Nov 15, 2013

5 Key Decisions a Occupancy Cost Analysis Can Help You Make

By Don Catalano


occupancy costWith the right supporting data, an occupancy cost analysis is one of the most powerful decision making tools in corporate real estate. Whether your company is trying to determine which sites to keep, how to size spaces in the future, or whether a site needs additional capital expenditure, analyzing occupancy costs is a key part of the calculus. Comparing a site's performance both to other sites in your company's portfolio as well as to competing sites in the market can help you make these five key decisions:

1. Consolidating vs. Retaining

Doing an occupancy cost analysis to benchmark your company's sites against each other will help you determine which sites to consolidate together and which ones to retain. When you have sites that achieve relatively low performance metrics, like sales per square foot or employee density per square foot, they could be candidates for consolidation, especially if you have nearby spaces that have room to accommodate more business.

2. Shrinking vs. Growing

When your occupancy cost analysis shows a site is performing well above average, it could be a sign that it's too undersized for your needs. While this can be a positive in the short term, in the long run, a too-small space can lead to lower productivity as workers trip over each other. In a retail setting, small space could limit sales if there isn't enough space to make customers comfortable or carry adequate inventory to meet demand.


3. Relocating vs. Staying

Benchmarking each site's occupancy cost against the market average can tell you how competitive your lease is with competing sites. If your expenses are at or below the market average, it could indicate that staying is the most financially sound choice. On the other hand, if you're paying more than you'd pay in other spaces, you might have an opportunity to negotiate with your landlord to bring occupancy costs in-line with market norms. If he won't work with you, your market intelligence will help make a good decision about relocation options.The key to a relocation decision is having a list of available market comps, or locations that meet the criteria for your business needs and have lower costs.

4. Investing vs. Retaining

When your business has a mixture of types, qualities and vintages of space, you can also use occupancy cost analysis to determine the economic suitability of making additional capital expenditures in existing spaces. For instances, if you see that retail spaces with upgraded interior appointments generate higher sales per square foot, you may choose to move forward with renovations of stores that are built to an older standard. If spaces that are built with high-efficiency fixtures and equipment achieve a significantly lower operating cost, it could also indicate that capital expenditures would produce positive ROI at other spaces as well.

5. Owning vs. Renting

Once you've used occupancy cost and performance analysis to identify which of your sites are best performing, that data can also be applied to an own vs. rent analysis, assuming that either is an option. Given triple net lease structures that leave you responsible for most of the expenses of ownership, the near-term economics of owning and renting can be very similar, other than the cost difference between rent payments and mortgage payments. If a site has a good operating history, is projected to serve business needs for the mid and long-term future, and costs less to purchase than rent, owning could be the best choice.Reducing occupancy costs throughout your corporate real estate portfolio doesn't have to be rocket science.


Here are a few other articles you might enjoy:

5 Ways to Optimize Your CRE Portfolio

Making the Lease vs. Purchase Decision

Commercial Letter of Intent Tips for Tenants


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Don Catalano

Don Catalano