Let’s talk about the building blocks of a real estate program: the potential projects. Across my experience, the best programs start by assuming every single site, lease, workplace, or real estate service could be a possible project. Every single location should go into the analysis bucket to be evaluated for what may be possible. Yes, this makes the analysis of opportunities take longer, but it also often brings about a surprising number of alternatives that would have otherwise never been considered. The wider the net you cast, the more fish you will usually catch.
Even though every site may be on the list for consideration, we will not have time to go into the details of each of them this early on. It is important to build up categories for us to consider. I typically start by building a series of filters that rate each project, but every single filter starts by looking at how much space could be reduced. This process could be an equation on an Excel spreadsheet taking in inputs for space, headcount, occupancy, and cost. It could also be a bit more manual in looking at what is possible based on experience of the teams most familiar with it. However, the teams most familiar with a site can sometimes be conservative about what is possible.
The starting point for all real estate savings is looking at what would it look like if a site was being designed brand new; how big is it today versus how big it would be. The bigger this number as a percent of the total site, the more likely this site will have some type of opportunity. If a site can shed less than 10% of its space, it is going to be hard to do much that generates savings. But sites that can save 50% or more are usually going to generate savings without too much pushing.
From there, look at each site by the type of project it could be (this list is not exhaustive but meant to give a high-level picture of what to look at):
- Owned site Sale/Leaseback. Any owned locations may have financial opportunities worth considering that can bring in cash today by moving to a traditional lease structure. This can be especially helpful when you have an opportunity to shift building maintenance and operations to a third party.
- Natural Lease Expiry. Sites where the lease expiration date is within the program window will always be the easiest to implement. As a rule, these sites will have the lowest cost, lowest complication to complete.
- Lease Termination or Lease Break Option. These sites give us a clean way to walk away from our current space with a knowable cost to achieve. These may require a bit of extra work with a landlord, but they still work out pretty straightforward.
- Sublease. Not every site with a large amount of unneeded space can be sublet as it depends on the design, lease, and location. Subleases are also highly timing dependent because you are at the mercy of finding a subtenant. The benefit you have in a program is the ability to estimate what kind of discount you can give on the sublease. Many times a project may reach the right financial paybacks at a sublease even 50 to 75% of your current rate. This is not to say you do not try for as much as you can get, but you do have a potential market advantage.
- Write-off. Sometimes the financials of an opportunity are such that it is best to take a one-time write-off on the lease and simply move early to a new site. Depending on your program structure, you could even try to negotiate an early buy-out from the landlord or take a non-cash P&L impact giving you a degree of freedom in considering these.
- Consolidation. There are often opportunities for sites within 20 to 60 miles (depending on the business model) to be consolidated into a single location. This could even mean completing a project with negligible costs if the consolidation can happen in one of the sites without much reconfiguration. The challenge in most consolidations is overcoming any one-time costs that need to be covered, but the program can hopefully account for that.
- Bifurcation. In some markets, there should be consideration given to moving from a single downtown/high-cost site to a smaller downtown site plus a suburban location. This opportunity can be highly flexible based on your employee locations in the market as well as the market opportunities around the area.
- Closure. Some sites may no longer be needed by the business. A real estate program can provide good cover for a business leader to close a physical space that they do not want to be paying for. Sometimes it is not a true closure but a move from a leased site to a coworking type of model.
Once you have a first pass of your analysis for all sites, it is time to sort each site into a High/Medium/Low likelihood of being a program project. The only Low projects at the start should be projects where there is no expiration date, the space is appropriate, and the current costs are not excessive. High projects should be any site where there is more than ~40% space savings opportunity or fits cleanly into one of the above buckets. Otherwise, group the projects in the middle.
Then, it is time to run a high level analysis for each and every High opportunity site. It is not about getting to a perfect scenario, but instead getting a good range of costs, savings, and likely start and delivery years. These ranges may be wide to start with. Spend time looking at what might be the most likely project you would deliver. After that, do the same for the Medium opportunities. You may not need to spend quite as much time on each of these, but you should still be as complete as you can. Finally, go through the Low opportunity projects and make sure you have not missed anything obvious. There are often a few sites that the math says nothing can be done for but there is a real possibility for after all.
The team that you have working on this analysis is something you need to carefully balance. This phase of program development is as much (or more) art as science. There is no perfect forecasting methodology or crystal ball available to get firm answers. At this level, you are only looking to create a view of what might get done without building business cases for any individual project. Until there is an approved program, it is best to keep it high level because you will likely have to come back and revise everything as the process moves forward.
Out of this process, you are looking to have a range of potential benefits and costs with a ranking of how likely an opportunity range is to complete. Ideally, your target benefit from your goal is somewhere in the middle of both of these ranges. If you have a range of benefits from $35m to $65m and your target benefits is $50m, that is a good place to start. However, if you have the same range but a $100m target, it may be time to revisit the goals already.
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