RESEARCH REPORT. State of the Market: Facilities Management. Prepared by Rabin Research

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1 RESEARCH REPORT State of the Market: Facilities Management Prepared by Rabin Research

2 2 Table of Contents Facilities Management Overview... 3 A Growing Market... 3 Market Size... 4 FM is a $165 Billion Market and Growing... 4 Market Growth Dynamics... 6 Niche Services Push Growth... 6 Key Trends... 6 Introduction... 6 Globalization... 6 Sustainability... 6 Individualization... 7 Commercialization... 7 New Ways of Working... 7 Preparedness and Populations at Risk in Densely Populated Urban Areas... 7 Smart Buildings... 7 Long-Term Sustainability... 7 More Outsourcing of Landscaping by Companies, Small Municipalities... 8 Increased Interest from Private Equity... 8 Economic Growth... 8 Technological Developments... 8 Focus on Health & Well-Being... 9 Growth of Knowledge Society... 9 Pushing Real Estate Analytics... 9 More Collaboration... 9

3 3 Facilities Management Overview A Growing Market The market for outsourced facilities management services is large and growing, estimated at more than $500 billion globally. Defined broadly, facilities management (FM) encompasses interior services such as cleaning, janitorial, project management, and general facility repair and construction; exterior services, including landscaping, snow and ice removal, and parking lot maintenance; and technical services, such as electrical, plumbing, HVAC, lighting, and energy management. The market is segmented by provision of services to include single service (65 percent of the global market), bundled services (23 percent), and integrated facilities management (IFM) service (12 percent). While growth in single services has moderated due to high outsourcing rates and pricing pressure, IFM demand is expected to remain strong as companies continue to consolidate their facilities management services and economic conditions improve. Global Market Segmentation of Facilities Management Integrated Facilities Management 12% Bundled Services 23% Single Service 65% Growing demand for service integration is spurring expansion of integrated facilities management (IFM), where interior and exterior facilities services from multiple providers are integrated to a consolidated, managed offering. Large property owners and REITs are looking to consolidate their service provider relationships on a regional and national level rather than manage facility maintenance needs through multiple single service providers on a local basis. IFM firms offer services related to the total integration of facilities resources and services delivered by a single supplier to support the operation of an organization. The IFM provider may take the form of a vendor-managed organization; a self-perform organization, or a hybrid (mix of subcontracting and self-performance of services by the IFM provider).

4 4 Market Size FM is a $165 Billion Market and Growing According to Frost & Sullivan, the North American market for Facilities Management was valued around $164 billion in The majority of that market, 57%, is single-service facilities management. IFM is the smallest segment, representing 17% of the total market. Albeit the smallest segment of the broader FM market, IFM is the fastest growing. The global IFM market, estimated at $64.2 billion in 2011, is projected to grow at a CAGR of 7.0 percent to reach $96.2 billion by 2017, with emerging markets such as China and India still in the early stages of growth. North America is the largest IFM market at $27.6 billion, of which the United States is the dominant region, accounting for $25.1 billion. North American market growth is forecasted to be robust, with industry revenues expanding at a six-year CAGR of 7.8 percent to reach $43.4 billion by More than 600 participants compete in the global IFM market, defined by those companies with revenue greater than $10 million, with the top five holding an estimated 19 percent of the market. KPMG s Global Real Estate and Facilities Management (REFM) Outsourcing Pulse Survey 1 is an annual study which examines outsourcing market trends and demand drivers. In 2014, a total of 217 organizations were surveyed for the study globally. 53 percent were from the Americas, and by industry, respondents break down as follows: Service providers and third-party advisors were next polled on demand levels by vertical industry and 1 pulse-report.pdf

5 5 industry group. Banking, financial services, and insurance (BFSI) is clearly the top industry group, cited by 49 percent of service providers and advisors. Healthcare is next at 39 percent followed by pharmaceutical and biotech at 36 percent. In facilities management, energy and utilities operations is clearly identified as the area exhibiting the greatest growth in outsourcing demand, as was the same in 2013, selected by 76 percent of service provider and advisor respondents. Next is a cluster of other activities, including project and program management, regulated maintenance, help desk, and R&D lab services.

