5 not-so-simple steps for building a Real Estate Portfolio Strategy for 2023 (and beyond)

I hear the question “What will real estate portfolios look like in the future?” a lot these days. Words like Hybrid, Flexible, Resilient, Agile, Mobile, Collaborative, and Smaller keep playing on repeat in real estate strategy sessions. However, these are usually just descriptive words in these sessions without much data to back up what they mean when building a real estate strategy. So to help out those companies working through their long-term strategy, here are some not-so-simple steps for coming up with a future direction. (Please know that I did my best to make them simple but real estate on its best day is challenging and these are not its best days – even if they are fun and exciting!)

1. Estimate how many employees and visitors are in each office on a typical and peak day.

Starting with the basics. Most companies shortcut this step before the pandemic by having one seat per person assigned to the office. The pandemic has since proven this strategy deficient by emphasizing that not everyone is in the office every day. Providing space for people who are not in the office is a quick way to spend unnecessary real estate dollars.

Please note that the answer to this question may have extreme variance and may not be knowable at this moment. Sometimes it is necessary to make a best guess and then come back to it at a later time. How conservative or aggressive that guess is will be based on the flexibility and risk tolerance of the business.

2. Identify the types of spaces people in the office need and want.

The way people use an office when they are not there every day is different than how it is used by people in five days a week. Spaces that support meetings and conversations have a higher demand than quiet desks. Teams have a higher preference for space directly together than being scattered. Movement across space types throughout the day is more frequent versus people claiming one space for the entirety of the day.

In this step, it is important to understand that managers in the business rarely understand their actual space needs. They will often remember past pain points but will rarely remember items that they have had in abundance. This makes surveying requirements a challenge. Similarly, conference room demand will always make it seem as if there are not enough rooms between 11a and 2p but meetings can move so it is imperative to look across a broader time from at least 9a to 4p.

3. Use the outcomes from 1 and 2 to target the offices that have the most opportunity for change.

Most real estate strategies start by sorting locations by lease expiration or leave event dates. I always argue that it is more important to start with the locations that offer the biggest potential benefit. Lease dates are a fact of life in everything we do in real estate, but opportunity can sometimes be big enough to allow for creativity.

Go through every single location in the portfolio and build an estimate of how much space is needed given the outcomes of steps 1 and 2. If you are not seeing opportunities for downsizing, it is possible you have gone too conservative with your estimates and need to try again. This is a common problem in these efforts. Most of us naturally tend to avoid massive changes to a given site. However, this step should show a 30 to 70% potential reduction in most locations. I have never worked with a company that did not see this level of opportunity in a greenfield approach when they were really honest with themselves. This does not mean you will definitively reduce that much, this is only a targeting step.

4. Prioritize opportunities based on the size of the prize, lease expiration date, market opportunities, and the reality of getting business agreement on changes.

This is where we begin to layer the realities of execution into the plan. Targets and potential are nice but they do not get business leaders to give us the funds to make changes on their own. For each target opportunity, identify whether a change is realistic and when that change could realistically occur. Often times there are multiple windows of opportunity given lease breaks or sublease opportunities prior to the actual expiration. Additionally, some business leaders will be more or less open to being early movers to a new workplace standard.

It will not always be possible to create a firm plan for a site. Some may end up with a 50% likelihood of happening in a given year. Similarly, there are always projects that were never planned for or on the target list that somehow come around as real and tangible at the last minute. This step is not about being completely certain, but about estimating the total range of what could happen. Each estimate should include a cost to achieve along with the savings that would come out of it.

5. Build the business case for the year.

In an ideal world, real estate could create a multi-year plan and just run with it. However, the business realities of capital planning, margin targets, cash flow forecasting, and resource availability to do everything that needs to get done means that there are always trade-offs that need to occur. Not every project will save money. Not every project that saves money has a great payback. The business case should reflect the full reality of what is likely to occur during the year. This means expecting more costs and fewer savings than the forecasts call for.

If all the steps above are fully completed, the business case should sell itself to both finance and business leaders. Where there are gaps, there need to be caveats around risks and expectations. The way the year actually plays out will vary from the business case. Markets are never as neat and tidy as we expect them to be on the cost side. Business changes always come through at the last minute changing our forecasts once conversations get deeper at a market level. But if done right, the shape and amounts should be close to accurate.

Finally, repeat this process every year.

This is the most critical part of the process. Repeat all the above every single year. Start from scratch and see how the new estimates compare to last year’s. Look back at completed projects and see what went right and what can be improved. Between the changes to real estate markets and business operations during the prior 12 months, the old forecast is probably out-of-date anyway. High-performing real estate teams reevaluate the total strategy regularly.