While many different factors go into managing your corporate real estate portfolio, occupancy cost analysis is frequently the most powerful tool that you can leverage to control expenditures. Ultimately, it isn’t about how much space you have or about each space’s rents. To control cost, you need to look at the total bottom line expense for each space.
Cost Components
When doing an commercial occupancy cost analysis, you look at every component of your real estate cost both independently and together. These parts include:
- Rent. Rent is the money that you pay to the owner of the building as compensation for your ability to use the space. While it is typically paid monthly, annual and other periods are also possible. There’s a good chance that your rent is also variable. Periodic escalators, calculated using methods like a flat amount per square foot, a percentage, or a variable increase tied to inflation, are all possible.
- Occupancy Cost Reimbursements. Lease structures like modified gross and triple net break out some or all of the building’s expenses for you to reimburse. Although the industry has set definitions for different lease types, in practice, landlords do not always follow them strictly. As such, you will need to look carefully at the language of each lease to determine exactly what you will pay and what your landlord will include.
- Additional Services. Above and beyond rent and operating expenses, you may also have additional occupancy costs that you bear. For instance, while a suburban building might offer free lot parking, downtown offices may require you to pay the cost of parking for your employees. Other landlords may charge for signage rights.
- Load Factors. Sometimes also referred to as a core factor, the load factor measures the difference between the usable space located inside the walls of your space and the rentable space, which includes your pro rata share of the building’s common areas like lobbies, hallways and restrooms. Given a lower load factor, you end up paying less for the actual space you use.
- “One-Time” Costs. In addition to looking at periodic expenses, your occupancy cost analysis should also take into account one-time costs like tenant improvements or construction management. On the other hand, you may also benefit from one-time concessions like a period of abated rent provided by your landlord to induce you to move in.
Doing the Occupancy Cost Analysis
Cost analysis is more complicated than setting out a matrix. You might know that a $20 per square foot space with no TI costs is a better deal than a $30 space with $20 in TIs, but is it better to take a lower rent and higher TIs or a higher rent and lower TIs? Comparing the two typically requires you to do the same type of discounted cash flow analysis that your landlord is probably doing to determine whether or not to rent to you.
In a discounted cash flow analysis, you look at the total cost of the lease over time. This way, you combine all of the benefits and costs and get a single number that you can use to compare between different offers. With this data, you can truly do an apples to apples commercial occupancy cost analysis and find the best deal for your company.
REoptimizer®'s corporate real estate portfolio optimization software can run an commercial occupancy cost analysis for your company.
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