Posts Tagged ‘cost savings’
| Newer Entries »What’s in Your Wallet–and How to Keep It There, Part I
Wednesday, February 23rd, 2011
By Phillip Infelise, Chairman & Managing Principal
In my last blog entry, I promised we would have some fun with acronyms. But I thought there was a serious subject we had not yet touched on—Project Budgets—so we will save the frivolity for a while. Related to our last edition, we should consider the overall Project Budget as yet another form of communication between us and our clients. This form of communications is often the most difficult one since no one likes to talk about money. But Project Managers do like to talk about it—exactly how to get the project you want at the cost you can afford.
Typically, we want to begin the money conversation very early, often in a first meeting. Whether a TI build or a build-to-suit, we believe that—given the right initial information on size, character, aesthetic approach, what’s in, and what’s not in—we can provide the client with an appropriate Conceptual Project Budget during the first conversations. The conversation we don’t like to hear—either from our side of the table or theirs—is: “We can build the space out for the TI allowances provided.” Too often, the client hears that comment and thinks the total budget can be covered. Our job is to provide the bad news that such a scenario is rarely true when total project costs are included.
This first budget is generally a conversation about how much the basic items cost and where this particular client wants to spend or conserve its dollars. Generally speaking, we usually have about 50-60 line items divided into the following cost categories (NOTE: Only because I knew you would ask for it, I inserted some typical ranges you might expect on a basic tenant build project. There are caveats galore, too numerous to detail here. Please call me for details.):
-Design Costs ($2.50 – $5.00/SF)
-Construction Costs ($35.00 – $60.00/SF)
-Furniture Fixtures and Equipment ($15.00 – $40.00/SF)
-Voice, Data and Special Power ($6.00 – $15.00/SF)
-Administrative Costs/Contingencies ($5.00 – $15.00/SF)
-Total Cost, Minus Allowances and Offsets (less than $25.00 to $75.00/SF)
Our job is to describe the typical project and the estimated costs to the client and open a dialogue about what should be included or not included in this particular budget. We work on a wide enough range of projects to fully understand the potential costs in each line item and to describe what you get for a low, medium, or high spend in each. For a build-to-suit, land purchase and due diligence around it adds a major component, as does the core and shell construction, but otherwise, the majority of line items remain the same (even if the dollars associated with them are higher). And month-to-month cash flows are usually included in the build-to-suit budget to forecast the big spends for the finance team.
After a little more time with the client and further conversations about wants, needs, and funds devoted to the effort, we refine the budget to the next stage, a Preliminary Project Budget, ready to be tested against early space plans (aka test-fits) in a number of potential sites. This may also be the time to introduce a General Contractor and pre-construction estimates to the table. Accurate budgeting against multiple sites allows the real estate team and the client to thoroughly understand the true cost impacts of the specific site’s building systems and distribution, built environment (if any), allowances provided, and the actual net “cash-out-of-pocket” costs to the client at the end of the day.
In Part II, I will discuss the Project Budget Revision and the three areas that are often the most challenging for Project Managers to control costs. Stay tuned.
Tags: budget, build-to-suit, corporate real estate, cost savings, PM, TI allowance
Posted in Project Management | Comments Off
Creative Tenant Solutions: The Blend and Extend
Wednesday, January 5th, 2011
By Darren Fleming, Managing Principal
As vacancies rise and rents begin to fall, some companies may grow frustrated about being unable to take advantage of a newly favorable market. So I thought I’d discuss a strategy that might be of interest: the blend-and-extend.
A blend-and-extend is when a tenant, typically with a few years of remaining lease term, signs an early renewal agreement with the existing landlord to add a few more years to their current lease. Usually this is done for one of two reasons: 1) to achieve a lower rental rate today or 2) to secure financing from the landlord to offset future construction costs. In both cases, the rental rate on the additional term is blended into the existing rate to create a new ‘blended rate’ that is often lower than the original one.
The mechanics of a blend-and-extend are relatively simple to understand. Let’s imagine a 15,000 SF company that has two and a half years left on its office lease and is paying $30/SF in a market where the rental rate for a new lease has dropped to $25/SF. Using simple math, if that tenant extended its lease for an additional two and a half years at $25 then the new average, or blended, rental rate would be $27.50. This would represent an immediate reduction of close to $100,000 spread over the original two and a half years.
