The typical transaction-based approach
to real estate planning focuses on a
specific property lease; the strategic business approach to real estate planning
focuses on how that or any lease impacts
the client’s bottom line. Greg Fischer, vice
president of strategy for CresaPartners in
Philadelphia, advises senior business executives on aligning their real estate costs
with their business strategy to improve
their bottom line.
“A tactical approach may result in an
effective property lease, but you need to
develop a strategic approach to reduce the
client’s operating cost as a percent of revenue, and improve their efficiency ratio,”
Fischer says.
Smart Business asked Fischer about
applying a strategic business approach to
the real estate planning process.
Does a real estate strategy work for every
company?
Yes. Companies usually develop strategic
plans that address revenue and profit projections, employee costs, capital spending
and R&D expenditures. However, while
real estate costs are factored into operating
expenses, the impact of these costs on the
company business strategy and the value
of real estate information on business decisions are often ignored. Real estate costs
for most companies are the second largest
indirect operating expenditure. The goal
for all companies should be creating a consistent real estate process to actively manage this expense.
What is the difference between a tactical and
strategic approach to real estate planning?
There’s a saying: ‘If you don’t
know your destination, any road
you take will work.’ The tactical
transaction-based approach to
real estate planning focuses on a
specific activity, one deal at a
time. The strategic approach focuses on the destination — real
estate cost as a percent of a company’s revenue. You could complete an effective real estate transaction and negatively impact the
company’s bottom line because
your focus is not aligned with the
overall company strategy.
For example, a client is looking
for a location to operate a call center. The general operating margin on a
call center is less than 10 percent. A real
estate services firm could identify and fitout a site for a client that is not the best
solution for that business need, and the
company will lose money on the call center
business.
The ideal approach is to develop a company-specific real estate decision support
model, which can be used to identify the
appropriate cost/space metric that will
positively impact the bottom line.
The starting point in this planning
process is occupancy cost as a percent of
revenue and cost per employee. This
example identifies a company with a current cost curve of $8,000 per employee and
an ideal performance target of $6,000 per employee. The difference between these
two cost curves is the cost improvement
opportunity. Any space cost/utilization
option that is on or below the company
specific ideal cost curve is an acceptable
real estate option.
Returning to our call center example, the
ideal performance target for this business
is $2,500 per employee. If the occupancy
cost is $20 per square foot [rent and operating expense], the space needs to be
designed to less than 125 square feet per
employee to positively impact the call center operating margin.
What are the industry benchmark targets?
Real estate performance targets vary by
industry and by competitor within an
industry. In general, service industry competitors tend to manage their occupancy
cost at approximately 2 percent of revenue, and technology companies tend to
manage their occupancy cost at around 4
percent of revenue. However, these general ranges are only useful as sounding
boards. The best approach is to understand
the company’s business strategy and operating model, evaluate the company’s current real estate operations, benchmark
industry competitors for best practices and
develop a company-specific occupancy
performance target and a real estate decision support model.
Does Sarbanes-Oxley have an impact on real
estate planning?
Yes. When the Sarbanes-Oxley Act (SOX)
was passed three years ago, it required
companies, among other things, to develop
a consistent, auditable real estate decision
support process. Public corporations were required to document
the processes they utilized to initiate, review and approve actions
that resulted in a material financial obligation on the corporation.
The preceding real estate decision support model was originally
developed as an SOX compliance
tool; however, it does more than
just help with compliance — it
also makes good business sense.
GREG FISCHER is vice president of strategy for
CresaPartners in Philadelphia. Reach him at (610)
684-1995 or [email protected].
