One of the most important CRE metrics in the restaurant world is the rent-to-sales ratio. Most restaurateurs know that profitability starts to feel squeezed at rents that exceed 8 percent of sales and almost impossible to achieve when rents are over 10 percent of sales. Retailers also track their sales per square foot rent to sales ratios to ensure that pricey store locations are paying off in enhanced income.
Office users, though, typically ignore this metric. If you are like most of them, your CRE metrics typically include looking at what it costs you per square foot and looking at what you pay in occupancy cost per person. While those are great metrics for comparing spaces, and they are helpful in sizing them relative to your workforce, they don't tell you much about how your total real estate expenditures impact your top line.
Why do you occupy office space? While you might have a host of answers, when push comes to shove, you're in the space because you need it to make money. After all, if your office workers weren't productive, you probably would have let them go or outsourced their roles.
However, in many industries, there is a direct correlation between office space and revenue. Medical practices know that adding more offices means that they can have more doctors seeing more patients (or the same number of doctors keeping patients waiting longer for greater efficiency in the use of the doctors' time). Bigger law firms have more attorneys and support staff to generate more billable hours and larger sales offices can support more sales representatives that can better blanket the market. With this in mind, your rent-to-revenue ratio becomes one of the most telling CRE metrics.
One way to use rent-to-revenue ratios is to compare yours to those of other companies. Third parties collect industry wide metrics, or your financial analysis team can look up the sales and rent expenditures of your publicly-traded competitors from their SEC filings. That gives you a benchmark to measure yourself against.
You can also use it internally to compare your locations. While rents are higher in certain parts of the country, they should also generate more activity for your company. If they don't, you could reconsider your locations there. On the other hand, this data can also let you make better decisions about where your spaces are too big and where they are too small, especially if you can assign revenues to specific locations.
Finally, like many other CRE metrics, rent-to-revenue ratios allow you to make better decisions about adding locations. If a location's rents are too high for its revenue potential, that knowledge could lead you to consider a more appropriately sized space or a more affordable location.
Ultimately, your corporate real estate portfolio might be accounted for as an expense, but it is also a revenue generation tool. Using CRE metrics like the rent-to-revenue ratio helps you find business opportunities in real estate instead of only looking for cost-reduction opportunities.
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