in a corporation than an investment firm,” he says.

“This is where the industry is changing dramatically. You’re

always going to need negotiation and lease administration expertise, but for the

young CRE professional to succeed in today’s landscape, they must

have a much more rounded and broader

perspective of the world.”

- Lee Utke, Whirlpool Corporation

Work Force of the Future

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Without some growth in the pipeline, at some point you reach a situation in which there actu-ally isn’t enough talent to continue to grow even at the same rate. It’s important for crE to have deep relationships with the universities and that the industry make investments there.

utke goes on to explain that numbers are important, but at the end of the day, it’s having that balanced scorecard approach to what is being successful, not just what is the absolute lowest cost or best roI. “those who learn the broader array of services, not just how long you can develop, fill and flip a building, will be the most successful in the CRE industry. I’ll teach people the real estate component if they have those other skills.”

As a discipline, Zamora adds that crE is not currently taught in many colleges or univer-sities. As a result, there is not a steady inflow of CRE professionals into the industry as with other disciplines including engineering, sales/marketing or finance. An imbalance is created by the limitation, and it is compounded with the growth in demand in Asia for crE as companies continue to grow. From a supply perspective, in the past few years many crE organizations have been outsourcing non-critical roles. this has caused the crE service provider industry to upgrade its organizations and look to train more people in the industry. Although the crE industry hopes this talent imbalance goes away, it’s not likely to happen in the near future.

“By and large today, someone is really forced to find their way in this fairly nebulous path. So, there’s a significant opportunity to start earlier at the university and business school level by exposing students to careers in crE, not just real estate development,” adds robinson. “this is a curriculum that is still fairly nascent, so I believe there are huge opportunities to capitalize off that.”

What’s next?

“While still planning for an uncertain future, we must be flexible, nimble and quick on our feet. Where do we think we as an industry are headed and paint those different types of scenarios of what we think the next five to 10 years will bring,” adds Bull of Air New Zealand.

And who knows what lies ahead as surging oil prices and fractured governments in the Middle East, as well as the recent natural disasters in Japan, Australia and New Zealand, continue to buffet world markets and undermine investor and consumer confidence. And considering the fast-changing nature of the current landscape, the findings and observa-tions contained within this report may take on different outcomes or appear to have shifted yet again in future weeks or months as compared to the baseline offered at this time. So, although the global economy appears to be on the mend and recovery is under way, unfore-seen and superseding events may limit or delay eventual robust global economic growth.

“While still planning for an uncertain

future, we must be flexible, nimble and quick on our feet.

Where do we think we are going and paint

those different types of scenarios of what

we think the next five to 10 years will

bring.”

- Robert Bull, Air New Zealand

TABLE OF CONTENTS

“PROGR E S S + OPPORT U N I T Y ” 2011 STAT E - OF -T H E -I N DUST RY R E PORT

“ TR ENDING TOWA R D R ECOV ERY”

REPORT:

THE FASB

EFFECTClose-Up

2011STATE - OF-THE -I N DUSTRY

COR POR ATE R E A L E STATE

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INDUSTRY CLOSE-UP: THE FASB EFFECT

FASB 13 is quickly becoming this year’s buzzword, like Y2K, sustainability or Sarbanes-Oxley in years past, and, similarly, evokes the questions: What does it all mean? And, is this anything at all?

CoreNet Global played an industry-leading role in addressing head-on the latest develop-ments with FASB 13 and how the proposed changes will greatly impact a company’s leased portfolio strategy and its balance sheet. The new standard would effectively eliminate off-balance sheet accounting for leases; essentially all assets currently leased under operating leases would be brought on the balance sheet.

The proposed model is far-reaching in its potential impact, and it will be helpful to look at the key provisions of the exposure draft from both the lessee and lessor accounting per-spectives. There are also a number of related matters, such as an increase in the number of required disclosures, that should be understood. The following is a “big picture” overview of FASB 13 and its probable effect on the CRE world.

