Occupancy costs

Occupancy costs have a big effect on
the bottom line. Depending on
whom you ask, they are usually the second- or third-highest costs of operating a business. Personnel costs are usually first. Occupancy costs rank just
before or after IT costs. Some companies consider some of IT costs as a part
of occupancy costs. You need to be fully
aware of what goes into occupancy
costs and look for ways to cut them and
still deliver all the needs for customer
and employee satisfaction.

“Occupancy costs are not just rent, and
when analyzing those costs, you also
have to consider the culture of the
organization,” says Eric Ross, senior
vice president in the Atlanta office of CB
Richard Ellis.

Smart Business talked with Ross
about what you need to know about
occupancy costs and ways to reduce
them.

What are occupancy costs?

Occupancy costs are any costs a tenant
incurs to occupy a property. They may
include but are not necessarily limited
to: rent, taxes, insurance, landscaping,
utilities, security, telephony, cabling,
computers, furniture, fixtures and equipment. Some businesses include capital
improvement costs they spend to
upgrade the property. Some IT costs are
lumped into occupancy costs for many
businesses. Occupancy costs are both
expense- and capital-related. These
costs can also be affected by proximity
to restaurants, entertainment, gyms,
shops, residential housing and hotels.
Closeness to public transportation also
can affect costs as well as traffic in or
around the property. In some businesses, traffic is very important, and in others, it can be a detriment. In any event, it
has to be taken into consideration.

It should also be noted that some firms,
even though they own their property,
charge occupancy costs against their
earnings for a more realistic view of
their expenses.

What do you mean by ‘culture of the organization’ and how would that affect occupancy costs?

The culture of an organization is its personality. It is composed of the attitudes,
experiences, beliefs and values of the
organization. An organization whose culture includes encouragement of physical
fitness, camaraderie and attractiveness
to young people may want certain amenities in close proximity to attract and
keep the best employees. Location may
not be important to attract customers,
but closeness to gyms, restaurants and
entertainment may be of great interest to
employees. Retail amenities and housing
within walking distance may be important. Easy access to public transportation may be another criterion. Organizations may be willing to pay more for
space that is close to public transportation. This can become even more of an
issue with rising fuel costs. Any or all of
these factors are going to affect costs.
The more attractive a property is to a
wide range of people, the higher the cost.

What are some of the other factors that
affect occupancy costs?

Taxes. Cities and other taxing authorities are raising property taxes because
of previous sales of properties at record
prices. They are basing their rates on the
highest possible values to produce more
income to cover their costs.

Utilities. These costs are not going
down. Tenants are trying to figure out
how to be better corporate citizens in
use of water and other utilities.

Insurance. Rates have gone up with
terrorism coverage. Of course, the coastal areas also have seen increases. Replacement costs have gone up, too. They
haven’t been spiking like in the past but
still are going up.

Landscaping. There are no significant
increases here except in the extreme
drought areas. Owners have to make
some changes in their maintenance practices and requirements.

Security. Since Sept. 11, companies
have looked more closely at their security plans and adjusted as needed. Almost
everyone has had to increase security. It
may only account for 1 to 3 percent per
year, but that must be considered.

What can be done to reduce occupancy
costs?

Occupancy costs can be reduced by
occupying less space. An area that is
becoming increasingly effective is
redesigning to fit more bodies into a
space. The working figure used to be
one employee to every 250 rentable
square feet. The norm is now becoming
one per 200 square feet. Another way to
reduce space needs is by what is known
as hoteling. If a business constantly has
people on the road, maybe one office
space will serve two or three employees.
Telecommuting also has an impact. It
may be driven more by fuel costs but
still affects space needs.

ERIC ROSS is senior vice president with the Tenant Representation Group at CB Richard Ellis. Reach him at (404) 923-1303 or
[email protected].

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