Survey: Efficiency and Cost Cutting Still Rule the Day

New findings show much-needed improvement in the nation’s real estate markets. As the CRE market continues to rebound in a lackluster economy, industry executives say multifamily development will continue to grow. However, they remain focused on initiatives that increase operational efficiency and reduce costs, according to a recent survey by the audit, tax, and advisory firm KPMG LLP.

The KPMG commercial real estate outlook survey, completed in June, tapped nearly 80 senior executives in the commercial real estate industry for their opinion on the state of CRE, now and in the near future. Respondents represented a variety of professionals: Based on revenue in the most recent fiscal year, 7 percent of respondents work for companies with annual revenues exceeding $10 billion; 36 percent with annual revenues in the $1 billion to $10 billion range; 55 percent with revenues in the $100 million to $1 billion range; and 2 percent with revenues of less than $100 million.

Cost Control, Efficiency Are Prime Priorities

In the survey, 51 percent of executives said they expect a significant amount of multifamily development over the next year--up from 34 percent in its 2011 survey’s findings. (Industrial development was the next highest sector with a significant amount of activity expected, at 14 percent.) And the encouraging recovery in real estate overall won’t stop: 46 percent of commercial real estate executives said their companies’ management teams will be spending the most time and energy on initiatives related to increasing operational efficiency or reducing costs in the next two years. Increasing operational efficiency while reducing costs is the prime strategy for executives who have seen their margins and profits being narrowed.

Slow but Steady Hiring

Signs of cautious optimism from real estate professionals are seen in executive predictions for hiring and revenue. Fifty-eight percent of respondents expect to add jobs in 2013, up from 53 percent in last year’s survey, while 30 percent predict headcount levels will remain the same, and 12 percent expect headcount to decrease. Additionally, a year from now, 8 percent expect their companies’ revenue to be significantly higher, while 59 percent predict moderate growth and 24 percent expect no change. Nine percent expect revenue to decrease.

Fifty-eight percent of the respondents expect the U.S. economy to improve next year, but they remain guarded about an economic recovery. In fact, 63 percent of those respondents don’t expect the economy to fully recover for at least two years. Contrast this with the 77 percent who predicted the recovery would be complete by the end of 2013, in last year’s survey. Executives blame growth challenges, including pricing pressures, lack of customer demand, access to and managing capital, and regulatory and legislative pressures for the industry’s difficulties.

Commercial real estate executives are finding it challenging to source sufficient product that will produce the necessary yields to meet investor expectations, say KPMG experts. It’s also taking a lot longer to raise capital needed to grow their portfolios, while increased regulatory reporting requirements are driving up costs, they note.

Narrowly Focused Spending

When asked to identify the three areas where their company would most increase spending over the next year, 52 percent of the KPMG survey respondents said information technology (IT), followed by acquisition of a business (37 percent) and employee compensation and training (32 percent). Among those respondents who said their company had significant cash on its balance sheet, the most likely time frame for investment was this year (54 percent) or next year (33 percent), while 13 percent said 2014 or later. Some said that the focus on making investments in IT is part of a strategy to further increase operational efficiency, especially in the realm of regulatory reporting. It can help companies attract qualified, high-performing individuals to join their companies—and they’re willing to do it.