How to Reduce Occupancy Costs

by CoyDavidson on September 24, 2009

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Controlling occupancy cost begins with the understanding of the “Three L’s”

Beyond occasionally reviewing market surveys, lease agreements and floor plans, senior managers in many companies rarely concern themselves with all the nuances of corporate real estate. Executives may not perceive that they can have significant impact on their cost structure by aggressively managing their corporate real estate performance. They may also think, even as they strive to enhance revenues and control expenses in other aspects of the business, that occupancy costs are strictly a function of market rental values and whether or not you have an appropriate volume of space for your headcount.

The impact of rising occupancy costs on a company’s earnings, shareholder value, and overall performance can be significant. Reducing these costs, on the other hand, can increase a company’s profitability because every dollar saved drops straight to the bottom line.

Aggressively managing occupancy costs is challenging for some organizations. Many times real estate and facilities decisions are fragmented by organizational boundaries, real estate is purely and administrative function performed by managers with other primary responsibilities or if a real estate department exists, it may be under resourced. The effort to manage occupancy costs has never been timelier and in the current economy that has clearly shifted in the tenant’s favor, significant opportunities to minimize real estate costs exist.

Occupancy Cost Drivers

Three primary factors drive occupancy costs: location, leasing & layout. Effective controlling occupancy costs for either a single location or entire portfolio of operating units begins with the understanding of these cost drivers and the ability to manage the closely related interplay among these factors.

  • Location: identifying and selecting operationally viable & cost effective business locations. Location drives costs for both labor and rental costs and the Landlord will lease his space at what the maximum the market will bear. In the current economic cycle more opportunities exist with increasing vacancy rates.
  • Leasing: Structuring transactions that compliment your corporate objectives and negotiating equitable financial terms. Landlords in order to retain and attract quality tenants are offering more aggressive terms and concession packages. Great deals are not just simply found but are structured with an effective negotiation platform and strategy.
  • Layout: Maintain cost control over the design and construction process. The efficiency of your office space and the cost to build it out is the third major contributor to your occupancy costs. Efficient design, space standards and construction management can yield significant cost savings.

As it appears we have bottomed out of the current economic recession, it will likely take some time for real estate markets to recover particularly in the office markets where significant job growth is not expected for another 12-18 months. The window now exists for office space users to take advantage of the opportunity to achieve cost savings that will drop straight to the bottom line.

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