3 Methods to Slash CRE Costs

Corporate real estate is typically the 2nd largest expense for a company. If you're the one responsible for it, you need to know that you're not wasting millions of dollars by having surplus space, paying over-market rent, or even being in the wrong location.

If these concerns keep you up at night, here are the 3 R’s of slashing your real estate costs:

1. Right-sizing - Do I have too much space?

2. Renegotiating - Am I paying over market value for my rent?
3. Relocating - Is this still the best location for my business? 

Through being present in the industry for over three decades, as tenant representatives, we have identified the most wholesome approach to finding the best properties and savings. The way to do this is with the 3 R's. 

This format maximizes commercial real estate savings while minimizing hassle. Tenant reps achieve this by working with market trends to capitalize on their benefits, but also holding on to tried and true methods of optimizatio

Depending on your organization’s CRE goals, your needs could fall into any or all of these three R's.  

To highlight what they are and how you can take advantage of them to save, read on. You will find that properly utilizing this system will reduce your overall costs to a fraction of what they were.    

Let’s Run Through A Scenario  

For this exercise, let’s say that you are currently located in San Francisco.  

As you know, it is costly to operate a business in California. You are faced with: 

• Higher rent
• Elevated payroll costs 
• More expensive taxes 
• Overall higher cost of living    

 (Cost of Living Across the US where the National Average is 100) Source: C2ER.org

There is currently a major push amongst organizations, tired of the overhead expenses, to move outside the city. However, this is not the only action you can take to reduce your costs. You can benefit from either right-sizing your space, renegotiating the terms of your current lease, or relocating.

Each has its own independent benefits and savings.

So, let’s go through an example of how a San Franciscan tenant can cut their CRE costs by using one or all three of a tenant rep's techniques. 

 3 Ways To Save On Your Office Lease

Here are the Facts:  

• You have 50,000 square feet of office space in San Francisco 
• You have one year left on your lease 
• Your landlord is offering you a 5-year extension to remain in your space 
  

Well, the demand for commercial space is currently low due to the work from home revolution. But, you signed your lease several years ago when rental rates were a bit higher. The current average price for San Francisco office space is roughly $68/ square foot.  You’re paying $70/ square foot. 

Should you choose to stay you would also be subject to additional rental escalations.  

If San Francisco is right for you, then San Francisco is right for you. However, if you are open to other options, you could fall into incredible savings; let’s go through how.  

 1. Right-Sizing  

If you want to remain in San Francisco, but wish to analyze where your space utilization can become more efficient, right-sizing is for you. It is a critical step to achieving your most optimal CRE performance.  

If any of your properties are over or underutilizing space, you have room to benefit from reassessing your current square foot usage.

Right-sizing can mean many things.  

• A deep dive into your portfolio 
• An assessment of how you use space 
• An analysis where your utilization can become more efficient 

For organizations with employees working at desks in hallways, it means expanding. On the other hand, if you have sent your employees to work from home and there is no end in sight, it means cutting down on the resulting wasted space. 

Wasted space is expensive. Keeping track of your utilization will avoid it.  

So let’s say that many of your employees are happy working from home. Through reassessing your necessary space, you find that you could stand to cut down 40%. Times have changed, and now you only need 30,000 square feet for your employees still coming into the office.  

Your original square footage in San Francisco will cost you $18.5 million for a five-year term. 

Cutting down at space with 30,000 square feet at $70 will cost you about $2.1 million for one year in San Francisco.  

Five years at this rate will go for $11.1 million.

With this metric, right-sizing alone has saved you over $7 million.

However, right-sizing is often not done alone. Your landlord likely won't be willing to just cut the amount of space you pay for. 

As a result, the value of renegotiation can not be overstated. Let's go through how negotiating with your landlord can improve the price and terms of your lease. 

2. Renegotiating  

The value of skillful negotiation cannot be overstated whether you are looking to right-size or not.

If you are happy with your current space utilization, you can still achieve savings by introducing renegotiation. The real estate landscape has changed since you signed your lease.  

The market has opened up for tenants. As many businesses have shifted online, landlords are now threatened by the potential of having vacant space.  

Properties without tenants to fund them are extremely expensive. To cut down their losses, landlords are more willing than ever to agree to favorable terms and features for low prices.  

If you come prepared with a representative, you stand to save even more. Tenant reps are experts in leveraging the value of your tenancy against landlords and their brokers. They often do this by creating competition amongst landlords. This critical step incentivizes them to drive down their rates in the hope of landing you as a tenant.  

The process of skillful negotiation has allowed corporate tenants to reach savings of 30%. Let’s be conservative here and say that your tenant rep creates 25% savings during arbitration in our scenario.    

So, rather than $70/ square foot, we are looking at $52/ square foot. 

By renegotiating alone you can save almost $5 million. Remember that this step can also be partnered with right-sizing to further increase savings. These steps rely heavily on each other.

However, if renegotiation is not an option and you are in a place to cut and run from your existing lease, let's see how you can cut expenses even more by moving. 

3. Relocating  

Relocating is a tough decision for an organization to make. However, if you have already decided that your current space doesn’t work for whatever reason, you’ve completed half the battle.  

The big question then is, where should you move?  

(US Cost of Living where National Average is 100) 

There are a lot of attractive regions for businesses sprouting up in the last few years. One of them is Jacksonville, Florida.  

With the state quickly becoming the “Wall Street of the South,” there are a lot of businesses taking advantage of its lower overhead costs. You’re not limited to Florida, of course. There are numerous business-friendly areas you could look to.  

For the purpose of this scenario, though, you decide after extensive deliberation with your team and real estate rep that Jacksonville may be the best place to shift your operations.  

The average rent price is too tempting to deny at $27 per square foot for Class A buildings.   

50,000 square feet at market value for five years in Jacksonville will cost you $7.2 million as opposed to the $18.5 million in San Francisco! 

 This savings metric considers a flat rental rate. It doesn’t account for the full savings you could experience moving to Jacksonville where costs like taxes and operational expenses are significantly cheaper. 

How The 3 R’s Can Help You  

We went through how the 3 R's can each save you individually. Now let's look at what your costs would total if you combine these steps. 

Using the 3 R’s, you have the potential to save 83% on your CRE overhead. If you move to a more business-friendly area, you can also save on payroll, taxes, gas, and overall cost of living. 

In addition, since these places are cheaper to work and live in, the power of the dollar is stronger. Consumers have more of an ability to freely spend, potentially furthering your financial benefit from moving.  

All said and done, the 3 R’s is a process that promises efficiency and savings. Each step could be used individually or in conjunction with the other actions.

How A Tenant Rep Can Help With the 3 R's

Making these decisions requires a great deal of soul searching on your behalf to determine what move would be suitable for your organization.  

The good news is: you have options. Maybe you would benefit more from an analysis of your space utilization. Or, perhaps you want to stay in your building but want to renegotiate your rent to market value. You have the power to utilize this sequence even if you are not comfortable with a significant move.  

Now, this process can seem incredibly daunting. But, if you are overwhelmed by the steps and the uncertainties, don’t worry. Tenant reps have mastered this process and can help you throughout every stage. Even if you are still unsure if you could benefit from the 3 R’s and want to work with a rep to assess your needs, they are available for you.  

Want to learn more about working with a tenant rep? Check out this article!