Leading real estate professionals, site selection consultants, and C-suite executives have begun to focus not just on pure cost, but more on the performance of real estate as an investment. Together, we are looking increasingly at real estate's contribution to overall company results and realizing return on investment (ROI).
Yes, return on investment. Now that's a new - and welcome - conversation on productivity.
Real estate productivity is often defined in terms of cost-per-square-foot and the ability to reduce costs. And managing cost is still important in today's business climate. However, if companies only view real estate as an expense, they are missing a big opportunity.
Here's our definition: Real estate productivity is the contribution an organization's investment in its facilities makes to overall performance. A productive real estate portfolio should drive profitability and contribute value. Therefore, if the portfolio costs more than it contributes over the long term, then it's time for a change.
Certainly a company incurs costs when investing in real estate. But the true measure of real estate value is not simply the direct costs, but the extent to which those costs create value beyond what is being spent. To determine if a real estate portfolio is productive, we suggest looking at the real estate contribution to ROI and other overarching metrics - rather than only at cost-per-square-foot.
Functionally, real estate enables the work of the company by providing shelter and operational spaces. Following on that basic concept, the facilities should help to create value for shareholders, directly or indirectly. Like IT or work force training, real estate is an investment in the platform used to create value for the company - whether that's building products, selling products, or delivering services.
A corporate real estate department can demonstrate the productivity of the corporate portfolio and create value for an organization in three primary ways:
- 1. Reduce costs to increase profitability
- 2. Improve return on investment (ROI)
- 3. Enable top line revenue growth
When combined, these contributions improve the overall effectiveness of an organization or company and, ultimately, its productivity.
Productivity Driver: Reduce costs to increase profitability
Historically, the real estate industry has tended to focus on cost reduction as its measure of success. It's understandable. We become so specialized in building, maintaining, and performing real estate transactions that we start to think of corporate facilities as costs instead of investments. But that can be a dangerous road to travel, because a singular focus on cost containment can actually hurt the business and deter growth.
We need to speak to more overarching C-Suite priorities, rather than cowering in the corner and being forced to achieve lower costs at the expense - literally - of other objectives. While there may be bumps in the road, this broader view will create greater alignment for a corporate real estate department with the C-suite perspective. After all, when CEOs look at their businesses, they not only see costs to be managed but also investments to drive growth. Real estate is in fact both, but is regularly mistaken for a pure cost.
A corporate real estate professional can achieve cost reduction without disregarding overall value - and, in doing so, can reduce costs in a way that does not hamper growth or reduce employee satisfaction. For example, one of our multinational corporate portfolio clients changed its efficiency metrics from a dual cost-per-square-foot/square-foot-per-employee measurement, and put in place a more strategic measurement: total cost per employee. While the previous square footage-based measurements tended to reduce site cost and increase employee density, the new measurement allows this company to support growth and improve its investment in each employee - while making significant gains in cost leverage.
In another case, we looked at the total cost per worker in an office portfolio. We included the support services and amenities as well as the cost of real estate and facilities. First, we looked at costs, space efficiency, market dynamics, desired amenities, support functions, and alternative workplace ideas. Then we optimized the total support provided to the work force, and thus improved support while reducing the total cost per person - in a word, we made the real estate more productive.
Productivity Driver: Improve return on investment