Commercial Space Use: Synergies from Operating Near Customers and Suppliers

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Market demand emerging from a recession awaits economic activity to grow and scale each business.  Market demand emerging from a global pandemic requires a healthy society and safety of public spaces to begin growing economics that scale.  With Q22021 upon us, municipal microeconomics await a path to reopen their economy.

Here are key points to assess how your business plans to re-open its work environment:

• Public health of mass transit or parking services to commute to work;
• Landlord’s efforts to provide public health and touch-free services to common spaces;
• Landlord’s efforts to improve and monitor air quality within the building;
• Leverage cloud services to establish hybrid work environment of on-prem, remote, and flex;
• Carrying cost of space and flexibility to sublet or divest unused space;
• Ability to divest space and convert to digital infrastructure to enable productivity remotely temporarily if economic conditions require it.

The goal is maintain business continuity and worker productivity when unexpected external shocks impact business operations.  Securing a lease or buying workspace should not occur in a production vacuum because it often leads to taking the wrong space at terms unfavorable to the business.  Securing the right space at terms right for the business enables it to thrive. 

Broadband and 5G mobile is enabling people to work from anywhere, even workers that reside in remote locations.  That enables business to operate with less commercial space to maintain productivity.  The real estate committee is composed of stakeholders in the space to be secured (e.g. business unit leaders) and a leader to guide activities of the committee (e.g., COO).

The best way to reach that objective is hire a business analyst to evaluate the need and prepare a detailed report that is submitted to a real estate committee that evaluates and oversees the real estate project.  The BA is trained to identify needs, engineer a solution, and present a report how to achieve the objective.  The BA report includes:

• Location of office with parking or mass transit support;
• Amount of space needed;
• when;
• for how long;
• estimated monthly carrying cost;
• how to sublet or divest unneeded space during the holding period;
• How to divest space if the event of merger or acquisition;
• Layout and floor stacking;
• IT needs;
• Furniture.

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The BA report provides support to the committee about how to proceed to locate, negotiate for, secure, divest space, and transfer to remote operations if needed.  The committee uses the BA report to support their decision-making to sharpen company objectives about future space needs.  Space needs typically translate to refresh existing space, renew, re-cast lease to contract or expand, or relocate.  Planning the project in detail facilitates a prepared response (what to look for and how to secure it) vs. an unprepared reaction that disrupts operations (dealing with a series of events).  Before commencing this project, it’s recommended to interview different real estate service providers and landlords to assess how your objectives can be met; a one-page summary appended by a matrix of choices can make talking points efficient.  If the business will lease or sublease, talk the concept out with a commercial real estate attorney; they’re trained to advise you on protections in the lease and important legal clauses.

All the information above becomes decision support to generate a project charter to search for space.  The real estate committee has established the scope of the project and its completion date.  There are co-project managers; one key member of the real estate committee plus the exclusive real estate services provider (a/k/a tenant rep).  Plan for 3-4 weeks of post move-in support to ensure all staff are settled into their space and can work productively.

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BREG Team’s web page about Corporate Real Estate Services and [educational] slide file at YouTube discusses our approach; find the link in the web page “About Us”.  I recommend at least 24 months lead time to carry out a space change from 3500sf of office space and 7500sf of industrial space.  A minimum of 12 months to plan and secure the space, 12 months to build it, move-in, and settle in; add time for larger space. If a change of the real estate for your business is on your horizon of projects, I encourage you to contact me to talk it out.  BA reports, test-fits of space and transaction modeling have worked well for BREG Team’s clients since the late 1990’s.  Please click “Request A Consultation” link at the base of the “About Us” web page.  Enter “Synergies” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours.  Thanks for reading and listening.###

CPA as Trusted Intermediary for Client’s Space Change

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Users of commercial space need negotiating advantage and a level playing field to perpetuate and/or facilitate their competitive advantage.  Handling space change as a demand-driven commodity often leads to overpaying and gives up legal rights of space use; that can become a material encumbrance on future revenues and operations.  Commoditized space change (e.g. listings, business terms, legal, uses of cash) enters a deal’s lifecycle 2/3 of the way into the transaction.  It enables the landlord [or seller] to benefit well economically and legally over the lease term [or at sale closing].  As space costs rise, a planned space change is more likely to facilitate operating objectives during the occupancy period (e.g. sharp cost, legal flexibility of space use).

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Clients expect their CPA [and CFO] to advise how to keep more of the revenue they make.  Unbeknownst to [client-facing] the firm’s practice partners, the CPA team can be leveraged as trusted intermediary to help evaluate feasibility, prepare for, and complete space change.  The client-facing [practice] partner should offer preliminary due diligence services that includes projections of future space costs, occupancy term per trends in [client] revenue history, plus a budget for space change.  The result is Occupancy Cost Ratio (OCR).  OCR suggests revenue as consistent healthy multiple of space costs; what ratio is in the client’s best economic interests?  What do operating trends suggest the term of the lease to be, limiting the impact of space costs on revenue?  If a property purchase is considered, what size should the land and building be to meet operating and future growth needs?  Should a portion of the building be leased until needed to grow daily operations?