Executing a blend-and-extend, however, can be very challenging and depends heavily on timing and reading the market. How do you know market conditions are right? How do you convince a landlord to go along? When is the right time to bring it up? It all depends on the situation.
The best part is if you aren’t able to negotiate enough of a savings, you already have several years of lease term remaining and have lost nothing but time.
In the context of a falling market, tenants can look at things from the landlord’s perspective and identify a positive rationale for the owner to go along with. Perhaps having your firm extend by a few years will eliminate some upcoming risk in their portfolio due to the chance that you might leave. If they aren’t open to this type of idea, in a few years they may have to compete for your tenancy on the open market and have a better chance of losing you to a competing building. Showing them how to eliminate that risk could be very appealing.
If your firm is planning major renovations or a purchase of expensive equipment that’s cost prohibitive or even impossible to move, then a blend-and-extend might be a good solution. Spending major, non-recoverable dollars in someone else’s building is a clear sign that you aren’t likely (or able) to move at the end of a lease. Thus, a savvy tenant should take preventative measures to avoid the appearance of captivity. Otherwise, they may find themselves without any real leverage come time to renegotiate the rent.
A successful blend-and-extend requires a lot of work and a high degree of market intelligence. Tenants must have a good idea of their landlord’s current bottom line, or they are setting themselves up for a failure before they even begin. Do your homework. Talk to other tenants in the building or in the business park to get a sense of where the market is heading. Are there any big leases expiring close to your own in your landlord’s portfolio? Will they be eager to lock down your tenancy, or will they be happier to wait a few years in hopes that the market recovers? This is information you must have because, rest assured, your landlord is a local market expert and certainly takes the time to stay informed; it’s their job.
Tags: blend and extend, corporate real estate, cost savings, landlord, tenant
Posted in Transaction Management | Comments Off
Is Outsourcing Facilities Management a Solution for my Business?
Wednesday, September 29th, 2010
By Jim Ricker
Outsourcing of various services has been around for decades—payroll, cafeteria operations, custodial, copy services, and guard services to name a few. In the late 1980s, outsourcing of real estate was added to the list— Transaction Management, Project Management, Lease Administration, and Facilities Management.
Entering its third decade, Facilities Management (FM) outsourcing has proven its value to corporations and institutions; often resulting in cost reductions of 10% or more, improved services, and better information for client decision-making. Of course, there are also examples of failure when the clients’ expectations were not met, and contracts were thus canceled.
So, is outsourcing the right solution for you and your firm?
To be successful, FM outsourcing depends upon several factors, with the absence of any one often leading to failure:
- Client commitment from the executive offices
- Clearly stated goals that are achievable
- Performance-based contracts with rewards and penalties
- Single points of contact for both client and service provider
- Constant communication – informal and formal
- Flexibility as scope of work and economic climate changes occur
- Technology applications that provide relevant information for decision-making
Even assuming that you are confident that all of the above factors can be met, is a successful outsourcing of your FM services a foregone conclusion? Not necessarily, if you have:
- A unique culture that is extremely difficult to replicate and would thus take a service provider several years to fit in and become productive,
- Successfully reduced operating expenses by subcontracting high volume, low cost services such as custodial and low volume, high cost services such as elevator maintenance,
- Reorganized to eliminate redundancy and poor performance,
- Implemented a performance-based review system for the employees,
- Consolidated services to take advantage of bulk purchasing, and
- Instituted a training program to maintain and enhance staff knowledge.
The decision to outsource is not a simple one. It requires a commitment at all levels within the organization and a tolerance for the disruption caused by a transition to a service provider. If your benchmarking efforts indicate that your costs are competitive, your customers are happy, and you have a well-trained, highly-motivated staff, then you might only outsource those services (custodial, elevators, pest control, etc.) that can be performed better and more cost-effectively by others.
