There are two ways to grow EBITDA -- make more and spend less. Given that real estate is typically a company's third largest expense line (after labor and cost of goods sold), real estate optimization is one of the most effective ways to handle the backside of the EBITDA growth equation. Here is a simple six-step process to get your occupancy costs under control:
First - Take Stock
Do you really know what you're paying for your space? Even if you know that you have a $30 per square foot rent on your lease, what is the rent rate today and what will it be after next year's increase? As if this wasn't hard enough, you'll want to know this for every property or space in your corporate real estate portfolio.
Needless to say, Excel probably isn't up to the task unless you have a large team of people to enter data, track it and check for accuracy. Because most companies lack this capability, many use specialized software since having good data is the first step in real estate optimization.
Second - Track your Non-Rent Costs
Rent is only part of the real estate cost equation. You'll also need to pay careful attention to all of the other expenses that you are paying, especially if you have triple net leases or gross leases that have exceeded their expense stops. Real estate optimization also takes into account where these expenses can go in the future and how each building's mix of expenses affects its cost variability.
In addition to those costs, look deeper at the non-real estate costs that are a part of your portfolio. If you have a sales office and your sales people have to keep their cars with them, a building with higher rent and free parking might turn out less expensive. Offices with on-site fitness centers can reduce benefit costs (and, potentially, the cost of employee sick days and health care). This deeper way of looking at real estate optimization lets your portfolio have a better impact on other areas of your operations.
Third - Get Expert Help
Once you know what you have, you can enlist the services of an outside tenant representative. He or she is a local market expert and can help you pull data from comparable properties to give you a deeper understanding of your portfolio's performance.
Fourth - Start Benchmarking
With understanding of what you have and the data that your tenant rep gives you, you can start benchmarking your portfolio to the market. After all, a $30 a square foot space is only a great deal is the rest of the market is at $33.00. Those benchmarks allow you to build a strategic real estate optimization plan that decides which spaces you keep and which ones you look to replace with more attractively priced options.
Fifth - Start Early
Realistically, you can't start this process the day before a lease rolls. Real estate optimization takes careful study and frequently requires you to amass months and years of historical data for accurate benchmarking. Once you have the data and you've built the plan, you're ready to start reaping the savings.
Sixth - Execute
Ultimately, even the best real estate optimization plan is meaningless if it doesn't lead to concrete action. When the time comes, find your biggest sources of savings (which might not be where you think they are!), and act on them. As you keep going through your portfolio, the benefits will gradually accrue to your EBITDA.
