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
On a very basic level in the real estate portfolio, an investment is made to build or buy facilities, and then more funds are required to maintain and operate a company's offices, stores, data centers, factories, labs, and other facilities. Further, a corporation invests in the real estate organization itself: the people and processes that bring it all together. These investments then show up on the balance sheet as assets and liabilities - that is, owned facilities are designated as assets, while liabilities include leases, debt financing, payroll obligations, and investment in tools and technology.
To be considered a good investment, real estate should show impressive returns. This can take the form of ROI (return-on-investment) or, on a more facility-specific level, ROA (return-on-asset). A sound ROA means the capital invested in a real estate asset should be an appropriate portion of the cost of doing business.without consuming capital that could be deployed in a better way to grow the company. If a company is able to maximize ROA across its portfolio, then its facilities are, one-by-one, contributing productively to the creation of shareholder value.
ROI is a broader measurement, and one that the corporate real estate organization is capable of impacting beyond individual facilities. Improvements to ROI can be made by investing in people and processes with portfolio-wide impact, such as by investing in the recruitment of high-performing personnel, installment of systems that boost efficiency, elimination of the need for certain facilities through portfolio optimization, and the implementation of productivity-enhancing technology platforms.
An example of this ROI-focused view on real estate productivity comes from the technology sector. We worked with a major technology firm to look at the total capital consumed by a set of facility assets and then together created a long-term capital plan guided by efficient use of capital and return on assets. By increasing the facilities' ROA, we increased the firm's overall return on assets - one of the key performance metrics for the company's investors.
ROI can be significantly impacted through strategic site selection and other portfolio optimization programs. In one company's recent regional office relocation project, we identified two location options with similar expense profiles. We then looked at the labor profile, commuting patterns, and access to mass transit. With that information in-hand, we calculated the relative cost of labor and employee turnover, effects on commute time, and associated carbon emissions. Selecting the right location using this framework helped the company access a labor force aligned with its operations, reduced employee commute time, and helped reduce the company's carbon footprint. In that process, the company both reduced its location's effect on the environment and improved the productivity of its capital and work force.
Productivity Driver: Enable top-line revenue growth
At its purest, productivity is the creation - the production - of goods and services. Real estate is the space in which those goods and services are produced. So by its very nature, real estate makes all other types of productivity possible. After all, you cannot look at the output of a function without considering the space in which it takes place. The good news for the C-Suite is that great opportunity for increasing productivity overall can be achieved by optimizing the location, configuration, and architecture of an organization's physical structures. In this way, the corporate real estate function contributes directly to the productivity of the work conducted within - "the business of the business."
Of course, the connection between real estate and the revenue stream is more direct in certain kinds of businesses than in others. In any retail operation, store location can make or break revenue targets and same store sales - store productivity. Retail rents in strategic locations are typically significantly higher than in less desirable locations, yet a well-located store's revenue is generally expected to more than make up for its higher lease rates.
In other industries, the tie is less clear and direct - but can be equally as powerful. For example, in the life sciences industry, the ability to attract and retain top scientists is critical to achieving return on investment from research and development (R&D). New drug discoveries and other scientific advancements are directly tied to the creation of new revenue streams. As a result, biopharmaceutical companies typically invest in well-located and technologically sophisticated laboratories and conference facilities to drive successful research. Additionally, they have begun to invest in sophisticated facility management functionality. Expert integrated facility management teams are able to ensure that system failures do not endanger the validity of highly controlled experiments, and that sensitive equipment is provided a consistent environment to avoid shut-downs.
Sales organizations also cite office locations as directly supportive of revenue generation. While this is becoming less essential as the world becomes more digitally connected, many organizations continue to cite opening an office in a new region as a direct driver of new revenues. Many companies today are opening sales offices in the Asia-Pacific region to take advantage of the market growth coming from businesses and consumers throughout Asia, including markets in China and India in particular.
What Is Productivity to Your Organization?
Real estate productivity means that facilities make a contribution to the success of the business they support. This contribution is, by nature, very specific to each individual organization, its operations, and its culture. For instance, to a hospital system, productive real estate may mean sophisticated and numerous operating rooms, robotic materials-handling systems, and well-designed emergency departments. Hospitals calculate productivity through a variety of metrics from FTE/B (full-time employee per bed), labor costs per operating revenue, total operating profit margin, or other metrics. The definition is very different for a chain of retail stores that measure in sales-per-square-foot, same store sales, and direct productivity measurements for sales, stock, space, and people. In another highly divergent example, banks tend to measure productivity via efficiency ratios, return on equity (ROE), risk-adjusted return on capital (RAROC), and other statistics. While there are common themes, it is critical to tie real estate to the metrics important to an organization's industry, shareholders, and stakeholders, rather than sticking to "inside baseball" real estate metrics focused on cost-per-square-foot.
The common thread that runs through every real estate portfolio is that productivity is defined by the ability to contribute directly to financial and operational success. So there is really only one question left to ask: how can you drive productivity in your organization?