January 11th, 2013, By Don Catalano
A new year brings new challenges, new responsibilities and new opportunities. As you review your company’s real estate portfolio, there are three questions that you need to answer to maximize your return on the capital you have allocated to your corporate real estate.
Like most aspect of business, corporate real estate is changing more quickly than ever. The spaces you need to occupy five or ten years from now will probably be different from what you need today. Considering the increases we’ve seen in employees working remotely.
Locking in spaces with long-term leases is an obsolete strategy for many businesses. Long leases give your landlord a great deal of protection, but leave you holding the bag if you need to leave the space. A much better strategy is to sign a shorter-term lease of no more than five years but demand that it include liberal options to renew. For example, if you could sign a lease with a five year term and four five year options, you’d have the ability to stay for 25 years, but be able to leave in five.
When you negotiate your options, pay careful attention to how the rent gets determined when you execute your option. Leases that have fixed increases at option execution are much more tenant-friendly than leases that reset to fair market value or 95 percent of FMV. Having a fixed increase insulates you from escalating rents while also letting you renegotiate from a position of strength if the market is weak and rents fall.
For your leases that are expiring this year, now is the time to start determining which spaces are worth renewing and which are not. For many spaces, the performance of the underlying business units that they occupy will determine whether they stay or go. However, looking at real estate metrics can also help you determine when you should be moving to different space in the same market.
Whether you do it in Excel or you use real estate portfolio optimization software, there are a number of metrics that you can use to make space determinations. Looking at productivity per square foot can help you identify which spaces are too big or too small. Production by dollar of rent helps you understand how wisely your money is being spent, and looking at lease comparables in your market helps you determine if you’re getting a good deal.
In addition to minimizing your rent, you also have the ability to control some of your other occupancy expenses. As a part of the portfolio analysis, make sure that you pay attention to expenses. Looking at your operating expenses per square foot for every site can help you to identify inefficient spaces. Some expenses are going to be high because of market factors, but you can norm those out. Try to focus on sites where expenses that you control are high and work with your team to control them. You might need to work with your landlord to make some upgrades for energy efficiency, or you might need to change how you utilize the space. Make sure to compare your CAMs with CAMs at comparable buildings in the area, as well. Sometimes moving is the best way to save money.
Answering these questions will get 2013 off to a great start. You can squeeze more productivity from your company’s corporate real estate portfolio.