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The Evolving Commercial Real Estate Industry
The single biggest mistake most companies are making is waiting too long to start getting ready.
Jean is the former leader of Deloitte's Corporate Real Estate Services Group, where she was responsible for overall strategy, design, transaction management, facilities management, and program management for North America and India.
Digitalization will affect investments in Commercial Real Estate and how real estate is used in the future.
Jörg von Ditfurth is responsible for Global Real Estate Transformation at Deloitte. In Germany, he is a lead partner for Real Estate Consulting, which provides all services in Real Estate Transformation and Location Strategy.
What are some major mistakes companies might make as they prepare to satisfy new regulatory requirements such as ASC 842 and IFRS 16?
Jean: These new regulatory standards are mandatory, time sensitive compliance requirements. Companies that don’t comply or don’t prepare early enough could risk significant changes to key financial KPIs (e.g., EBITDA, debt to equity), incorrect public financial statements, or even re-audits that can impact share price.
The single biggest mistake companies could make is waiting too long to start getting ready; if you have not started preparations yet, you are likely already behind. Companies should consider lease abstraction (which can take many months), collaboration between multiple internal departments and the potential benefits of implementing an integrated leasing solution, such as Deloitte’s LeasePoint.
What particular changes or progressions are expected to have the most dramatic impact on the real estate industry?
Jörg: I see two aspects that are expected to have severe effects. First, retail businesses are changing and consumers now demand more interaction between point of sale, experience with the goods to be sold, and the e-commerce environment. Second, as office building occupants shift from tenant groups toward single users there will likely also be an increase in the amount of data provided by tenants through new channels, which may lead to technology firms taking new landlord roles where they analyze data to optimize office use.
What are the potential balance sheet implications of the new regulations ASC 842 and IFRS 16?
Jean: As a result of the new regulations, potential balance sheet impacts could be, but are not limited to:
- Multinationals having to keep two different financial books for their lease portfolios (ASC 842 and IFRS 16)
- Lease administration-related operational and financial process change
- Credit ratings being affected due to significant increase in liabilities and debt to the balance sheet
- Changes to EBIDTA, debt covenants, and other KPIs such as debt to equity
- Negative impact on the ability to borrow money
With respect to CRE, what is one piece of advice you can give companies that you believe will be helpful for the future?
Jörg: The needs of corporate occupiers are changing and we currently observe two drivers that can influence how CRE space will be used in the future. First, the new IFRS standard will bring lease contracts onto the balance sheet and prompt corporate occupiers to adjust the way they use office and retail spaces. We will likely see shorter lease periods, more pay-per-use agreements, and a need to be more diligent in understanding how leased spaces are being used. Second, workforces are increasingly asking for more innovative real estate solutions that require an approach to CRE that takes into consideration not only physical workspaces, but also the talent agenda, information technology, and other workforce factors.
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