The Players

The Financial Accounting Standards Board (FASB) and the International Accounting Stan-dards Board (IASB) issued an Exposure Draft of proposed changes for lease accounting in August 2010. The draft creates common standards for lease accounting to ensure that the assets and liabilities arising from lease contracts are recognized on financial statements in a consistent manner. Under the current regulations, similar transactions can be accounted for very differently, reducing both the transparency and comparability of financial statements. The proposed regulations will be finalized sometime in 2011 with possible adoption as early as 2013, but most likely in 2014 or 2015. Once implemented, accounting for leases from the lessee and lessor perspective, financial reporting for the commercial real estate industry, as well as any industry where leasing is utilized, will change significantly.

Why The Change?

“Although fairly understood, the push for change has been debated for a while as the lease accounting rules are complex and open to wide interpretation,” says Sven Pole, Senior Vice President of CB Richard Ellis, Global Corporate Solutions. “As a result, FASB and IASB are currently working on converging U.S. and international accounting standards. And the SEC wants to eliminate ‘off-balance-sheet’ financing arrangements. Currently, lessees are permitted to avoid booking a liability for most lease transactions, even though they typically incur a significant financial obligation.”

Randall (Randy) Smith, MCR, Vice President, Global Real Estate of Oracle Corpora-tion adds, “Most CRE leases are treated as operating leases. This means that the lease payments are expenses and there is not a debt obligation shown as a long-term liability. Of note, however, lessees are required to fully disclose the future rent obligations in the notes to the financial statements.”

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The Client EffectBecause the proposed model is far-reaching in its potential impact, it will be helpful to look at how this will impact future real estate decisions for the client:

• Lease vs. Buy decisions will need to be revisited o Since the accounting will be similar, clients with cash may opt to purchase real

estate vs. leasing it o Possible complacency in lease vs. buy decisions, based upon reliance on operating lease treatment, should be addressed

• Demand for shorter lease terms? o Effort to minimize lessee’s financial statement impact

o Will shorter lease terms mean higher lease rates? o Shorter lease terms will likely reduce the appraised value of buildings. Will landlords agree?

• Tenant improvements (TI) o Will lessees opt to fund TI for lower rental rates?

o Lessee may prefer to depreciate TI costs over their useful life (vs. a longer or shorter lease term)

• Renewal options – will carefully be considered • Supply Side o Will there be an increase in lease administration, IT and consulting activity to

further boost the capital in property market recovery?

The Financial Statement EffectThe following reflect the possible financial statement impact of the proposed changes:

• EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) will increase, possibly affecting: o Company valuations o Compensation or performance bonus models o Shareholder agreements o Will EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization and Rent) replace EBITDA?

• Debt ratios will increase, possibly affecting: o Existing loan covenants o Future borrowing capacity • Administrative costs will increase, due to:

o Requirements to calculate PV lease cost for all outstanding leases at initial transition o Requirement to subsequently re-calculate PV lease payments and lease terms if facts change o Financial statement audits will require more testing of lease transactions o Companies will need to invest in new computer systems, processes and controls to monitor lease transactions

The FASB EFFECT

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Its Importance

As mentioned previously, the new standard would effectively eliminate all “operating leases” and require them to be capitalized on the company’s balance sheet. It would also replace rent payment expense reporting with interest and depreciation expense reporting.

Because virtually all companies enter into lease arrangements, the model would have a pervasive impact for U.S. GAAP and International Financial Reporting Standards (IFRS) preparers. Some entities would be affected more than others, depending on the number and type of leases in existence at the transition date.

As far as its effect could go internationally, the proposed lease accounting model may have other impacts on the tax treatment of lease transactions. In many jurisdictions outside the U.S., tax accounting for leasing is often based on accounting used for book purposes. Because there is no uniform leasing concept for tax purposes, the effect of the proposed lease accounting model will vary greatly, depending on the jurisdiction and company’s country of origin.