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The CPA team projects a budget for space change, that plans for rent security [or down payment], tenant improvements, and moving costs, leaving room for unexpected nominal items.  Space change costs can be factored into the change year’s P&L to assess its impact and payback term.  Any tenant improvement costs may be depreciable over the lease term.  The CPA team also explains the tax advantages of property ownership when applicable.

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The firm’s business development executive should build a network of savvy commercial tenant reps to partner with when client’s require space change.  BREG’s 7-Point Service partners with CPA’s to process their client’s space change; the project partnership factors Occupancy Cost Ratio.  Click here to learn more.

Economic or Operational Changes Prompt Changes in Space Use

Your company is enduring changes to its economics (good or bad), and/or real estate costs have escalated to be too costly; either are affecting operations. The business is either growing or retracting and margins are flat or thinning too much. Payroll, FF&E, and real estate costs are being reviewed. If change could be required, now is the time to determine how, when, and how much it will cost to implement. This is the best time to take a detailed financial and qualitative review of your business operations for the next 12, 36 and 60 months. Assess the occupancy cost ratio and identify options to accommodate the changes you’re enduring.  Corenet Global makes note of the following that influences how your real estate services provider performs on your company’s behalf (CND, n.d.).  “Corporate Real Estate Services must support the corporation’s business plans and metrics, which are in a constant state of dynamic change. 

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Staffing. If your staffing needs are changing, will you have too much or too little space to seat them? Approx 100sf per person is ample (executives may need a bit more), plus 20-25% for people movement. Lease office space so you reach your occupancy limit at about 2/3 or 3/4 of the way through the term (Smith, 2017, Feb. 27). Leasing too much space and cash flow can be hobbled by an excessive rent payment and under-utilized space, too little space and staffing growth will be limited (Fennie, 2005, Jan). Space issues affecting 20 or more permanent staff are cause to re-evaluate space needs. Your COO should be guided by a space planner about the carpetable space optimal to meet staffing and workflow needs.

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Occupancy Cost Ratio (OCR): Ratio of Real Estate Costs to Revenue.  Your real estate services provider carries out a strategy to position real estate assets to increase productivity while decreasing occupancy costs (CNG, n.d.).  (OCR)The rent to sales (revenue) ratio (a/k/a Occupancy Cost Ratio) measures the impact of the cost of leasing commercial real estate space (Smith, 2015, April 23). Measure with gross space costs in mind (e.g. rent, additional rent, utilities, CAM). Space too small could inhibit production capacity and revenue growth. Space too big could be cutting margins enough to prompt cost cutting. Your COO and CFO should be collaborating to identify the correct amount of space to foster productivity, at a defined OCR.

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Holding Period (Lease or Owned). How are business cycles affecting the holding period for space taken? Holding period is affected by the location needed to operate from, projected annual revenue, staffing costs, and the FF&E needed for production. Ensure your tenant rep and real estate attorney collaborate to negotiable acceptable exit clauses from leased space. Owned property should include space to rent until needed or vacant land to expand the building footprint and height as needed.

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Flexibility of Space. The three items above will affect how flexible your space should be. The office landscape as we know it is changing and the mobile working revolution is helping third spaces race to the top of wish lists (Moufarrige, 2018, Jan 30). Flexibility translates into expansion or contraction clauses in your lease, buying a building larger than is needed to expand into, or buying the right size building with extra land to build on later. Expansion space can be delineated and rented until recapture is needed. Commercial real estate landlords should already be thinking about offering more flexibility, more amenity, more community and a customer service experience to avoid empty or underused real estate (Moufarrige, 2018, Jan 30). In general, technology companies, that are often open long hours, are pushing the collaborative, flexible and sustainable work environment into other industries rapidly. It’s decreasing the amount of space per person and how flexible space design is.

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Condition of Space. If the business is operating from a space for more than 10 years, it may be becoming obsolete (design, function, technical, aesthetics) because workflow, market dynamics and work culture have matured. It’s not uncommon for established companies to move to position productivity for the next 10-15 years ahead.

 

 

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Steering Committee. The COO should call a meeting of department heads or managers to identify how space and its costs are affecting daily operations. A lead time of two weeks or so should be sent out for the meeting to enable participants to assemble facts and qualitative content of the meeting’s agenda. The meeting should be substantive, honest, reveal facts and subtle chatter about space use. Once facts are shaped to paint a tangible picture of space status, it’s recommended to hire a space planner to assess the space, then draft a 3D plan of what new space could look like; a timeline to build and buildout costs should be estimated. Decision support for your COO, CFO, and CEO should come from the steering committee. The space secured for use is decided upon and signed for by the CEO and COO. The CFO guides them how occupancy costs and expenses will affect financial statements and tax returns.

