Commercial Real Estate Optimization: Taking an Operational Perspective

Posted: 10/30/2019 - 03:01
Commercial Real Estate Optimization: Taking an Operational Perspective
Corporate real estate is often one of the largest single categories of spend relative to a company’s revenue and budget, but many organizations view it as a cost to be managed and mitigated rather than a strategic opportunity to align the footprint with business growth and operational expectations and to increase the overall enterprise value of the business. This means that commercial real estate strategy is one of the most important, yet often underutilized levers of a successful business operation. For a company looking to move toward becoming “best in class” in real estate spend, investing the time and energy to assess and develop a thoughtful real estate strategy can translate to a significant opportunity for the company to drive value and support long-term growth.  
In general, there are four common mistakes that organizations make relating to real estate spend. Luckily, there are some best practices for overcoming these mistakes, which many organizations can implement: 
1.) Underestimating Real Estate Responsibility: A common and significant mistake that organizations make relative to the real estate spend category is a lack of focus. For many companies, the real estate function is overseen by a single individual who has additional responsibilities to manage as well. Corporate real estate is typically of a size and complexity that it is difficult for any single individual to have the time, resources, or capability to develop a holistic perspective of the real estate footprint and business needs. In addition, businesses will often place responsibility for real estate under the finance, legal or procurement functions.  This can result in a fundamental misalignment of ownership and responsibility for the real estate function. While it is important for business unit stakeholders to have input, buy-in and some “ownership” of their own requirements, a best-in-class approach to managing corporate real estate ensures that all real estate decisions and management integrates with the overall business goals to create long-term value. Companies that are most effective in managing this approach generally have a set cadence that is used on a consistent basis (depending on the size of the footprint) to identify synergies and opportunities across the real estate footprint and to align real estate needs with other business functions and priorities.  
2.) Misunderstanding the Total Cost of Occupancy: Another key misstep relating to real estate spend is the lack of holistically analyzing the total cost of occupancy. Companies often separate the cost of rent from the various components of facility management spend (e.g., security, janitorial supplies, food services, maintenance).  In doing so, companies will focus on acquiring these other services as a part of a separate, procurement-driven function. As a result, the company can miss out on potential opportunities to drive economies of scale across the operational footprint that could result from considering all facility management-related elements as part of the bigger real estate picture. Additionally, many companies overlook other significant factors relating to real estate, such as furniture and facility equipment, utilities, IT/network infrastructure, transportation/commuting costs and landlord pass-through expenses.  All of these factors can significantly drive up the total cost of occupancy and effectively wipe away any benefits a company might expect to receive from what was considered to be a “cost-effective” lease. When setting budgets and reviewing expenditures, companies should provide and review all of this data with their finance, operations and real estate teams. This will ensure that the total cost of occupancy is fully understood and will also ensure companies account for more than just the lease cost of the facility when they think about their real estate spend. 
3.) Inefficiency in Office Utilization: Perhaps the easiest mistake to correct when attempting to mitigate inefficiency in the real estate category is the assessment and subsequent optimization of office space utilization. Mitigating waste in office space is a simple lever that companies can employ by benchmarking their facilities against industry norms and identifying opportunities to reduce their footprint (in line with internal business needs and priorities). Upon embarking on a space utilization assessment, companies may find there are several facilities where they are significantly above market square footage per employee benchmarks. In these cases, companies may have an opportunity to consolidate facilities or renegotiate the amount of space leased, either of which can significantly reduce costs. Additionally, for companies with highly mobile workforces and relatively low “badge in” rates, it can be worth looking into smaller, shared and collaborative offices that employees can use when needed, allowing the company to minimize space and save costs. For any real estate utilization exercise, data is key, and real estate decision makers should take the time and effort to conduct detailed analysis and to communicate identified opportunities with all decision makers or key stakeholders.  
4.) Metrics and Operational Misalignment: As noted above, misalignment between real estate and business operations goals and objectives can hinder the long-term success of an organization. By setting a baseline set of metrics for a company’s real estate portfolio, the company has an opportunity to assess real estate and facilities as a part of business performance. For example, after defining and capturing key real estate and operational metrics, a manufacturing company can measure the throughput and output of product at an individual location against their projected capacity to determine the efficiency of that location, and (if necessary) can determine how to optimize production and distribution across their footprint. In the retail space, companies can compare metrics from store to store to see which may be generating the most sales per square foot, and where performance is lagging. As companies become more comfortable and advanced in their ability to incorporate real estate as a strategic enabler, these metrics can be expanded to include additional cost drivers such as transportation and logistics spend, maintenance and equipment costs, or even labor costs by location. These additional points of analysis can allow decision makers to develop long-term strategies that align with the broader goals and direction of their respective organizations. While this effort does require an investment of time, this approach provides an opportunity for organizations to build a long-term location strategy to enable business growth.  
When companies begin to look at real estate through an operational “lens” they have an opportunity to optimize performance, build resiliency across the organization, both as the result of the development of a strategy that covers all areas of the business. Addressing some of the typical shortcomings most companies experience in this area, the real estate function can become a conduit for increased communication across the organization. This generally can only occur if executives invest time and resources to support the analysis and identification of strategic opportunities across the real estate category. However, those executives that consider the real estate function as a critical business enabler will likely find they have the opportunity to gain a competitive edge in the market and be better positioned for long term success.  

About The Author

Nick Snoad's picture

Nick Snoad is an Associate at Pace Harmon, a business transformation and outsourcing advisory services firm providing guidance on complex transactions, process and operational optimization and provider governance.