What Will the New Rules Look Like?

While no one knows exactly what the final rules/standards will look like, Smith and Pole ex-plain there have been various types of proposed standards issued and read. To the degree the Boards stick behind those, people now understand what that means. “The challenge is during this last period of review, various companies have sent in letters suggesting further changes. What we don’t know is whether or not they’re going to adapt any of the recom-mendations that those letters may have included,” says Pole. The following is an overview of the proposed lease accounting standard:

• Accounting should reflect “ownership” of the leased asset (and also obligations)

• No more operating leases: o “Right-of-use” asset and “obligation to pay” liability recorded on balance sheet at “cost” (= PV of payments over lease term) o Lease payments include all projected increases (fixed, CPI or %) o Amortization and interest expense replace rent expense o Includes subleases o No “grandfathering” of leases on effective date • Transition requirements:

o Recording assets and liabilities will be required for all leases outstanding on the transition date (except those with remaining term <12 months) o Measurement will be the PV of remaining lease payments using lessee’s incremental borrowing rate as of transition date

SEC TION III

“ t R e n Di ng toWa R D R ecoV eRY ” 2011 STAT E - OF -T H E -I N DUST RY R E PORTPage 4

Section iiiPage 4

• Lease term more likely to include renewals

o Lease term defined as longest possible term “more likely than not” to occur o Renewal terms with rates at or below “market” at the date of renewal will be required to be included in the initial lease term o Shareholder agreements o Will EBITDAR replace EBITDA?

• Subsequent adjustments may be required for:

o “Change in facts and circumstances” • Sale/Leaseback transactions

o Treated as a sale and subsequent lease ONLY if risk and benefits of ownership actually transfer to purchaser/lessor…if not, the lease is ignored and the transaction is treated as a loan

The Latest

With the comment letter period ending December 15, 2010, there was a heavy response to the exposure draft of the new leasing standard, especially among the key lessee and lessor stakeholders. As foreshadowed in Asset Finance International (AFI) reports of the early responses, the comments show a lot of concern over key features of the proposals.

The texts of all the responses have been posted by the IASB and FASB, who are jointly undertaking the convergence project. There was a huge response that went in close to the deadline, and many were not posted until January of this year. The final number of responses came in at 755 (although the number listed by the Boards is 764, due to some duplication). All have been fully analyzed for an AFI summary of the breakdown on key outstanding accounting issues for equipment leasing.

“Pre-existing leases are not expected to be grandfathered, with the exception of ‘simple capital leases,’” says Pole. “The boards are proposing that lessees and lessors apply the new leasing approach by recognizing assets and liabilities for all outstanding leases at the date of the earliest period presented using a simplified retrospective approach.”

Get Ready

Upcoming changes to lease accounting rules will have a major impact on U.S. companies and will impact return on assets and other key financial ratios significantly.

Some industry projections estimate more than $1.3 trillion would be transferred to U.S. corporate balance sheets, with roughly 70 percent being in real estate leases.

“Because possible implementation could come as early as 2013, corporations will have to restate earnings for the prior two years when they conduct their financial reporting,” says Smith. “Therefore, getting guidance in 2011 is crucial in order to get a jump on that two-year time frame. Companies must adopt a standard as they will need to restate retroactively two years in arrears. This means every real estate decision a company makes today will ultimately be reflected on that restatement.”

The FASB EFFECT

“Because possible implementation could come as early as 2013, corporations will have to restate earnings for

the prior two years when they conduct their

financial reporting. Therefore, getting guidance in 2011 is

crucial in order to get a jump on that two-year

time frame.”

- Randall (Randy) Smith, Oracle Corporation

Section iiiPage 5

“ t R e n Di ng toWa R D R ecoV eRY ” 2011 STAT E - OF -T H E -I N DUST RY R E PORT

As it relates to disclosure, Smith and Pole both explain that the proposed model would require more extensive disclosures than currently required under U.S. GAAP and IFRS. The increased disclosures focus on qualitative and quantitative information, including the significant judgments and assumptions made in measuring and recognizing lease assets and obligations. “This is a fairly significant change, particularly for companies that have a lot of leases on their portfolio,” notes Smith.

