Last week, we spoke with Mortenson principal, Tammy Carr, about the basics of commercial, corporate and enterprise real estate optimization efforts. Today, we dig deeper and explore the optimization value proposition relative to more specific and nuanced situations.
AZRE: Can optimization services provide executives with learnings about disposition or expansion decisions? Can you elaborate?
Tammy Carr: Executives must have deep-level insight into their headcounts and capital. This knowledge set includes: how many people can operationally fit into existing facilities; how many additional square feet are needed to accommodate corporate growth in 5-10 years and what types of spaces are needed (meeting space, collaboration space, vs. quiet workspace). Understanding and feeling confident in the accuracy of a firm’s workforce growth projections, allows for optimization services that can make the difference between a measured, proactive approach and a reactive approach that leads to unplanned CAP-EX. And conversely, if there is excess space capacity, optimization services can provide insight into which disposition option offers the most value to shareholders.
AZRE: Does optimization pertain to peer-to-peer competitor benchmarking, as a means to monitor cost and expense?
TC: Benchmarking is a continuous process that measures processes and performance for purposes of organizational comparison and improvement. These tools help companies monitor, assess, anticipate and mitigate unnecessary risks and costs. Conducting organizational benchmarking, as well as peer-to-peer competitor benchmarking can identify costly or inefficient practices and contribute to strengthening the bottom line by reducing operating costs. This is an invaluable opportunity to seek the highest level of operational efficiency, productivity and performance, as well as proactively position CRE assets for maximum valuation should an M&A transaction present itself.
AZRE: Discuss the topic of cost delta as it relates to optimization services.
TC: Findings from an assessment typically include a stoplight-style rating system indicating whether any problems exist, and, if so, which issues are benign and which may be red hot problems. Delta, specifically the degree and latitude of change, should be addressed as soon as possible to prevent a threat to capital stability. Mortenson experience shows that at least 30 percent of corporate facilities will have hidden issues and deferred maintenance that the C-suite is unaware of. A recently conducted case study illustrated $100,000 a year in over-spending on electricity in just one satellite facility.
The assessment will determine what facilities are truly costing an organization. Examination includes gauging opportunities through ROI analysis for OP-EX savings and creating a CAP-EX cash flow roadmap. Assessments provide a grounding for risk avoidance, clarity on benchmark performance and properly balancing a real estate portfolio ensuring valuation is maximizing ROA.
AZRE: Can these services be tailored to companies contemplating a merger or acquisition?
TC: Citing a 2016 study, the CEO of Deloitte Corporate Finance LLC notes, “…among the broader universe of companies in our survey, 78 percent pointed to insufficient due diligence as a key barrier to success in merger and acquisition transactions.” During acquisitions, rigorous due diligence for target firm’s real estate and facility assets is rarely completed due to lack of bandwidth.
In a recent case, an evaluation revealed that an organization would essentially save $29 million by demolishing a building, when market conditions swiftly changed, which unlocked significant capital to be redeployed elsewhere. A CRE Asset Portfolio Optimization assessment performed by a company interested in selling or merging can improve valuation and mitigate risk for the acquiring company, expediting the merger and acquisition process.
Integration plans on how to: utilize space; consolidate, dispose of lease A and grow lease B, renovate, build new, take to market underperforming or no longer necessary sites or buildings and geographic expansion plans will be accelerated by the assessment.
AZRE: Is there one major takeaway executives should understand about CRE optimization services?
TC: Knowledge = Mitigated Risk + Informed Decisions
A CRE Asset Portfolio assessment will deliver visibility into annual OP-EX spend relative to peers through operations and maintenance (O&M) benchmarking; provide insight into potential future expenditures CAP-EX and cash flow schedules; identify geographic placement and space needs; provide information critical to growth or consolidation plans and ensure accurate market valuation of corporate assets and the enterprise value of the company.