Today, the role of Corporate Real Estate is increasingly challenging and many companies approach real estate purely as an administrative function rather than taking a more strategic mindset. This post is Part 1 of a three part series: “Driving Value with Corporate Real Estate”, taking a look at various methods and strategies to align Corporate Real Estate with your overall business objectives for better operating efficiencies and financial performance.
Occupancy Cost Reduction in a Down Market
Real Estate is typically the second or third largest expenditure for most companies. In the most recent recessionary economic cycle, the need to reduce operating costs caused many companies to look beyond labor costs and take a closer look at their real estate for occupancy cost reduction to improve the bottom line and in some cases as a matter of survival.
For very large companies with a Corporate Real Estate Department and experienced Corporate Real Estate Managers, the expertise to implement an aggressive occupancy cost reduction initiative exists and once a plan is formulated and approved by senior management, it is simply a matter of having the right real estate service providers to assist in executing the plan.
However, for smaller companies without experienced real estate staff, the role of corporate real estate management often falls on a senior executive who has other primary responsibilities and may not be terribly experienced in this endeavor.
Right-Sizing your Facilities
The most effective way to reduce real estate costs is obviously to eliminate space and reduce your obligations whether leased or owned. This can be challenging with the long term nature of real estate leases and the relative illiquidity of owned real estate, particularly in recessionary market conditions. However, there are proven methods to achieve this objective:
- Dispose of Surplus Space: Getting rid of extra space or under-utilized assets can take time and be challenging particularly in a soft market. However, a realistic and well executed sublease and disposition program can make a significant impact on the firm’s overall financial performance.
- Close Non-Profitable Locations: Evaluate the bottom line of branch locations or non-core business units. Are these locations capable of producing an acceptable R.O.I. While this may be a difficult decision, you are not only eliminating labor costs but also ultimately real estate expenditures.
- Enhance Space Utilization: Looking for ways to improve or enhance the efficiency of your office space and facilities through re-design and alternative work-place strategies can often can achieve significant results.
- Consolidate Operations: The consolidation or co-location of branch offices, business units or suitable operating functions can not only eliminate staff redundancy, but also eliminate redundant support spaces in various facilities. Can certain back office functions be relocated to less costly space or locations?
Your real estate services provider should be capable of formulating and implementing an effective space disposition program using various strategies depending on your particular situation and objectives. Even in softer market conditions, with realistic expectations, proper asset pricing and pro-active measures, real financial benefits can be realized relatively quickly.
In part 2 of this series, I will discuss taking advantages of opportunities that exist as a result of today’s market conditions.