Corporate Real Estate Strategy - 101

Then: "Okay.. so, let's reduce them! Simple, isn't it?"

Now: "How much space? Which location? What type of office? What's the best route- lease or buy? What kind of workspace strategy? Can we "renegotiate or restructure" ? What are the "other" costs? What is the tax impact? How "Green" is the space? How can we leverage emerging technology (like block-chain, cloud and advanced analytics) to our advantage? What's the space utilization and how to optimize it? How to improve telecommute & connectivity? How to make workplaces engaging?... "

And so the list goes on.. 

Corporate Real Estate executives no more look at their portfolio from a mere cost-cutting perspective - they realize the importance of an integrated approach as their portfolio builds on and the complexities associated in managing it.

1. Get together - The first step, hence, in formulating a working and sustainable RE strategy is - "Get in a war room with all your warriors" viz. the management executives, Finance, HR, Operations et al.

2. Look where you stand – You may not go forward until you know where you stand currently. Take inputs from everyone, listen to the problems and ideas from their perspective - find current utilization, anticipated growth, employees' preference, transport data, current occupancy costs and so on. Discover opportunities and partner with an established Real Estate Consulting firm to formulate strategy to tackle all/most of these problems. In all of this, do not forget to think from your most important customer’s perspective – your own employees, who buy a firm's idea and vision and provide their blood and sweat to deliver them for you! 

3. Uncover opportunities - Use market and competition bench-marking studies to figure out where you currently stand. Technology & experts can help at this stage to uncover anomalies in occupancy costs across your portfolio (another reason why you should switch from desktop/excel based portfolio analysis to a centralized view on integrated software systems that talk to your firm's ERP systems). If you are still storing those old leases in file cabinets- go digital right now and save some space and manage your portfolio digitally rightaway!

4. Looking beyond "transactions" - Though the tactical aspects of your real estate activities would never cease to be important, there is a time when every firm realizes the ad-hoc nature of their various leases/agreements spread across geographies and the need for greater transparency, insights and actionable strategy for the entire "portfolio". It is no more about just lease renewals, acquisitions or dispositions - it is beyond that. It is about a direct impact on the growth of business, time and work-efficiency, employee acquisition, engagement and retention, performance edge over competition, compliance with the ever changing laws et al.

5. Lease or Buy- this is not a debatable question. It is a driven by what kind of business or situation a firm is in. Knowing to ask the right questions to yourself will automatically, most of the times, clarify which way to go.

Ask yourselves,

1. How new is the business and what does it prospects and viability look like? Sometimes, business start with enough cash/funding but with more uncertainty of the viability - in this case, purchasing a real estate asset might make more sense so that it can be sold off in due course if the business doesn't take off (and balance your losses). Till such time one can find a buyer, you can of course lease it out to others.

However, often start-ups struggle with initial cash-flows, capital or can make do of it elsewhere. In this scenario, leasing is an obvious choice.

Even for established firms, it can be a dizzying decision - let's look in deeper detail to find out what suits best to who?

When you purchase a real estate asset, you can depreciate some of the equipment and earn deductions from your taxable income, while associated mortgage becomes a liability in your balance sheet. On the other hand, lease costs can reduce the taxable income as they pass off as "expenses", without impacting your balance sheet.

While the upfront costs in purchasing a property traditionally involve high down-payments and other capital investments, which can be reduced through creative financing models, zero-downpayment financing options (difficult for early stage start-ups to obtain though) and so on.. Then there is the problem of finding the right property (less properties on sale vs lease), at the right price. Involving the tax experts in making this decision becomes imperative to assess the tax impact of a "lease vs buy" decision.

More than the financial statements and tax impact, it is often the nature of business which drives this decision - if you are into a business where you must deliver services from a physical location to clients (think of fitness, medical etc.), making a purchase decision seems the way forward.

However, if you are looking for more mobility depending on your business needs, leasing seems better (notwithstanding initial lease lock-in periods).

Earlier, leasing was considered as a much better alternative than purchase due to practice of "gross leases" where you pay an "all-in" rental without paying any other operational expenses that the owner must bear. Now, in most of the markets, such leases are replaced by the "Triple Net" leases - where a tenant pays everything - base rent, maintenance, taxes, insurance and so on and is exposed to similar responsibilities and risks as an owner. So, the lines are increasingly blurring between these two models in terms of exposure to cost increases and responsibility.

In my experience, after running various financial models for big or small Corporate - purchase and leasing costs break even after about 7-8 years of occupancy. Thereon, the savings become a factor of the timeframe, area occupied, market dynamics on rentals etc. On an average, after the break even point, in about 15-20 years, a firm can save hundreds of millions of dollars when they own the asset compared to lease.

Overall, this decision is a choice which your business has already made for you - you may just consult your broking firm, tax lawyers and other experts just to ascertain if what you have realized makes sense or not.

Moving pieces..

Technology - Such real estate initiatives like portfolio optimization, etc. work well when you have the "data" - difficult to track using desktop based methods. Hence, use of advanced analytics and integrated systems that communicate with the other larger systems of your firm - are the way forward, as they are less error-prone, give a holistic view of the portfolio. Use motion sensors on lights in lightly used portions of space, or implement a physical turn-off light policy, manage temperature settings automatically and so on...

Think different– it is time for CREs to think and implement telecommute, flexible and mobile, shared work-spaces.

Use the right people - using the right real estate consultants can help you find spaces which are not “officially” in the market, low on operating costs, priced well.

Check Occupancy levels: Often, companies establish a standard 85% occupancy rate, i.e. keeping 15% of their space vacant for potential growth. Each firm needs to:

-         Find utilization

-        Explore if under-utilized spaces can be divided into independent areas

-        find out the remaining term left in leases (to explore if it's worthwhile to sub-lease)

-         Sublease – figure out which space to sub-lease, what does the agreement say? Can you use the one where you are much below the market ? Are there any profit-sharing clauses?

Renegotiate /Restructure

Know the market – rents, occupancy/vacancies, building or micro-market issues, supply/construction pipelines and find out what you can trade with your landlord to land a win-win deal (rent-free, longer term, lower starting rent and higher escalations or higher starting rent and lower escalations? )

While you may have an option to renew – just because you are long-term tenant, doesn’t mean u are getting a great deal!

Landlords are the most business savvy and able negotiators. Tenants need to up their game to get a good deal out of them.

Look at last dates options can be served (renewal, expansion, contraction, termination etc.) and start negotiating much earlier – even if the talks fail, you have the option to fall back on to.

Change is difficult – seen as disruptive, expensive but many times needed – research the market and find out your options. Most leases have several room for negotiations (now or future) – use an expert to uncover these and leverage them to your advantage! They bring market info, inside info, negotiation skills and bind various players together to structure a deal together. Use attorneys (experts along with brokers) to tailor your leases as per standards and save you from fine -prints easily missed otherwise.