An Introduction to Commercial Real Estate Optimization

In this article, you'll learn:

• How to analyze lease data and space utilization for optimization.
• Methods to compare and benchmark space performance.
• Strategies for managing lease expirations, negotiations, and exits.
• The importance of tenant representatives in the optimization process.

Commercial real estate optimization is both a process and a way of doing business. It spans multiple disciplines but has two primary goals -- lowering your overall occupancy cost while also improving the productivity of your company's space.

The first step in the process is to conduct a detailed analysis of your company's entire portfolio. The analysis starts by looking at basic lease data like rents, CAMs, utility and other costs, and space sizes. A careful date analysis, spanning commencement, anniversary, expiration and option dates also follows.

Once the lease information has been captured -- usually in an abstract -- the analysis continues to look at the utilization and efficiency of the space. Depending on the type of space, the analysis could look at metrics like sales per square foot, cube utilization or employees or workspaces per square foot.

When your business calculates all of the metrics for every space, you are in position to start the process of commercial real estate optimization for your company. To do this, you look carefully at each space compared to your entire portfolio of similar spaces and compared to each space individually. Spaces that outperform the norm become benchmarks, while those that under perform receive further scrutiny to see if they can be improved or if your company needs to look into making more drastic changes.

At this point in the commercial real estate optimization process, you should have a list of spaces to keep and spaces to either renegotiate, shrink or exit. Your list of expiration dates and option dates comes into play. For spaces that are coming up soon, either notify your landlord that you want to exercise your option, or them them know that you plan to vacate.

When you have a space that you want to leave and that has a long term lease, the process gets more complicated. You will usually have to find a way to shrink it with the landlord's permission, buy the lease out, sublease it or hold on to it and absorb the cost. Many of these possibilities carry complexity.

The commercial real estate optimization process takes an entire team of professionals to complete. Your internal accounting or corporate real estate team, working with commercial real estate optimization software, can usually collect the data and calculate the metrics. Decision making and execution could go as high as your C-suite and may also involve in-house or outside counsel.

No commercial real estate optimization campaign is complete without outside help from a tenant representative. He can help you look at your company's portfolio and its performance in the context of the surrounding commercial real estate world. In addition, if your company decides to make changes, he can advise you as to the best strategies to use, then execute in the market for you.

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