Nov 8, 2013 1:13:00 PM

CRE Portfolio Management: What Am I Risking by Being Flexible?

By Michael Sweeney


Real estate asset management is a sensitive balancing act. If you choose a portfolio that is highly stable, it could be less expensive and easier to manage, but difficult to adapt to your company's changing needs. On the other hand, structuring your portfolio for maximum flexibility with short-term leases and multiple smaller, locations lets you shrink or expand and easily adapt to the fluctuations of business. However, this strategy costs more money and time on a per-square foot basis. Flexible portfolios may be rewarding at times, but they aren't panaceas and carry some risks.


Short Leases

Signing short leases lets you quickly leave a space if it doesn't fit your needs. However, it also leaves you at the landlord's mercy when it comes time to renew. While options can help to mitigate this risk, if you end up with an option that is set to "fair market rent" rather one that has a fixed increase written in, you could end up facing a significant rent increase when it comes time to renew. Of course, this is more likely to happen with good spaces than with borderline ones. 

The flexibility of a short lease frequently costs you more in your initial rent. After all, landlords are more willing to cap base rents for a desirable long term lease than a short term lease. Nonetheless, from a real estate asset management and cost management perspective, paying 10 or 15% per year extra over a three-year period is still better than paying rent for a vacant space for a year or two. 


Why Short Leases Are Tenant-Friendly in CRE


Small Spaces in Multiple Locations

Having lots of smaller spaces in many places allows you to conduct business just about anywhere it needs to be without having to commit to few locations. This is great for customer service, and since you can easily add or subtract a space without an outsized impact on your overall budget, it's great for your flexibility. On the other hand, it's also a major stressor on your organization. Managing multiple far-flung locations is challenging for your executive team, and adds additional complexity for your real estate asset management team.

For businesses with stakeholders in numerous markets, it may be beneficial to have a flexible portfolio with a number of locations. 

Minimal Capital Expenditures

Frequently, when a business chooses a flexibility-based corporate real estate strategy, it ends up making few, if any major capital expenditures in spaces. Typically, leased spaces get used when needed with as much rented furniture and equipment as possible. This leaves your business open to the whim of the people from who you rent your furniture and equipment. It can also leave you without space that is perfectly suited to your needs. On the other hand, you also benefit from keeping your company's capital available for other purposes. Renting your FF&E also lets you upgrade freely with the market, keeping you more current. Minimally built-out space is also frequently flexible space, giving you the ability to change your space to suit your business' shifting needs without moving.


The Right Real Estate Asset Management and Deployment Strategy

While flexible space has some real risks, for companies that have uncertain futures, the rewards outweigh them. On the other hand, more mature organizations with clearer mid- and long-term growth paths can reap benefits from committing to space on a long-term basis. Ultimately, there isn't on right real estate asset management and space acquisition strategy. There's only the right strategy for your organization.


Other great Commercial Real Estate articles:

3 Must-Haves for Today's Commercial Office Space

Signs It's Time for a New Commercial Real Estate Broker

Should You Sign a Short or Long Corporate Lease?


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Topics: Commercial Real Estate Portfolio

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Michael Sweeney