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Ranked #7: Occupancy & Construction Costs

The importance of Occupancy & construction costs, which ranked seventh in Area Development's Corporate Survey, varies according to facility function.

Aug/Sep 06
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The Project's Place in the Corporate Real Estate Portfolio
Real estate is a significant balance sheet item and a major contributor to enterprise costs. After labor costs, occupancy costs are often the next biggest bill. Many opportunities to cut real estate costs are overlooked. It is essential to take a total portfolio perspective when selecting a site. Consider the following portfolio cost-reduction opportunities:

Optimizing capacity: Does the company have surplus, appropriate space in its property portfolio? Review the trade-offs between using existing space versus greenfield solutions.
Alternative work placing: Can you leverage technology? Hoteling and telecommuting can often reduce space requirements without reducing headcount.
Efficient space allocation: Are space standards consistent across the organization, and can square footage per person be reduced without compromising the work environment while promoting team collaboration? Is the configuration efficient or a waste of rentable space?
Maximizing asset value: Sometimes the market value of a property is significantly greater than book or utility value. Selling the site and moving the operation can then be a source of cash.
Other financing techniques, such as a sale-leaseback arrangement, can also reduce upfront cash outlays.

In summary, the relative importance of occupancy and construction costs as a site selection factor depends on the situation. While nearly always an obvious and visible component, real estate may be the most variable of the major cost categories of site selection, being an afterthought in some situations.

The efficiency of how organizations make decisions also comes into play. In highly decentralized organizations, business units, rather than corporate real estate departments, may spearhead location projects and site selection decisions. The centralized corporate real estate team may eventually have to face a hodgepodge of inefficient space and long-term commitments. Inefficient planning, use, and administration usually result in underutilized properties and excess real estate costs. Companies that align location facility decisions with broader corporate strategy and enterprise cost management objectives represent the gold standard. In these organizations, business unit leadership works hand in hand with the corporate real estate and workplace team to plan and implement location strategy and project-specific site selection.

Larry Moretti is a senior team member of Deloitte's Global Location Strategies and Corporate Real Estate practices. He has over 20 years' experience working with corporate clients on workplace location and facility portfolio issues around the world.

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