Optimizing Your Commercial Real Estate (CRE) Portfolio

In this article, you'll learn:

• Using market data and occupancy cost analysis for CRE optimization.
• How tenant reps assist with lease management and relocations.
• Maximizing space usage and implementing green initiatives.
• Scenario planning and risk management for future CRE needs.

Optimizing your commercial real estate portfolio is very important if you want to grow your revenue, minimize costs, and free up time for more business activities. At the end of the day, your company is the one signing the checks for its corporate real estate portfolio. You take responsibility for managing the spaces, handling the expenses and planning the cash flows, but you aren't alone.

Optimizing Your CRE Portfolio: What You Should Know

Optimizing your commercial real estate portfolio requires planning, preparation, and ongoing professionalism. Here are a few things that you need to know if you want to optimize your commercial real estate portfolio.

Market Data

If you're not active in a market, it's hard to tell what's really going on. The space that you leased five years ago because it was in the best building in the best location may now be undesirable. Your tenant rep is constantly updated on the current market data and can give you an unbiased third-party view of what is happening with your space relative to the market.  Ideally, your tenant rep should advise you on:

• The alternatives to current market locations within the market.

• The effect of decisions on total occupancy costs.

• New and available projects.

Occupancy Cost Analysis

While you can probably pull lease comps yourself to get a sense of asking rents in your market, your tenant rep has inside information on where deals are actually getting done.

This can help you gauge what your rents may do in the future when your lease rolls. In addition, it gives you ammunition for negotiations with your landlord if your lease is out of alignment with the market. Your tenant rep can also help you analyze your CAM costs to ensure that they are in-line with what other tenants of similar space.  Your landlord has this information.  Why shouldn't you?

Lease Administration Assistance

Many tenant reps can connect you to full-fledged property, project and asset management teams that can handle just about any aspect of your tenancy. At no cost, it's reasonable to expect your tenant rep to track crucial dates in your lease and keep you informed. Doing this is in the tenant rep's interest since those crucial dates are usually opportunities for them to do more business with you.

Rollover & Relocation Planning

When your lease is coming up, your tenant rep comes into his or her own as a resource -- connect you to new spaces, help you renegotiate your option with your landlord, and help you find resources to help you with the nuts and bolts of relocation. 

Competitive Intelligence

It's your tenant rep's business to know what is going on in the commercial real estate market. This includes paying attention to what tenants are doing. To this end, your tenant rep can frequently be a good source of intelligence about what your competition is doing. While she or he can't violate any confidences, you might be surprised at what can be delivered when asked.

Tips to Optimizing Your Commercial Real Estate Portfolio

When you have a large portfolio of commercial leases, you simply can't afford to think about the various spaces and buildings individually when it is time to renew.

Reviewing all of your leases will give you a clearer picture of what your costs are and how well your current portfolio is meeting your needs. Then, you can optimize your portfolio to positively impact your bottom line. Here are some tips to help you get started:

Make it a Team Effort

Optimizing your commercial real estate lease portfolio should involve more than just you and your accounting department. Involve your entire management team, so you can benefit from the perspectives of all of your key decision makers. At the start of your optimization efforts, establish a goal for the process based on your strategic plan for your company. Then, you can let that goal guide you as you review your leases.

Focus on Maximizing Usage

Small amounts of unused space in your commercial portfolio can be a massive waste. Take stock of how much space in each of your offices is currently unoccupied. Brainstorm how you can fill the space by consolidating work teams, utilizing empty rooms for storage and more. You may even decide to sublet or sublease all or part of an office once you've evaluated usage.

Analyze With the Latest Data

It's impossible to analyze your portfolio in a vacuum. To get a clear picture of how well your commercial leases are working for you, do some market research to find out about the current trends in the areas where you're renting. You may discover that one or more of your offices cost more than they should or that you're getting your space at premium prices.

Search For Ways to Green Your Spaces

As you analyze each property in your portfolio, consider what steps you have taken to green the various locations. Identify which properties are costing you the most in terms of utilities and find ways to reduce electricity consumption. You may decide to switch off more lights during the day, invest in efficient LED fixtures or upgrade to Energy Star-approved office equipment.

Get a Pro on Your Side

If you discover that you need more office space or that it would be best to relocate, enlist the help of a tenant rep broker at the start of your search. A tenant representative can help to identify your needs when it comes to commercial leasing and find a building or office that will meet them. Brokers are paid by landlords, not by you, so you won't add more costs to the search process by hiring one.

Head Back to the Table

If you discover that you're currently paying too much for one or more of your spaces, request a lease renegotiation with your landlord. Often, if you agree to extend your lease or commit to renewal at the end of the term, you can negotiate a better deal.

Scenario Planning Strategies

A CRE portfolio exists in three different blocks of time. You signed your leases in the past, you occupy spaces in the present and they need to serve your business' needs in the future. Balancing these three-time spans can be challenging for a portfolio manager. However, applying traditional tools from the fields of risk management and scenario planning can help to create a portfolio that meets your organization's needs now and in the future.

Future Planning with Scenario Planning

CRE portfolio management might not seem like a blue sky industry. Generally, managing a company's real estate assets is a nuts-and-bolts endeavor, focused on leases, CAMs , and operating expenses. However, given the forward-looking nature of leasing, signing a document without first going through a scenario planning exercise could lead your organization to lock in a space that becomes a white elephant.

Many things can happen with a space over time. The hope is that it will be such a successful location for you that you rapidly outgrow it. If it doesn't work out well, you could end up needing just a fraction of it. The focus of the community in which it is located could shift - today's hot office market could become tomorrow's Class C backwater. Scenario planning lets you look at a space and an area, determine where changes could occur and project their impact. Based on the scenarios that you feel likely, you can create different emphases in how you sign your lease. Here are some of the strategies that scenario planning can help you:

• Request rights of first refusal for spaces adjacent to a premise that you might outgrow.

• Select a sub-divisible space in case your space needs diminish.

• Sign a shorter lease if you anticipate an area's inherent nature changing.

Managing Rental Risk

While scenario planning can encompass the process of identifying future risks, it doesn't necessarily work to manage them. The best way to manage your CRE portfolio rental risk is to negotiate a shorter lease with more options. A ten-year lease with two five-year options gives you 10 to 20 years of relatively risk-free occupancy since your landlord won't be able to evict you and the terms of your renewal are predetermined. The biggest risk is that you'd stop needing your space before the 10-year initial expiration date.

A five-year lease with four five-year options gives you even more protection against the rental market. You gain control over the space for up to 25 years if you want it. On the other hand, you can move out after just five years. This increases the flexibility of your CRE portfolio and decreases the risk that you'll be stuck with a space you don't want or need.

Risk Sharing Approaches 

One of the fundamental principles of risk management is that you can control your risks by sharing them. Here are some strategies that allow you to transfer risk to other parties, making your CRE portfolio a safer financial bet for your company:

• Choose to lease space instead of owning it. This transfers the large risks of vacancy, capital expenditures and obsolescence to the owner while leaving you with a manageable risk of rental increases.

• Sign full-service gross leases that transfer OpEx liability to the landlord. If possible, replace tenants that are less efficient than you.

• Occupy smaller spaces with rights of first refusal on adjacent ones. This way, you control expansion space without paying for it.

• Operate multiple, smaller locations, reducing the impact that a problem at any one space could have on your CRE portfolio as a whole.

Conclusion

Nowadays, most companies utilize the services of a Tenant Rep real estate broker to advise them and provide real estate market intelligence. By utilizing the services of a Tenant Rep, you can easily optimize your commercial real estate portfolio. Engaging a tenant rep broker can help you navigate these issues and much more. 

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