Week of October 15, 2001
Raise Host of
Real Estate Questions
By JACK LYNE Site Selection Executive Editor of Interactive Publishing
Security in parts of the post-Sept.-11 U.S. workplace has become almost part of the genetic code.
At Coca-Cola's headquarters in Atlanta, for example, visitors must now park first at a distant lot, where their vehicles are inspected. Only after passing inspection can they board a shuttle bus to the entryway of Coca-Cola's headquarters complex.
Things have likewise changed dramatically at New York's Waldorf-Astoria Hotel. X-ray machines, once brought out only to protect visiting dignitaries, are now used to scrutinize every delivery, from bed linens to booze.
And those examples represent only the tip of what is a rapidly expanding security iceberg. Guards, sometimes armed, are now legion inside many high-profile business buildings. Bags are now inspected at many doorways. Gone is the age of the free-range visitor pass, with guests left to amble at will down corporate corridors.
Outside, many landmark facilities now feature steel bollards to foil anyone intent on driving a truck loaded with explosives through the front door.
"No question, since Sept. 11 the culture in corporate real estate and for those who own and manage buildings has changed dramatically," said Steve England, a manager with Ernst and Young Real Estate Advisory Services' (E&Y at www.ey.com) Operations and Construction Practice.
Moreover, Sept. 11's attacks, shortly followed by a spate of anthrax mailings, have changed not only real estate's level of security. The terrorist threat has also heaped new cost pressures and strategic questions onto the plate of the real estate industry.
"Real estate is very much on the front lines of the crisis affecting New York and rippling throughout the broader U.S. economy," said Owen Thomas, a managing director at Morgan Stanley (www.morganstanley.com).
'Very Relaxed' Workplace
Many companies, particularly big ones, have had formidable security operations in place since at least the 1960s, said E&Y's England.
"A lot of the things that are at the forefront now - the security procedures, policies and briefings - have existed for a very long time. But have they been deployed? No," he asserted. "We had a pretty relaxed business environment in the U.S.," England continued. "Things have changed dramatically, from being very relaxed to being very tense. And it's all happened so quickly."
That heightened tension was evident in the American Institute of Architects' (AIA at www.aia.org) recent notice to members to "immediately report any suspicious requests to the appropriate local FBI field office." Released in cooperation with the U.S. General Services Administration, the AIA notice explained that architectural and engineering firms had reported "requests for building plans that, in light of the Sept. 11, 2001, attacks, appear unusual due to the structures identified in the requests or the type of information solicited."
Several of those "unusual" requests have been referred to the FBI, according to AIA officials. Those requests, they explained, were soliciting highly detailed information about facilities that included airport terminals and towers, and federal office buildings.
The AIA, association officials stressed, continues to be a strong supporter of information sharing, a touchstone in the field. Still, some in the industry have withdrawn, at least for the moment, information previously accessible to the public. The Federation of American Scientists (www.fas.org), for example, has deleted from its Internet site the locations and layouts of facilities that house U.S. intelligence agencies.
The AIA's action reflects the fact that terrorists have capitalized on what some consider one of American society's best features: its openness.
SMEs: More Lax Security?Today's more highly visible building security is a logical reaction. Some analysts maintain, however, that major discrepancies exist within that tightened security web. Some companies, they contend, are far more advanced in their awareness and skills vis-à-vis proper security procedures.
At the top of the security-awareness totem pole are large companies, according to England. "We understand terror; there's nothing too new on the horizon here," said England, a 30-year industry veteran. "It's a very mature business, the knowledge of terrorist insurrection. It's all been talked to death. And most large corporations' security operations are headed by former FBI people or former policemen with terrorist training. These are people who've gone through bomb threats and real bombs."
Thorough Y2K planning has enabled some companies to react more quickly to new security demands, he added.
What has differentiated large-company security plans in the past is "how well supported they are," England said. Since Sept. 11, however, security support levels have been rising like a river in monsoon season, he added.
"Security people are now the most welcome people in the organization," England said. "I'm sure budgets in the organization are being shifted, and more money is being spent on security than there has been in 20 years."
In contrast, many small and medium-sized companies have far less comprehensive security plans and procedures, according to many security analysts.
"An effective security plan is not just placing a 70-year-old guard at the door armed with a sign-in book," said Tzachi Weintraub, CEO of Weintraub & Co., a Mt. Kisco, N.Y.-based security consultancy. "It's a carefully designed combination of manpower, training, equipment, procedures and drills that reach into virtually all facets of a company's daily procedures."
Added the San Francisco-based England, "From my experience, a lot of small and medium-sized companies probably don't have one person who is dedicated to the security function. At a lot of the high-tech companies I've worked with, the person who was assigned security had that function as one of five hats that he or she was wearing.
"That will change, though," he added. "The security function is now getting a lot more attention at small and medium-sized firms."
Less 'Security Mentality'
Part of that increased exposure lies in buildings that were designed for the ease of entry, an earmark of pre-Sept.-11 design in much of the industrialized world.