Tags: corporate real estate, cost savings, FM, real estate outsourcing
Posted in Facilities Management | Comments Off
Workforce Optimization
Wednesday, September 22nd, 2010
By Tim Myllykangas and Mitch Jacoby
In our previous post, we noted that a growing list of companies both large and small are looking at their workforce as a way to reduce costs. These companies are going beyond their real estate costs, and are considering a much larger expense: labor. Although real estate costs are typically the second largest P&L expense, the annual cost of labor is usually 6-10 times greater than the cost of real estate. Consequently, a workforce optimization analysis can in many cases lead to significant savings…and typically a new real estate project, even for companies with flat or negative growth.
The typical client project team consists of representatives from Finance, HR, Operations, and Real Estate. Once a workforce optimization analysis is performed, where factors such as labor quality, availability, and costs are examined to identify more favorable markets for the client’s job descriptions, a business case can be made to consolidate, expand, and/or relocate the real estate footprint. The bonus for clients in these projects is normally not just reduced labor costs, but that they have a labor pool with higher underemployment, leading to lower turnover and a more loyal workforce. Additionally, clients can receive state or local incentives which in some cases can be significant.
So, which companies are doing this? Business giants like Hewlett-Packard (HP) are consolidating their national footprint in places such as Conway, AR; Rio Rancho, NM; and Dubuque, IA. These locations are small towns for sure and many would say too small, but the companies’ successes to date are clear proof of the benefits of finding the more favorable markets for a client’s labor needs.
According to HP, it selected Conway, AR as the location for 1,300 new sales and support jobs, as well as technical positions as part of its national consolidation strategy. These types of jobs are not the low-paying, entry-level jobs requiring little education that most people typically think of when companies move to small towns like Conway. These positions require college degrees and reportedly pay starting salaries in the $30,000-$50,000+ range.
Not every project works in a smaller city, but the benefits that are achieved for those that do include improved workforce quality, lower labor costs, cheaper real estate, and often meaningful incentives from the local community and state.
Are you considering a move to a smaller market to reduce labor costs?
Tags: cost savings, Site Selection
Posted in Workforce & Location Planning | Comments Off
Seven Real Estate Cost Reduction Strategies
Wednesday, August 18th, 2010
By Jack Burns
There are many ways to consider cost savings, but there are seven in particular that you might want to focus on today. You can implement the following cost saving strategies yourself, but you will see quicker results if you utilize your service providers or other consultants.
1) Eliminate Surplus Space – Shadow & Swing Space
Even with reported vacancies through CoStar and other tracking services in the mid teens to low twenties in many areas, the true vacancy rates are often much higher. Typically a company will track a 5% – 10% vacancy to allow for churn. But today, many corporations may have 15% to 30% vacancy in their portfolio. This shadow space tends to be spread throughout a building or portfolio and is not easily assembled to dispose of through a restructure, sale, or lease/sublet. Through a planning exercise, study what it would take to unlock these spaces and dispose of them quickly. It may require spending capital to rework existing spaces to accommodate a consolidation, but many times the payoff will be outstanding.
2) Appeal Property Taxes
Most properties reached record values 4 years ago, and the real market values have now plummeted in many areas. If you own property today you must evaluate the real tax value. Make an effort to seek a reduced value to reduce the tax basis and even seek abatements on current tax bills.
3) Own Instead of Leasing (new FASB Regulations)
When making real estate decisions today you must consider the impacts of impending Financial Accounting Standards Board (FASB) changes. These changes may make the impact of renting the same as owning relative to how the property is placed on a company’s balance sheet. If ownership is a possibility, the payback will be beneficial with both a longer depreciation period and the ability to segregate cost for construction and investments.
4) Renegotiate Leases Early to Take Advantage of Low Rates (Blend & Extend)
This is old news and I am afraid that in many markets the window for this opportunity is closing quickly as vacancies are reduced and landlords become more confident in the market’s ability to recover. However, your advisor needs to test the options by completing a Rent Gap Analysis which will quickly assess if the trade off for additional length in term is worth the potential reduction in rent that could be achieved.
5) Implement Workspace Strategy for Increased Cost and Space Efficiency
Let’s face it: The best way to reduce costs is by owning or leasing lower cost real estate solutions. This is a great strategy, but many times may result in a need to locate in an area that may not be conducive to your business operations. However, using less real estate is the #1 opportunity to reduce costs. Workspaces can only get so small before they serve no functional purpose. However, a mobile worker strategy or a work from home policy will allow most companies to reduce space significantly. Typical work groups that can adapt mobile or work from home solutions include: sales, professional services, consulting, call centers, shared services, accounting, procurement, support HR functions, and other support functions. Development, R&D, engineering, management, and other similar functions many times do not work well in a mobile or work from home basis.
