The Role of Research and Development in Commercial Property Developers
Abstract: The commercial developer strives for a logical assessment of market comparables and trends to arrive at a thoughtful and informed opinion of economic feasibility on behalf of the client, investor, lender, or landowner. However, the purpose, form, and content of property R&D may vary considerably during the development process. This note presents a broader, if not simplified, view of R&D relevant throughout the development process in contrast to specific analysis targeted at only one stage in the process. An overall analysis of the role that R&D plays, or should play, in commercial development opposed to a more detailed breakdown of one specific area.
I am going to discuss the importance of Research and Development for Commercial Property Developers. Firstly I will identify the ‘development process’, this will provide reference throughout my paper; I will then briefly introduce R&D and subsequently consider the role that R&D plays within this sector of the property market.
1.0 The Development Process
Although no description of the development process applies to all projects, the following stages usefully summarise the general sequencing 1:
Stage 1*: Idea inception
Stage 2*: Idea refinement
Stage 3*: Feasibility
Stage 4*: Contracts
Stage 5*: Commitment
Stage 6*: Construction
Stage 7*: Completion
It is increasingly recognised that the utilisation of knowledge and learning in organisations is vital to effective performance. Indeed some would argue that ‘business-related’ knowledge is now the single most important factor in corporate competitiveness and success.
Today the speed of technological change and increasing wants of clients have forced companies in all markets to invest in R&D. Research is the enquiry and discovery of new ideas, the evaluation of your products or services and the performance of your competitors. Development is turning ideas into marketable products and services.
The task of R&D is to work with marketing to supply the client with what he or she wants ‘tomorrow’. Research and Development is carried out by many businesses, universities and government research centres. It is very expensive which means that only large businesses are likely to be able to afford it whilst smaller companies tend to use a ‘me too’ approach and copy the competition. UK companies have neglected R&D in the past and have been overtaken by our foreign competitors. Firms increasingly need to budget for R&D if they are to stay on a level playing field with foreign competition; however, it is a well-known fact that if times are hard, R&D is cut back, research institutions are closed and people are made redundant. R&D is a long run strategy that is often sacrificed at the first sign of trouble; yet it is R&D that has the potential to boost business and cut costs.
1.2 R&D Process
Property, like money, is a rare and valuable resource. Property constitutes a substantial element of most company’s assets yet research in this market is not allocated accordingly. Property is the key to managing an organisation’s objectives; R&D is the key to successful proactive property management.
Property companies use property and operational information such as data on portfolio, market trends and occupiers requirements in order to carry out their functions productively.
Research functions for this sector will depend upon particular circumstances; however, we can identify some fundamental applications.
R&D is used to develop appropriate structures and processes that facilitate an efficient and productive organization. R&D is also used to explore the emerging economic and social trends, i.e. September 11 causing move away from high-rise commercial property, and to inform new thinking about how to meet client needs effectively 2.
During (Stage 2*), the developer generally engages in market research activities described below to refine the project idea.
* Assess general market conditions, political attitudes, plans, infrastructure and physical suitability.
* Define the market area.
* Analyse competing developments to determine what is selling and public reactions to recent projects.
* Study existing and potential space users to identify market segments and the attributes important to each.
* Relate benefits to alternative project features. Move from market segmentation to identify the market niche to be served.
* Refine the preliminary design at the selected site. Plan product differentiation to meet the competition and gain market share.
Research conducted during (Stage 3*) is often the judgement of the professional market analyst who renders an objective opinion on the proposed development. This ‘professional’ finding serves several relevant purposes. Either the developer uses the professional market analyst for an objective second opinion about a project idea, or the investor / lender requires an independent analysis.
When a market analysis is joined with a feasibility study, a decision can be made whether to form contracts and proceed to (Stage 4*)
Clearly, commercial development R&D encompasses a broader range of activities than those reflected in formal market analysis. In practice, the developer uses R&D to arrive at a project idea (Stage 1*), to refine the idea (Stage 2*), to develop a marketing strategy (Stage 7*) and, if the project is to be held in the developer’s portfolio longer than anticipated, high rise developments (September 11th), to reposition the development at appropriate points in time.