"Most of today's office buildings don't have physical barriers because of aesthetic concerns," England said. "Physically, they're not designed to maintain control. You have multiple entrances, multiple elevator banks that require a guard at each. The building I'm in in San Francisco, for example, has at least 10 entry doors to the lobby. How do you secure that?" Another factor increasing tenants' exposure, England added, is many building owners' lack of knowledge vis-à-vis high-level security procedures.
"They don't have a corporate security organization or mentality," he noted. "Basically, they lease and manage space and maintain some level of security awareness - probably in the areas of fire safety and bringing people to the door and making sure where they go."
To bulk up security, some building owners are considering high-tech alternatives. Among the options being weighed are high-quality videocams aimed at every entrance. That, however, is a pricey option. One analyst at an architectural firm estimated that a high-end scanner monitored 24 hours a day, seven days a week, costs some US$230,000 a year.
Other newer technologies may prove equally expensive.
Consider Visionics, which produces face-recognition systems based on 80 unique facial aspects. After seeing its stock prices more than triple since Sept. 11, Visionics this week received an order for 20 face-scanners from the U.S. Immigration and Naturalization Service Office of Inspection. The value of the order "exceeds $1 million," according to Visionics officials. And that cost doesn't include the outlay for the manpower to monitor the technology.
"Are technologies like facial and voice recognition a tempest in a teapot? I don't know," England said. "It certainly makes sense to use the technology. But we need to make sure we're taking advantage of the technology that's already out there to the extent that people can control costs and also maintain control.
"People have not used existing technologies like X-ray," he continued. "That's probably something people want to think about. Some of the older technologies are fairly reasonable in terms of costs, but they're not part of current procedures."
Tenant Costs for 2002:
Leased space, however, presents a different cost dynamic. Namely, that owners have decision-making power in terms of what security features are added. And almost all commercial leases contain "pass-through" provisions that leave tenants responsible for common-area maintenance costs.
"That's the typical way it's handled, although some tenants may have negotiated caps for common-area maintenance costs," England explained. "If they leased their space in the last three or four years, when there was a landlord's market, they probably don't have caps. "I think it's going to be a difficult year for tenants," he continued. "Landlords are preparing their estimated pass-throughs right now, and they're also doing their budgets for 2002. And on top of that, there's the energy issue. So there's going to be a real double whammy. I think it's going to be a shock to a lot of people."
Building owners also face extremely thorny questions. Chief among them: In the current age of workplace anxiety, what is the appropriate security response? And how can anyone really know the appropriate response without being able to foretell the future?
"When things settle down and the air clears, a lot of questions will come up in that area," England said. "Tenants will be looking at their costs and saying, 'My God, we're got to pay for all this? Did the landlord do the right thing in putting in 25 extra guards 24/7, or should we have just used the normal guards? That's what they're there for.'
"I think only time will tell if a landlord's actions were an overreaction. Twenty-twenty hindsight is perfect vision."
Julien J. Studley (www.studley.com) has weighed in on the issue in "One Month Later: A Special Report," which was released this week.
"Tenants must examine their existing leases and consider future negotiations in light of the disaster," the report noted. Among the Studley report's findings: "Tenants might need to demand specific security measures, and the direct and pass-through costs for these and other new services will be an issue. Will those buildings that do not pass-through costs, via actual increases in operating expenses, change security measures appropriately?"
Mailroom Screening IntensifiesOnce routine and largely low-tech, corporate mailrooms have also become a major security focus in the wake of the recent wave of bio-terrorist attacks. The Centers for Disease Control and the U.S. Postal Service have both released mail-screening guidelines (see chart).
Careful screening can greatly reduce the hazards of bio-terrorism by mail, many security analysts contend. Thorough employee scrutiny greatly reduced the potential dangers and disruptions related to the letter bombs that were part of the 1970s' opposition to the Vietnam conflict, England recalled.
More than a few companies, however, may opt for higher technology in mailroom screening. That trend is already evident in the reversal of fortune for companies like Cepheid, which are involved in detecting infectious biological agents. After recording net losses last year of $7.3 million on revenues of $5.4 million, Cepheid has seen its shares soar by 97 percent in the last week.
What's driving the spike in Cepheid's stock are products like the company's "Smart Cycler" detection system. That system amplifies DNA in a sample to detect the presence of targeted substances like anthrax. The standard Smart Cycler system sells for $27,500 in the United States, while a portable version goes for $33,000, according to Cepheid officials.
A newer Web-based system was previewed during the American Society for Industrial Security's (ASIS) annual conference in early October in San Antonio, Texas. The system, called R.A.P.I.D., allows users to confirm the presence of dangerous pathogens through online consultation with experts. Those experts can review over the Internet lab reports that are generated by the R.A.P.I.D. system, ASIS conference speakers explained.