6) Real Estate Cost Allocation through Chargebacks
Within many corporations the true chargeback for use of space is not properly captured. This results in many business units not recognizing the cost of their use of facilities. If true costs are recognized and allocated to business units, P&L statements may allow these units to be more realistic about how they use space when they are hit with the chargeback for the space. This will require the implementation of a good CAFM system and utilization of internal or external resources to properly record who is occupying specific spaces and tracking those consistently.
7) Internal and External Benchmarking
How do you know you are doing well? Benchmark against outside firms and internally between business operations or divisions. Competitive advantages always drive good behavior. Good measures for benchmarking include total cost of facilities as a percentage of revenue or as a percentage of SG&A, total cost per employee (include contractors), total cost per seat, or cost per cubic foot in storage. Get involved with smaller focused groups to compare metrics, or look to larger organizations like CoreNet Global, IFMA, or REEB to compare your cost and space metrics against others. Make sure to compare yourself to more progressive industries and not just those in your area of business practice.
Do you agree with this list of seven cost reduction strategies? What other strategies would you add to the list?
Tags: corporate real estate, cost savings, real estate portfolio
Posted in Corporate Services | 1 Comment »
Towards Optimal Efficiency
Wednesday, January 6th, 2010
B
y Vik Bangia
For the past twenty years, the mantra in the real estate service provider world has been “cost savings.” Most service provider firms in this industry say they’re experts on delivering real estate solutions that result in bottom line savings. Whether the savings is related to occupancy expenses, energy, or operating expenses, their stated goal is to reduce real estate spending. However, with any line of thinking, what starts small often goes to extremes, and what has transpired in this industry has damaged both client corporate real estate (CRE) organizations and service providers alike.
In the zeal to cut costs, CRE organizations made several missteps over the years. In the 90s they over-outsourced their real estate departments and dramatically reduced headcount; often losing institutional knowledge along with the layoffs. Service providers, in a similarly zealous effort, made recommendations that reduced short-term spending but neglected long-term implications especially in the changing economic times and challenges such as the 1990s recession, turn of the century dot-com era, and our recent (and continuing) economic crisis. The result was a glut of office space, scope creep on outsourcing engagements, and a push by corporations to compress service provider fees. This has commoditized the real estate services industry and made it more difficult for corporations to get what they needed all along, sound advice.
Instead of looking back at what could have been done differently, I’d like the industry to look forward about how to think differently about what cost savings really means. And as usual, I don’t turn to the readily available commercial real estate publications. Instead, I go back to the basics and open up my college physics book.
In physics, the optimal performance of any system is a range in which the system performs best. In corporate real estate, for simplicity, if you define this range as a line, the optimal efficiency of a corporate real estate department is achieved by bringing the organization closer to the line (see graphic below). Working against optimal efficiency are certain internal and external factors. External factors, among others, may include: the economy, competition, politics, regulatory issues, and public perception. Internal factors, among others, may include: vacancy, demand for space, attrition, asset value, and the company’s own business strategy.
In traditional real estate brokerage, an assumption tends to be that every optimal transaction creates an optimal portfolio. But a true real estate advisory approach considers the real estate portfolio as a “system” in which the optimal efficiency of the whole is paramount, and individual decisions are made with the system efficiency goal in mind.
This system framework is created by recommending and implementing the right combination of outsourced support services, CRE organizational design, internal processes and workflow, best practices, communication, internal customer relationship management, and both internal and external benchmarking.
The system then looks to define the optimal framework for decisions by developing space standards, communication and reporting protocols, financial and business controls, and performance measures.
In 2010, consider your real estate portfolio as a system which should be managed with a system view to efficiency. If you’re thinking about a new real estate service provider relationship, be sure to ask questions of your service provider candidates that go beyond the traditional day-to-day or deal-by-deal approach. If you’re looking for questions to ask, write me at vbangia@cresapartners.com.
Tags: cost savings, optimal efficiency, real estate portfolio
Posted in National Accounts | 1 Comment »