6 6 Market Growth Dynamics Niche Services Push Growth Contract cleaning services market is expected to receive bonus gains from the growing niche areas, which had previously remained less explored. While demand for cleaning of interior building works is augmenting business for traditional janitorial service providers, cleaning of HVAC and swimming pools is the new market niche. Expeditious growth in new lodge construction designed with swimming pools and relocation of Americans to regions with warmer climates is expected to keep up the demand for pool cleaning services. Alongside, demand will continue to grow for HVAC cleaning for the sheer need of improved air indoors 2. Key Trends Introduction Increased outsourcing as companies look to reduce operating costs and concentrate resources on core revenue generating activities. Significant opportunities exist within the REIT and retail sectors, with companies looking to outsource a large majority, if not all, of property management responsibilities. Other verticals expected to see greater outsourcing penetration include healthcare, a market seeing strong secular growth from an aging population and facing ongoing cost pressure, and education and government, where first-time outsourcing opportunities are significant. Continued shift toward service integration to drive growth in IFM as companies look to singlesource service providers to minimize complexity of managing multiple vendors and realize cost savings (e.g., consolidating invoice and service management). Use of advanced technology to improve service delivery and integrate the service offering. Service providers are investing in proprietary technology that can deliver greater transparency and real time tracking of property conditions and maintenance requests for clients and leveraging tools to gain insight into deferred maintenance to drive increased work orders and sales. Following is a brief discussion of several other trends and dynamics at play in the FM industry today: Globalization While globalization makes us more alike, at the same time, it makes us more aware of local differences. A growing number of multinational companies have therefore begun to adapt their products and marketing to local markets. This is commonly referred to as the Glocalization strategy. Companies that are able to navigate between emerging markets and different cultures can look forward to a prosperous future. Sustainability Global warming is one of the main sustainability challenges for the coming century. To become more energy- and carbon-efficient, societies around the world may be forced to restructure their economies and infrastructure. Sustainability challenges will have a number of implications for the FM and services industry in the coming decade, affecting supply and value chains as well as building design, management, and maintenance. Systemic design will become more important. 2 Facilities Management, Global Industry Analysts, November 2014

7 7 Individualization Individualization will continue to impact organizations and social relations, especially in low- and middleincome countries. People and organizations expect tailored products, services and solutions. Companies expect their FM and services industry providers to supply individualized services that maximize their value proposition. Additionally, companies will experience increasing employee turnover. Individualization will be prominent as employees and customers increase their demands for individual attention. Commercialization Commercialization means faster competition and shorter product lifecycles, as well as increased specialization, differentiation and innovation. FM and services industry companies will have to find ways to help their customers stay competitive and maximize value. To do this, managers will have to understand the key business indicators that promote value in an organization and how FM and services industry can help their customers improve performance. This could be achieved by understanding their strategic plans and objectives. It could also be achieved by employing lean management techniques to cut waste and use six-sigma strategies to increase quality. New Ways of Working Corporations are implementing alternative workplace practices and new ways of working to promote corporate identity and foster more efficient collaboration, knowledge sharing, flexibility, speed, innovation, and productivity. The traditional workplace will become the alternative workplace. FM managers will increasingly have to make use of online facility reservation and management tools that also pinpoint underutilized facilities, leading to better facility management and eventually better building design. Preparedness and Populations at Risk in Densely Populated Urban Areas According to the United Nations Population Fund (UNFPA), climate change and rapid urbanization occurring in middle- and low-income countries will expose the FM and services industry to new challenges and lead to a greater emphasis on contingency and continuity planning. The next wave of urban development will occur in areas already prone to natural disasters. FM and services industry managers should prepare contingency and continuity plans for a number of challenges 3. Smart Buildings New technology providing FMs with critical information can be used to provide a comfortable and safe environment. Technology has now advanced to the point where it can alert an FM to oncoming equipment failures, track space use among employees, and remind FMs to perform routine maintenance on an asset. This will allow FMs to control and maintain their buildings like never before. Long-Term Sustainability FMLink reports that long-term sustainability is also on many professionals minds, based on a recent survey conducted by sustainability management company Ecova. The survey found that these ecominded professionals are taking a long-term view of sustainability, planning projects that are timeintensive but ultimately cost-effective. According to the survey, 57 percent of those surveyed believe their organization will spend more time or money on sustainability in the coming year. By doing the same 3 9 megatrends that every FM provider should know, ServiceFutures.com, posted December 16, 2014

