admin / February 27, 2019
Over my many years of consulting with corporate executives, the one question I ask that seems to get the loosest and most unspecific response is, “What do you estimate your Costs of Occupancy are in your current facility(s)?”
It does not matter if I am speaking with a private owner, regional company or national firm, most companies view occupancy costs as not a concern or too insignificant to worry about. The reality is rising costs in a market that is trending upward are more impactful on profits, a company’s earnings and overall performance than they realize. At a minimum an organization should know what is involved with calculating this cost in order to address and possibly lower the costs of occupancy. Reducing these costs can help in increasing a company’s profits and identifying line items that are beyond the real estate or the structure.
There needs to be a lot of thought given to the way your business is operating. Has technological advances in your particular business changed the space needs for office staff, equipment, racking systems and inventory. Can you operate with a smaller foot print? The old school thought that growth will require more floor space needs to be looked at. Focusing on growth and not the cost of growth can be a mistake.
Getting back to basics and make “improving productivity” a goal by possibly consolidating functions, downsizing staff, investing in more efficient equipment and revisit space planning. This can be very challenging in the short term, but a necessity long term.
Location of plants and distribution centers in geographic locations that meet the list of needs required to run efficiently, which may include; key employee residences, central location to service customers, knowledge based tasks which can be done from home or remotely, local City and County fees (taxes, utility costs and surcharges, gross sales receipts, etc.), rail service and facility design, to name a few.
Most companies don’t keep or track the data needed to calculate Occupancy Costs. Most companies find managing occupancy costs a time consuming task they are reluctant to allocate staff to track. Without established methods and structure, executives will not attempt to track these costs, because they also believe there is not much of an impact real estate can make on the bottom line.
Major corporations like GM, AT&T, IBM have come to realize redundant real estate and costs to carry these facilities have major impact on their overhead and profits. Also, they are locating in areas of the country which are business friendly and where costs are competitive.
To manage Occupancy Costs you need to identify the components, determine their importance, develop options if possible and determine what can be changed or not. Buy versus lease analysis needs to be completed, building efficiencies/inefficiencies, renovation costs, disposition and all administrative costs associated with operating space need to be looked at.
Successful companies found this effort to open the door to competitive advantage, businesses transformed brick and mortar into less costly space to occupy, which created more flexible and productive environment for employees as well as satisfied customers.
The following are topics which will help create the outline of items needed to allow a company to begin the process of taking action:
- Occupancy Cost History
- Occupancy Loss History
- Component Cost Analysis, (heating, ventilating, wiring, plumbing, TI’s and safety items, etc)
- Lease Aging Profile, (Future real estate commitments already made)
- Cost Drivers (Ownership, Leasing, Location and Layout).
The following is a chart to help calculate Occupancy Costs:
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