Real estate asset management for corporations is no different from other types of resource management. If mismanaged, business goals are at risk for failure. A company's real estate portfolio should be actively managed throughout the holding period and costs need to be completely accounted for. Many companies fail to do this, letting leases and owned properties become drags on their bottom lines. While there are many reasons that this can happen, three are particularly salient:
Ignoring True Costs
The cost of real estate assets is usually much higher than what appears on a lease or on a purchase agreement. At the most basic level, most properties have operating costs that have to be paid in addition to rent or payments on a mortgage for an owned asset. However, occupying real estate also leaves a company open to significant capital expenditures over time. Both leased space and owned space needs to be periodically overhauled to meet a business' changing needs. While a business can always abandon an unsuitable leased space, with owned space the disposition process can add additional costs.
Real estate asset management frequently fails to take into account the additional costs that come from having more locations. Each location requires management to oversee it, deliveries of corporate materials, access to telecommunications and data networking resources and other costs that get spread out across the corporate operating statement. While it's possible to have too many people in any one space, a more diverse portfolio frequently causes a company to lose economies of scale.
The Risk of Auto-Pilot
Once a company finds space, the natural tendency is to leave it alone as long as there are no serious problems with it. The cost of selecting, acquiring and starting up a space can be staggering, as is the cost of vacating and replacing a space. Because of this, real estate asset management teams frequently start from the assumption that every real estate asset should stay as it is.
This inertia can be expensive. While some locations, like retail stores, can be hard to move without disrupting operations, others could be optimized through relocation or consolidation. Without regularly testing your company's real estate asset management strategy against alternatives, you could end up leaving money on the table. Even given the cost of moving, there may be a better deal available.
In Edina, Minnesota, a Walgreens and a CVS drugstore sit right next to each other on the same block. Sometimes, a me-too location or real estate strategy can be a suitable one. At other times, companies end up cannibalizing each other’s sales to a point where no one is profitable. Choosing office locations based on where competitors are sited is frequently a "safe" choice, but it fails to take into account the unique nature of any given company.
Anticipating and Solving The Problem
Companies with successful real estate asset management strategies take very little for granted. When adding space to their portfolios, they do extensive financial modeling that looks at every cost in both the near- and long-term. At the same time, they conduct careful internal needs analyses and detailed site surveys to find locations that are truly right for them.
Finally, while occupying spaces, they regularly analyze and benchmark those real estate assets against the market and against each other to find out where to tweak their portfolios for better operational and financial performance. In other words, a little bit of investment in initial analysis and ongoing real estate asset management can reap significant rewards and high ROI.
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