Dec 09, 2013

4 Occupancy Cost Metrics You Should Be Using

By Don Catalano



Since real estate is a company's second or third largest expense line, corporate real estate optimization is crucial to controlling costs. However, the basic metric that many CFOs and real estate directors consider - cost per square foot - is frequently the least useful metric. Instead, looking at occupancy costs relative to what the space actually does for the business or what it represents in a large context can be more telling. Here are four metrics that you should be using to understand your company's portfolio:

1. Occupancy Cost per Square or Cubic Foot

Frequently, all that a cost per foot will tell you is that some markets and some types of buildings are more expensive than others. Office space in New York City costs more than office space in New Braunfels, Texas. You're also going to pay more rent per square foot for a retail location in Kansas City than you would for a factory there. However, the metric can be useful in two instances:

1.  It allows you to quickly compare spaces that are similar. For example, if your operations are spread between three different light industrial facilities in a given submarket, and one occupancy cost is out of line with the other ones, you may focus on replacing that space.

2.  It allows you to identify which locations could be targets for closure if they are not location sensitive. Paying more rent for a retail location on Melrose Avenue in Los Angeles might be justified, but a call center in New York City could probably be replaced with a lower cost center in Sioux Falls. However, for many businesses, the results of this study will confirm what you already know.

Converting occupancy costs to a per cube basis instead of per square foot can also be instructive. While the trend is to move to warehouses with extremely high ceilings, landlords may actually offer lower cube rents in older 24- to 26-foot clear height facilities.

2. Occupancy Cost Per Person

Looking at occupancy cost on a per-headcount basis is instructive when you are trying to determine which non-location sensitive spaces to keep and which to consolidate. If you need a set amount of square footage per employee and it doesn't matter where the office or facility is located, space with $20 gross rent makes more sense than space with $80.

This metric becomes even more useful when you strip it down to its components, discard the cost and focus on square footage per employee. For spaces that are fully occupied, it measures space efficiency, and for spaces with vacancy, it measures usage rates.

3. Occupancy Cost Per Outcome

Also known as the rent to sales ratio, calculating this metric tells you how much you spend in rent for a dollar of sales. For non-retail buildings, you can choose just about any denominator - client inquiries, contracts signed and units produced are all examples. These metrics look at the revenue site of occupancy cost by telling you what your rent expenditures actually produce. They can also norm out for regional differences since higher-rent locations should generate better results.

4. Occupancy Cost Per Competition

Finally, if your business isn't looking at its occupancy cost relative to what it would be in a competing building, you could be leaving money on the table. Knowing if better deals are available in similar, nearby buildings can help you to negotiate better lease rates when your lease comes up for renewal. Unless you subscribe to a database of lease information, your corporate real estate broker is usually a good source for this kind of information.


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Here are a few other articles to check out:

What Factors into My Occupancy Costs?

Costly Mistakes to Avoid When Leasing Commercial Space

Top 5 Commercial Occupancy Cost Metrics You Should Know


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Don Catalano

Don Catalano