Malizia (1990) defines ‘Property research as an exercise in synthesis and reduction; a funnelling process where experience and information together may lead to insights about profitable possibilities. The developer screens project ideas given the objectives and competencies detailed in the strategic plan. To identify attractive proposals, the developer typically uses a wide range of information and creative problem-solving methods. The developer’s information base often draws on in-house expertise as well as outside research on macroeconomic trends, demographics, preferences, technology, space use, locational factors and the like’.3
During (Stage 7*) R&D is used to formulate an effective marketing strategy for the project. Here, research from prior stages of the development process is built upon to devise the strategic plan and to budget to sell or lease the space that has been designed to achieve client satisfaction. The most useful previous research is that which identifies the target market segments, describes the specific benefits attractive to each sector and details the way that the development provides these benefits.
If prior R&D proves correct, the space will be easier to sell or lease in (Stage 7*). If the scale, price and timing are on target, the developer will spend far less time and fewer resources on promotion and sales activities. However, if the market analysis has been sloppy, marketability research has not been conducted then the development may require time consuming and costly marketing efforts during the latter stages of the development. 4
It is important not to take my simplication of the R&D process at face value; obviously the process that I have described does not always occur in such an orderly fashion nor do specific research activities only occur once. It is important to realise that many R&D processes are repeated throughout the development procedure. For example, comparable methods, techniques and information sources are applied to estimate market demand during different stages of development. Similarly, the analysis of competitive projects is repeated to find attractive geographic locations (Stage 1*), to select an appropriate site (Stage 2*), and to determine the best way to position the development relative to competition for the marketing effort (Stage7*)
‘What distinguishes property research throughout the development process is its changing purposes and applications rather than methods, techniques or data’.3
Prabhakar (1996) is of the opinion that strong argument can be made for increasing the industry’s investment in academic research, but not without qualification. Academic institutions must respond to powerful forces from intensifying international competition. These forces are challenging many old ways of doing business, rendering them obsolete and ineffective.5
With whatever funds available, all sectors of the property market must work smarter and faster, more interactively and more efficiently. This does not mean that the legitimate R&D roles of individual sectors and organizations should be distorted in the service of another. Universities, for example, must maintain a strong focus on long-term research and education, especially as industry narrows the focus of its R&D and moves it “closer to the customer.”
Still, the property sector can afford neither the luxury of leisurely harvesting the fruits of discovery and invention, nor the mistake of leaving them for others to harvest and market. Today the sector must change for tomorrow, we can point to important exceptions however, examples in which the dated model of R&D has been replaced by a more dynamic, interactive style of working that goes beyond market restrictions. Biotechnology and software are two particularly strong examples of fields where linkages between University research and the marketplace have worked in exciting new ways. Property must follow accordingly if it is to adapt to an increasingly difficult and demanding market using R&D.
A final thought; the purchase of commercial property must be proactive, especially during the current period of economic uncertainty. Owners and investors must evaluate their properties’ susceptibility to diminished demand by closely managing tenant leases; monitoring expenses; assessing the impact of new supply coming into the marketplace; and considering their properties’ redeployment and redevelopment opportunities. In this period of the cycle (September 11th), the flip side of adversity may be opportunity if R&D facilitates proactivity.
Although I have demonstrated the relevance of R&D principles to Commercial Development, R&D primarily exists in the world of large, established corporate companies and offer ways for companies marketing a wide range of consumer services and products, to a multitude of market segments, to manage demand. However, the property industry is dominated by small entrepreneurial firms that appear to be unconcerned with R&D issues. Indeed, close examination of the development process highlights the irrelevance of such concerns. The only point at which firms begin to use R&D is (Stage 7*) where construction is ending. During this stage, the developer uses prior research to develop a suitable marketing plan.
However, a strong argument exists in contradiction to my last point. This argument comprises the notion that property is no longer an industry full of small entrepreneurs; it is a niche market that has just been recognized by the’ big boys’, as it were. Firstly, there has been a dramatic shift in property ownership from public to private ownership over the last three years. Secondly, large sophisticated; multinational companies and institutions have become dominant space providers. Such organisations, often financed by major investors or tenants, will scan property markets globally to identify attractive locations and will use extensive R&D to evaluate potential sites.
In conclusion, R&D is increasingly becoming important for commercial property developers. Linear R&D has always been a core competence of any developer; it is the ‘new age’ R&D utilised by large institutions in other markets that is becoming progressively more valuable and ultimately central in achieving successful development.