Apr 6, 2015 8:47:00 AM

Commercial Real Estate Portfolio Consolidation Strategies

By Don Catalano

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Commercial Real Estate Portfolio ReductionOver the years, many companies grow a large portfolio of commercial real estate properties. Some are owned, some leased and some are big while others are small. Your portfolio could include office, retail and industrial sites in large and small markets. While a certain degree of diversity in CRE is to be expected even in a mid-sized company, there's a good chance that you have too many sites and that one or two (or more) can be easily consolidated. Here are some factors to look for as you review your company's portfolio for consolidation.

Unused Spaces

This might seem obvious, but if your company has a large and geographically diverse portfolio of commercial real estate spaces, it's entirely possible that an unused one could still be on your books. While you might not forget about your New York office, it's entirely possible that you could forget that a small part of the space in your Los Angeles warehouse is on a separate lease that you can let go now that you aren't using it.

Geographically Overlapping Spaces

Another source of consolidation can be to look for spaces that are extremely close together -- such as in the same city or neighborhood. Frequently, the business you are doing in one of those spaces can be distributed amongst your other nearby locations. If it can't be, you may be able to achieve greater economies of scale by consolidating multiple spaces into a single one.

Markets in Flux

As your company reviews its commercial real estate strategy, it might want to look carefully at locations in areas that are in a state of change. Some will be getting better while others are likely to deteriorate. Unless you need to be in those borderline areas, they could be ripe for consolidation, letting you focus on now more desirable urban locations and suburban locations that offer a Millennial-friendly live-work-play component.

Underutilized and Inefficient Offices

We opened this article with the lowest hanging fruit of your portfolio -- empty spaces. However, when you start to stack rank your commercial real estate on metrics ranging from employees and sales per square foot to cost metrics like energy consumption or overall occupancy cost, you get a fast read on which locations are offering the greatest returns on your expenditures. Those that end up on the bottom of the list should be targeted for consolidation.

Consolidation Strategies

Typically, cleaning up a commercial real estate portfolio is a process that takes years. Waiting for leases to expire, finding new space to expand existing locations and selling unused and underutilized locations are all time-consuming processes. However, the sooner you start, the sooner you will finish. Here are some ways to more speed up your consolidation.

  • Buyout leases when possible. While a buyout may cost a lump sum up front and could cost the same, on a net present value basis, as paying your lease, you will still get out of the ancillary costs of having an additional location.

  • Sale-leaseback out of owned real estate. If you have borderline properties that you own, consider doing a sale-leaseback. This will allow you to turn a commercial real estate asset that may or may not have long-term value into cash for reinvestment. It also leaves the owner with the risk of vacancy.

  • Consolidate first where expansion is easy. The ability to quickly expand your location in Oakland, CA to absorb additional staff makes it simpler to shut down your San Francisco and Palo Alto offices since you won't have to go through a site selection process.

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Topics: CRE portfolio, CRE portfolio consolidation, CRE Strategy, commercial real estate, CRE

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Don Catalano

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