Pole adds, “The savvy CRE executives are getting a firm grip on what implications these changes may have and are starting to make decisions today, because it will be reflected two years from now on the balance sheet. The best analogy I can think of is this is Sarbanes-Oxley for CRE – a real game changer because a lot more work will be required of those CRE departments in order to comply with these standards, as the accounting implications are fairly significant. The portfolio management and the data administration implications are large and, in essence, will require more manpower to properly manage the day-to-day data that will arise from these standards.”

What’s Next

The Boards expect to issue final standards in mid-2011. The effective date, which is yet to be determined, could be as early as 2013; although, it’s more likely to be 2014 or even 2015. “Given the potential impact of the proposed changes on accounting and operations, management should begin assessing the implications of the proposal on existing contracts and current business practices,” explains Smith.

“Once the final standards are issued, I believe further education, and the exploration of ef-ficient ways in implementing those changes and generally promoting those concepts and best practices is paramount to understanding fully this tectonic event,” adds Pole.

Additional Resources

For additional information, please see the following white papers and presentations:

- FAS 13 Suggested Comments - CNG SPP Phoenix Summit

- The Future of FAS 13 – How the Proposed Changes Will Affect Your Leased Portfolio Strategy

- Corporate Real Estate Implications of Planned Lease Accounting: A Working Session

- New Lease Accounting Standard for Lessees

“The best analogy I can think of is this is Sarbanes-Oxley for CRE – a real game changer because a lot more work will

be required of those CRE departments in order to comply

with these standards, as the accounting

implications are fairly significant.”

- Sven Pole, CB Richard Ellis

APPENDIX

“ TR ENDING TOWA R D R ECOV ERY”

APPENDIX

2011STATE - OF-THE -I N DUSTRY

COR POR ATE R E A L E STATE

APPENDIX

2010 Presentations, Case Studies, as well as Related Articles seen in THE LEADER magazine

Benchmarking

- Corporate Real Estate Benchmarking Techniques

Brand & Culture

- Brand, Culture and the Workplace

- THE LEADER magazine: “Delivering Workplace Transformation: Creating an Environment that Fits the Company”

Building Retrofit

- RetrofitIndustryNeedsAssessmentStudy-RockyMountainInstituteRetroFit Depot

Capital Markets & CRE

- TheInfluenceofCapitalMarketsOnCorporateRealEstate

- THE LEADER magazine: “Project Finance and Capital Markets: The Financial ImpactsofSignificantCorporateRealEstateTransactions”

Corporate Governance

- CorporateGovernanceandOutsourcing

- THE LEADER magazine: “The Ontario Plan: A New Model for Comprehensive Planning”

CRE Office Occupiers Strategy

- OfficeOccupiersPreferences&Needs

Energy Management & Sustainability

- ReducingWasteandIncreasingValuethroughCorporateEnergyManagement

- THE LEADER magazine: “Beyond the Buzz: Alternative andRenewable EnergyandSustainabilityNowStandardOperatingProcedure”

- THE LEADER magazine: “SustainabilityIssuesinRealEstate:ExecsStepUp TheirRole”

Integrated Workplace Management Systems

- IWMS–IntegratedWorkplaceManagementSystems

- THE LEADER magazine: “AWorkinProgress:RedefiningtheMetricsofWorkplace Strategies”

- THE LEADER magazine: “Integrated Workplace Management”

“ T R E N DI NG TOWA R D R ECOV ERY ” 2011 STAT E - OF -T H E -I N DUST RY R E PORTSECTION IV PAGE 1

Mergers & Acquisitions

- RealEstate&FacilitiesFunctioninM&AandDivestitureActivity

- THE LEADER magazine: “RealizingthePotentialofDivestiture&RestructuringActivity:A RealEstate&FacilitiesPerspective”

