COVER STORY, AUGUST 2009

TAKING CONTROL
Real estate strategies to boost a corporation’s bottom line.
David Rau

Generally, real estate is one of the largest expenses for a corporation (behind personnel and IT or manufacturing equipment). Yet, companies don’t spend a lot of time thinking about it because it’s not their core business. Real estate managers can gain a strategic seat at the C-level table by showing executives how millions of dollars can be added to a corporation’s bottom line through basic real estate management changes.

For example, a large financial services company based in Minneapolis, whose business model had changed dramatically as a result of shifts in the economy, realigned its real estate strategy to synchronize with the organization’s business goals, and subsequently uncovered $10 million in savings over a 3-year period.

Ensure that your real estate strategy ties into your business strategy

The financial services company implemented a two-step strategic plan focusing on three areas: asset utilization, opportunities to convert under-utilized assets into cash, and the restructuring of real estate and facilities. Real estate costs formerly embedded in business units were extracted into a common cost center for greater financial accountability. 

The following results came from the completed real estate strategy:

• Eight under-utilized locations totaling 1 million square feet were closed, sold or redeveloped, reducing the client’s rent obligation by 35 percent.

• Three owned facilities were sold, generating cash proceeds in excess of $4.8 million.

• A remaining 16-acre site was evaluated as a redevelopment opportunity that will yield $35 million to $40 million. 

By consolidating real estate and facilities departments, as outlined in the strategic plan, the company achieved $1.4 million in annual operational cost savings through staff reductions, aggressive vendor management and process improvements.

Target operating expenses

A company must determine how its business tracks maintenance requests, facility services and real estate transactions. If the company doesn’t have a system to track all maintenance calls, there is a real possibility of missing the savings opportunity provided by channeling simple requests to a lower-cost vendor or an in-house resource, rather than consistently calling upon a higher-priced contractor.

NorthMarq’s financial services client in Minneapolis worked with an outside real estate management company to develop a more centralized facilities management program and leverage corporate volume, resulting in the consolidation of vendors and a national purchasing program, which lead to tremendous long-term savings.

Additionally, energy consumption can be a significant drain on operating costs, but the benefits of conservation can both save money and provide a positive environmental impact. The financial services company implemented an aggressive demand management program — projects such as lighting retrofits, high-pressure humidification in its printing operations and installation of energy management systems saved millions of dollars. Overall energy use declined by 13 percent in 2008; working with the company’s Internet technology department to shut off computer monitors when not in use yielded an additional $75,000 in savings.

Improve business controls

To improve control, it is important to centralize real estate information. When there are multiple spreadsheets and accounting systems showing discrepancies, a business is likely losing money daily.

Corporations lose track of how many locations they have, how much each costs to operate or when their leases need to be renewed simply because managing real estate portfolios is not the business they are in. Businesses should taking inventory and input the findings into a system that will show exactly when leases should be renegotiated and exactly what the payments should be. This kind of audit can save millions of dollars. In the case of one client in Silicon Valley, NorthMarq uncovered $1.1 million in sub-tenant rent and created $100,000 in savings through audits of current lease obligations.

Taking steps to effectively manage a corporate real estate portfolio during a challenging economic environment can result in a double win for the real estate user. Not only can companies boost their bottom line when it is needed most, but a powerful base of real estate may better position businesses to succeed when the economy recovers.

David Rau joined NorthMarq in 2009 as the vice president of business development with responsibility for the Midwest region.

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