When Corporations Break Up CRE Usually Sees a Benefit

GE is to split into three separate companies. So is Toshiba. Johnson & Johnson? Two—at least that’s a Johnson for each. The hope is that shareholders will be happy and the separate businesses, better able to focus. 

But what are the impacts to commercial real estate? Potentially good for a while and not so good over a longer period, if history is any guide. 

This concentrated burst of major corporate disintegration isn’t unparalleled. There has been an ongoing pendulum swing between conglomeration and the benefits it supposedly offers of diversified revenue streams and better access to financing, and the potential disadvantages, such as lack of focus and fuzzy financial reporting.

Each swing has some natural implications, including for commercial real estate. Larger companies are supposed to eliminate duplicate resources in people and operations. That would lead to less overall office space, and perhaps warehousing and other industrial uses, that the resulting giant would need. 

The opposite should happen when companies break up. Each will need accounting, legal, operational, logistics, and other functions that a business needs. That means more space, at least in the short term.

“In almost every case, the short-term impact on CRE is that the footprint stays the same or increases slightly—2% to 5%— in cases where the additional space needs to be added to the portfolio to accommodate physical separation of employees due to legal or confidentiality reasons,” Rob Raymond, managing director of the real estate solutions group at global business advisory firm FTI Consulting, tells GlobeSt.com.

Raymond says that there is often a short period of planning before the split is announced. The rush “does not allow for sufficient time to research the market for available space, negotiate lease terms, build-out the space, and move employees.”

Much of any new space can be a stop-gap solution, like subleased space or co-working space, to meet physical separation requirements before the split goes into legal effect.

“That said, the long-term impact on CRE is that the split of the companies provides an excellent opportunity for both companies to take an in-depth look at their portfolios and footprints, consolidate the vacancies and underutilized spaces that resulted from having to separate the companies, exit the short-term solutions that were put in place to satisfy legal day one, and ultimately allow both companies to end up with smaller footprints,” Raymond adds. The decrease can typically be 15% as executives try to make the separate companies as cost-efficient as they can.

Another complication is that each of the separate companies, while smaller, is most likely to retain bargaining power when dealing with landlords. 

“For example, once General Electric completes their restructuring they will become an aviation company,” Yaniv Adar, a partner at litigation law firm Mark Migdal & Hayden, tells GlobeSt.com. “Despite their smaller size, General Electric will still be one of the biggest players in the aviation space and their ability to negotiate jet engine contracts will not be affected by their inability to package the sale with an MRI machine. Similarly, the commercial real estate needs of the aviation division of General Electric will not be impacted by the carving out of their health care and power divisions from the corporate structure. Even just as an aviation company, the new General Electric will still be a multi-billion-dollar powerhouse that is unlikely to lose any bargaining power in its commercial real estate transactions.”