To Disperse of Not to Disperse?Still shaking out is the impact of Sept. 11's attacks on corporate employee concentrations. Dispersal was a word that dominated location strategy discussions in the first few weeks after the terrorist attacks. With the passage of more than a month, though, the dispersal drumbeat seems to have diminished somewhat. Many analysts now view dispersal as a major location issue only for companies that have large employee concentrations that are housed in high-profile landmark buildings.
An online poll on SiteNet (www.sitenet.com), a part of the same organization as this publication), for example, currently shows that some 74 percent of respondents are reporting that their firms "plan no action in examining and/or reappraising employee concentrations." Some 10 percent of respondents said that their companies were "currently" examining and/or reappraising employee concentrations, while 10 percent said that their firms "plan to" look at such concentrations.
"I think we're seeing some dispersal in New York City," England said. "There are companies that have made that decision to disperse and have multiple locations; but it's a few, not a lot. "With videoconferencing and broadband, there's no major reason not to disperse. There's all this inexpensive fiber out there, and that can also reduce travel."
Whether they disperse or don't, companies will now scrutinize lease clauses far more sharply, according to Studley's "One Month Later" report.
One area that tenants will focus on is clauses for damage and destruction. "Tenants will begin to scrutinize certain aspects of leases, seeking to alter the damage and destruction clauses," the report projected. "These clauses have traditionally provided up to 18 months before displaced tenants can break their leases. Tenants will now focus on everything from the duration of displacement to the specifics of what constitutes 'force majeure' and 'occupiable' space."
Tenants will also focus more on lease terms for interruption of services, according to the Studley report. "Tenants will more closely address what constitutes an interruption and the opportunities for recourse," said the report. "Access to the building, air quality, disruption of deliveries, window blockages - all issues that comprise the 'normal conduct of business' - should be reconsidered."
The Insurance IssueSept. 11's impact also includes major uncertainties about real estate insurance.
The insurance industry reportedly has some $300 billion in available capital for all property and casualty claims. Sept. 11's attacks will cost the industry somewhere between $30 billion to $50 billion, according to insurance industry analysts' estimates.
That scenario has raised major concerns over property owners' ability to obtain adequate insurance coverage. In Sept. 11's wake, reinsurance companies have indicated that they will no longer cover acts of terrorism.
"Without adequate insurance, it would be difficult, if not impossible, for real estate owners to operate or acquire properties or refinance loans," said Jeffrey DeBoer, president and COO of the Real Estate Roundtable (www.rer.org), during an Oct. 4 panel discussion on Capitol Hill. "We urge policymakers to recognize this as a major threat to the economy and to address this issue expeditiously."
This week President George Bush proposed a three-year plan that would cover most insurance losses from Sept. 11's attacks, capping the industry's liability at $12 billion.
The Bush administration's plan calls for the U.S. government in 2002 to pay 80 percent of the first $20 billion of insurance claims from Sept. 11 attacks. The plan would pay 90 percent of the next $80 billion in claims for 2002. And if 2002 claims exceeded $100 billion, the Bush plan calls for Congress to determine how they would be paid.
Under the Bush plan unveiled on Oct. 15, the industry's liability in 2003 from terrorist claims would be limited to $23 billion, but insurers would pay all of the losses on the first $10 billion.
Then, in 2004, the industry's liability would be limited to $36 billion, according to the Bush plan. Insurers, however, would pay all of the losses on the first $20 billion in claims for 2004.
Congress still must approve the plan, however. It may not be an easy sell.
Opponents have voiced doubts over bailing out an industry from "the first dollar spent." And even supporters say that the plan's three-year span flies in the face of real estate realities.
Said New York Democratic Senator Charles Schumer, "If you're planning to build a major power plant, a major amusement park and major skyscraper, you won't be done in three years if you start today. The problem with this proposal is that it's the opposite of putting your toe in the water. It's jumping in and then walking out."
Becoming 'Truly Global'Even with all the increases in real estate security, huge uncertainties remain over where the next threat that might rear its head.
One of the best long-term defenses lies in developing a keen company-wide awareness of what it takes to keep the workplace secure, England feels. "People are going to have to build security into the day-to-day culture," he asserted.
People, however, tend to forget, England added. "I know from working on energy conservation programs that the average life cycle of what you do is 24 to 36 months," he recalled. "After that, all you've done is undone. People have stopped all the conservation behaviors. It has to be reinforced, just as with security."
Becoming forgetful in the current atmosphere, however, may be a much less likely prospect.
"This is not going to go away," England maintained. "If Osama bin Laden and his associates die, their sons and daughters will carry on.
"This is a paradigm shift that's taking place. We are truly now global, and we're going to have to think and act like global companies. That's been the mentality in Europe for several decades now."
But even if today's security issues are not new, they contain an unfamiliar and disturbing element, England allowed.
"What's new, for us at least, is to conceive of someone so willing to die in a suicide situation without one thought," he said. "OK, maybe one person might do that. But 20 or 40? A whole state or a whole country of people?
"The answer is starting to become apparent, and it might be yes."
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