Shedding Excess Space

by CoyDavidson on June 19, 2010

The Challenges of Space Disposition

The most recent recessionary cycle has left many companies with excess office space, under-utilized real estate assets and the need to minimize occupancy costs to improve financial performance. During challenging economic periods, real estate is often an area company’s look to trim operating costs. However, real estate by nature is a long-term commitment whether owned or leased and disposition of excess space or real estate assets can be challenging.

An effective disposition strategy must:

  • Establish clear objectives
  • Gain consensus among decision-makers
  • Be based on an comprehensive Marketing Plan
  • Assemble the proper team to execute
  • Quantify and evaluate all decisions

Establish Clear Objectives

For companies with excess space, the first step is determining the best course of action to produce the most favorable operational and economic result. All appropriate vehicles must be explored sale, sublease, buyout, or renegotiate, etc. and the ramifications of each viable option evaluated from both a financial and operational perspective.

Disposition or real estate entails much more than just bringing the space or property to market and should be viewed as a business project rather than a real estate project. Dispositions are driven by operational and financial objectives that can have a significant impact on your enterprise.

Prior to execution of any disposition an occupancy or real estate strategy should be in place that maximizes the benefit of the disposition going forward.

Consensus among Stakeholders

In addition to market conditions, many times one of the biggest disposition challenges is internal consensus among stakeholders. While senior managment might all agree action is needed, what a successful end result looks like is more likely to garner a difference of opinion. A meeting of the minds among decision makers on the operational and financial benefits of any contemplated disposition will improve the chances of a successful initiative.

Establishing a consensus as to what is the most favorable or likely outcome is critical. Carefully detailing the disposition process, market conditions and likely scenarios to stakeholders is key. Failure to establish a consensus among senior management regarding expectations can result in a poor decision or losing a deal because approvals cannot be reached quickly.

The Marketing Plan

The marketing plan and its execution is the core of the disposition process. The plan should be driven by a clear and concise disposition strategy so that the ultimate outcome supports business objectives.

An effective disposition plan will:

  • Thoroughly evaluate the property
  • Define market conditions
  • Identify likely purchase or sublease candidates
  • Establish the property’s competitive position in the marketplace

Assembling the Proper Team

The marketing plan serves as the guideline for assembling the appropriate brokerage team members with the specific expertise, market knowledge and experience to execute the plan. Team members should include professionals with a track record in the appropriate product type and/or geographic market.

The marketing plan should include detailed action items, specific responsibilities and a reporting platform to provide accountability and regular progress updates.

Pulling the Trigger

Decision making regarding dispositions can be difficult in a down market. Market conditions may not cooperate in terms of delivering a disposition option in terms of a buyer, sub-tenant or at the expected economics or time frame. Analytical models need to be in place to evaluate the impact financially and operationally of any proposed transaction or disposition decision. Understanding shifts in market conditions as well as financial and operational consequences are critical to making the best decisions and provide the ability to react in a timely manner to opportunities.

How We Can Help

Space disposition is not a corporate tenant’s core business. The effective disposition of excess real estate requires clear objectives, a comprehensive approach and proven real estate partner to assist in implementation. A well executed disposition and real estate strategy going forward can make a significant contribution to your company’s bottom line and accelerate your overall real estate performance.

  • Is this something you believe can successfully be outsourced? By this I mean the creation of a contingency plan for disposition of space.

    Would you mind commenting on the pros/cons of creating this plan in house versus outsourcing this to, say, a consultant?

  • CoyDavidson

    It really should be a collaborative effort between the corporate real estate department and the real estate service provider. Many Corporate RE departments have the expertise to develop the contingency plan but ultimately in most cases need the CRE service provider to execute the disposition

    However, a collaborative effort is more effective because the CRE service provider should be providing the critical market data to the Corp RE dept and Senior Management in developing the disposition plan.

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