Occupancy costs Featured

8:00pm EDT August 26, 2008

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 Eric.Ross@cbre.com.