 

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To recap, successful space changes occur through careful evaluation and preparation to begin a space search.  The mission of your real estate services provider is to support the corporation and its business units to provide employees with the most effective, efficient workplace possible (CNG, n.d.).  You’re likely to get the acquisition terms your business needs by guiding your endeavor with objectives for the space change. It’s essential that your real estate services provider aligns their strategy and approach with corporate business operational strategy, thereby ensuring that real estate brings value to the enterprise (CNG, n.d.).  If your COO is interested in evaluating options to change the commercial space for the business, please ask your COO to fill out “Request a Consultation” at the base of About Us in this website. Enter “Considering Change” in the subject line, then paste the email signature of their executive assistant the message body. I reply within 24hrs to arrange an exploratory conference call within their calendar. ###

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References

CNG (No Date).  Corenet Global, Corenet Global, Retrieved from http://corenetglobal.org/

Fennie, N. (2005, Jan). Space Planning: How Much Space Do You Really Need?, The Space

Place, Retrieved from https://www.thespaceplace.net/articles/fennie200501a.php


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Smith, N. (2017, Feb. 27). What is the average square footage of office space per person?,

Austin Tenant Advisors, Retrieved from

https://www.austintenantadvisors.com/blog/what-is-the-average-square-footage-of-

office-space-per-person/

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Smith, N. (2015, April 23). What Should Your Annual Rent to Annual Sales Ratio be When

Leasing Commercial Real Estate?, Austin Tenant Advisors, Retrieved from

https://www.austintenantadvisors.com/blog/what-should-your-annual-rent-to-annual-

sales-ratio-be-when-leasing-commercial-real-estate/

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Moufarrige, M. (2018, Jan 30). Changes In Commercial Real Estate Are Rewriting Landlord

Rules For The 21st Century, Forbes, Retrieved from

https://www.forbes.com/sites/forbesrealestatecouncil/2018/01/30/changes-in-

commercial-real-estate-are-rewriting-landlord-rules-for-the-21st-

century/#1e2ee32441ad

Business Analysis = > Tenant Rep

(Post updated 01/26/2019) If your COO thinks its time to change the space your business uses, a great deal, in a seemingly good space, could become a (operating and financial) debacle you’ll seethe from long-term. (i.e. bad layout, a long inflexible lease, construction cost/time overruns, poor construction finishes, unexpected extra fees in the monthly rent bill). Blah, blah, blah you say? I’ve seen it happen many times; some clients were referred to me to solve such problems with their space.

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A space debacle is avoided through planning – AND – using time to your advantage. When neither of these two elements are used, you pick the short straw and overpay. Analyzing your business carefully, to identify its needs [from workflow] and resources, become the baseline to negotiate the deal that meets the operating needs of your company.

Basic “Business Analysis” questions to ask:
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• How is the business operating today from its space?
• Does the space facilitate productive workflow for ALL your staff (from baseline workers to C-level executives)? Is the work environment functionally collaborative and comfortable?
• Does the space layout, location and rent bill foster productivity and profitability?
• Can your space size change as your business does?
• Does your office furniture, equipment and phones foster your comfort, efficiency and work pace?
• Does your lease (or sublease) protect your occupancy rights? (this is more a business term that legal advocacy guides you to secure).

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These questions are basic yet with privately held businesses, I’ve often seen little thought, planning and execution done in 24+yrs as commercial Tenant Rep. The best plan to change your space is a flexible one that’s able to make reasonable compromises as they arise. Identifying why your business is failing to meet executive vision, with worker comfort, leads to a baseline of expectations for new space. Let your Tenant Rep interview executive management, mid-management plus a few line workers; the data gathered will lead to an understanding of information flow, what defines a) a comfortable, efficient working environment, b) flexible occupancy, c) a flexible lease, d) sufficient utilities to meet operating needs.
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If your business occupies 7Ksf [or more] of space, budget at least 2 years prior to occupancy to address your change vision at a leisurely pace; that puts time to your advantage to secure the right deal for your business (vs. a good deal for the landlord).  A virtual test-fit (1) of your space helps to create a short list of spaces/properties to focus on.

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If you agree these suggestions are sensible for you, request a free 45 minute consultation with me by clicking the link at the right. Please put in the subject line “Business Analysis meets Real Estate.”; I reply within 24 hours. We hold a substantive face to face conversation, and see if our personalities are compatible to work with each other. Thanks for reading, perhaps I’ll hear from you soon. ###

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1. Kirsch, B. (2016). The value captured through a faster tenant test-fitting process, REFM, 03/15/2016.