8 8 and thinking in the long-term, facilities managers can not only cut down on their companies expenses, they can also ensure they adhere to the ever-changing standards of environmental responsibility 4. More Outsourcing of Landscaping by Companies, Small Municipalities The landscaping industry has grown rapidly in recent years partly by offering a specialized service which customers do not want to perform. While highly specialized land owners like golf courses typically retain their own landscaping staff, the seasonal need for services, cost of equipment, and greater complexity of landscape installations have encouraged companies and towns to outsource to landscaping companies. Increased Interest from Private Equity Private equity capital is flowing to the FM industry, with growth equity and buyout transaction activity robust. Sponsors are attracted to the industry s growth prospects, with fragmentation presenting the opportunity to pursue accretive buy-and-build strategies. The high free-cash flow and low capex profile of the vendor managed model is a particular draw for investors 5. Expanding Janitorial Demand from Outsourcing Companies that do not have the time or money to maintain a maintenance staff are increasingly outsourcing janitorial and other facilities services. Outsourcing non-core functions by many businesses and smaller apartment building managers has expanded the market for commercial janitorial services. New Security Monitoring Products Affordable integrated monitoring systems now include devices that measure environmental factors, such as humidity and the quality of the air and water. Such systems are inexpensive enough for general commercial use. Other devices can monitor swimming pools, appliances, and lawns. These systems also can alert service personnel when maintenance is needed 6. Economic Growth Global economic power will likely continue its shift eastwards. The FM and services industry will experience consequences when most construction activities move towards emerging markets. Increasing competition coming from new players in emerging markets will force companies to search for greater differentiation, and to be innovative in how they adjust their business models and deliver extra value to clients. Technological Developments Technological progress increases productivity and leads to the development of new industries, income growth, and reduced poverty. By 2020 we expect to see major progress in intelligent technology, such as near field communication (NFC) sensors, smart surveillance, security applications and smart robots, which will enable automation of more activities. Technology will take over more domains and functions as robot technology improves in quality, prices for advanced technologies decline, and labor costs increase. 4 Facilities Management Trends for 2015, The OfficeSpace Software Facilities Management Blog, posted December 23, Spotlight On: Facilities Management, BGL Consumer & Retail Services Insider, May Business Services Sector Industry Profile, First Research, August 10, 2015

9 9 Technological development is squeezing low-quality labor out of the market and creating new demands for skill sets. Cleaning, for example, is no longer an issue of elbow grease. Security is much more than a pair of eyes. New technologies require that people work in more intelligent ways. Focus on Health & Well-Being Over the coming decade, an increasing focus on health will permeate more aspects of private and business life. More lifestyle-related disorders and diseases are expected to emerge. The focus on health and a better lifestyle will lead to artificial and technologically enhanced human capabilities, creating major impact on the global FM and services industry. In Europe, over 30 percent of integrated FM revenue is generated by the healthcare sector. As budget cuts in Europe affect service provision, governments will likely outsource more activities. The doubling of the prevalence of lifestyle-related diseases, like diabetes, will lead to new incentives in building designs to promote healthier and more productive lifestyles among company employees. Buildings will be assessed and designed to promote more active, comfortable, and productive lifestyles. Growth of Knowledge Society New reporting, collection, and control technologies are creating a mountain of data that needs to be collected, stored, and analyzed. The successful FM and services industry companies looking towards 2020 will be the ones that can efficiently collect, store, secure, analyze, and operationalize data to generate maximum value and benefit for customers. Pushing Real Estate Analytics Smart buildings are signaling an entirely new way of approaching FM. However, in spite of these advances, the C-suite has yet to fully grasp the importance of the data they provide, according to a study commissioned by Jones Lang LaSalle. Summarizing the study s findings, FMLink writes that only 28 percent of CRE [corporate real estate] teams consider themselves to be data-centric. This figure is set to double to 56 percent over the next three years. The faster facilities managers help executive leadership connect the dots between real estate data and a company s profit and productivity, the more competitive a business will be. More Collaboration As facilities and technology become more integrated, says Ehrenberg, staff members specializing in each will experience increased contact with one another. Facilities that implement smart building technology will require even more collaboration between FM and IT than was once required; for building operations to run smoothly, cross-training and support for both departments will be critical. Meanwhile, HR will continue to be an important partner for FM, as providing the right conditions for mobile working and productive output is a concern for both departments. Contact us to learn more about optimizing your facilities management operations or visit compwalk.com/learn-more.