- THE LEADER magazine: “Mergers&Acquisitions:HowRealEstateCanPlayaKeyRole”

Offshoring & Outsourcing

- TheChangingShapeoftheOffshoring&OutsourcingWorld-Executive Summary

Workplace Strategies

- HowtheWorkplaceFostersInnovation

- THE LEADER magazine: “Delivering Workplace Transformation: Creating an Environment that Fits the Company”

Additional Resources- KnowledgeCenterOnline

- Research Landing Page

- IndustryTracker

2011CoreNetGlobalState-of-the-IndustryReportAcknowledgements

Primary Author:

David Heaton, SeniorResearch/EditorialAssociate,CoreNetGlobal

Project Support:

Lawrence Bazrod, ChiefOperatingOfficer,CoreNetGlobal

Chelsie Butler, ManagingEditor,THELEADER,ProgramManager,GlobalAwards,CoreNetGlobal

Autumn Calhoun,Webmaster/SocialNetworkingStrategist,CoreNetGlobal

Richard Kadzis, CAE, VicePresident,StrategicCommunications,CoreNetGlobal

MelissaSecurda,Director,KnowledgeandResearch,CoreNetGlobal

TimVenable,VicePresident,Knowledge&Research,CoreNetGlobal

“ T R E N DI NG TOWA R D R ECOV ERY ” 2011 STAT E - OF -T H E -I N DUST RY R E PORT SECTION IV PAGE 2

SEC TION I V

3/17/2011

CoreNet Global/ Partners –

102

Corporate Partners –

81

Strategic Partners – Gold Strategic Partners – Silver

Strategic Partners – Bronze

For more information regarding Corporate and Strategic Partnerships call 1 + 866- 362-4181 or visit http://www.corenetglobal.org/

ABB Adobe Systems, Incorporated Allstate Insurance Company AIG AMERIGROUP Corporation AstraZeneca AT&T AVNET Bank of America Barclays Bank BB&T BP International British Broadcasting Corporation Capital One Services, Incorporated Cisco Systems, Incorporated Coca-Cola Refreshments Corning, Inc. Deloitte Services LP Deutsche Bank AG Dow Chemical Co. Duke Energy eBay Inc. Eli Lilly & Company ExxonMobil Corporation Fidelity Real Estate Company Ford Land General Electric

CB Richard Ellis Johnson Controls, Inc. Regus Steelcase Deloitte Consulting Newmark Knight Frank Sodexo

General Services Administration General Services Administration HQ GlaxoSmithKline Google Herman Miller Hewlett Packard Humana, Inc. International Monetary Fund JDS Uniphase Corporation Juniper Networks KeyBank Level 3 Communications Life Technologies LMC Properties, Inc. Mary Kay Cosmetics McKesson Corporation Medtronic, Incorporated Merck & Co, Inc. Microsoft MMC (Marsh & McLennan Companies) Motorola, Incorporated Nokia Nokia Siemens Networks Northrop Grumman Oracle Corporation Pfizer, Incorporated Pitney Bowes

Cassidy Turley DTZ NBBJ CresaPartners Grubb & Ellis Tandus Cushman & Wakefield Jones Lang LaSalle Tishman Speyer Properties

5 HGA Mississippi Development Authority San Bernardino County, EDA HOK OVG Projectontwikkeling BV

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Procter & Gamble Co. PWGSC (Canada) Royal Bank of Scotland Royal Dutch Shell Standard Chartered Bank Steelcase Symantec TD Ameritrade TD Bank Tennessee Valley Authority Texas Instruments, Inc. The Clorox Company The Traveler’s Companies T-Mobile Time Warner Tyco International U.S. Bank U.S. Department of State Unilever UnitedHealth Group United Technologies Corporation USAA Verizon Communications Visa Vodafone WellPoint Whirlpool Corporation

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