April 10th, 2014, By Don Catalano
Whether your company is using commercial real estate software or you have a team that analyzes your portfolio with you, you’re probably awash in CRE metrics. Just about every aspect of your company’s corporate real estate holdings can be quantified and calculated, making it challenging to determine which metrics matter and which don’t. Here are four CRE metrics that can help you spot not only which properties are inefficient, but why:
This metric is useful in identifying when you have a space that is not being managed effectively or that has an out of date physical plant. It’s usually best used when comparing sites of similar types and in areas with similar climates and numbers of daylight hours. Within those horizontal cohorts, it can make it easy to spot which locations are good for your company’s environmental footprint and which are having an outsized impact.
As floor plans evolve, companies are able to build spaces that squeeze more people into the same number of square feet. At the same time, changing workforce sizes are leaving many businesses with spaces that are too big. Calculating this ratio for each of your properties can help you see which ones are giving you the maximum density for your rent dollar and which are too big and need to be resized or abandoned for smaller locations.
Industrial properties can be analyzed using similar CRE metrics. However, while you can probably get away with squeezing an extra person into an office, utilization that is too high can make your industrial spaces much less efficient as workers start tripping over each other. As such, there tends to be a harder limit on how much you can optimize your industrial spaces.
CRE metrics that compare occupancy costs to productivity help to strip out other issues and focus on which sites are positively impacting your bottom line. Barring any marketing benefits that might come from a particular retail site (like a loss-leader flagship on Fifth Avenue), locations where the rent represents a relatively high percentage of sales are usually inefficient ones. A good flagship store should have increased sales to match the high rent. On the other hand, an inline store in a regional mall that is past its prime might combine relatively high rent with extremely low sales, making it a prime candidate for closure or relocation to a lower-priced open-air center.
While most CRE metrics focus on a site’s performance relative to your other locations, measuring your locations against the broad market tells you whether or not you’re paying a reasonable rent given current conditions. To compare apples to apples, compare your gross rent including CAMs against the average gross rent in the surrounding market. Locations that are significantly above average are the ones that are most inefficient and the ripest for renegotiation. Especially if you have space in a market with high vacancy or one where spec building is likely to outstrip near- or middle-term demand, you could be in a strong negotiating position even if your lease isn’t up for renewal.