Occupancy cost might seem like a relatively simple metric. If you add up what your company spends on its real estate portfolio, you have your total occupancy cost, right? However, as with any omnibus number, the total tends to hide important details. Digging deeper into your occupancy cost can help you to uncover savings. Here are four ways that you can get started.
1. Calculate the Cost of Empty Space
A 3,000 square foot space with $40 in rent and $18 in CAM charges costs $58 per square foot and has a total occupancy cost of $174,000 per year. Calculating that is a matter of simple multiplication.
However, 3,000 square foot spaces aren't all created equal. If you have two, both of which are built out to hold 25 people, and one holds only 17 people because you recently eliminated positions, that latter space is more expensive.
Both cost $6,960 per work space ($174,000 divided by 25). The space with the vacancy, though, has $55,680 worth of wasted space. Once you do this analysis across your entire portfolio, you can identify where your real estate dollars are being wasted and work towards right sizing those spaces and your costs.
2. Manage Portfolio Management Expenditures
Every space in your portfolio consumes time, effort and money to manage. At a minimum, someone needs to track lease dates, pay the rent and manage the relationship with the landlord. Beyond the direct occupancy cost, additional spaces need additional copiers, coffee machines, office staff, and the like. By reducing your total number of locations, you can eliminate redundancy and, with it, the costs that might not be immediately noticeable on your real estate budget.
3. Analyze Build Out Costs
When you lease a new space, it's common to build it out to meet your company's standards. However, it's also wise to compare what you are spending to the norms in your area. It is not uncommon for companies to unintentionally spend multiples of the are's norm. If you need a $200 per square foot space in a market where build outs are typically between $70 and $90, it could still be a wise choice. Any money that you spend on unnecessary construction without a good reason could turn out to be your largest hidden occupancy cost of all.
4. Investigate Average Lease Lengths
Finally, if your company is signing leases that are too short, you are creating a hidden cost by trading uncertainty for money. In a landlord's mind, a longer lease is better because it gives him more time to amortize the cost of leasing it out. With this in mind, most of them will offer a lower lease rate in exchange for a longer term lease.
This doesn't mean that you should always sign long leases, though, since paying for empty space can be expensive. Instead, it means that you should strategically analyze which of your spaces are likely to be needed for the long term, and focus on lengthening those leases.
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