The basics of Commercial Real Estate Optimization
As the real estate market continues its slow and steady recovery, C-suite executives are showing great interest in how to optimize their corporate and commercial real estate portfolios.
All businesses — small, medium and large — are affected by real estate decisions and for Fortune 500 companies, corporate real estate can be one of the most expensive budget items.
Helping C-suite executives accurately survey, analyze and configure their asset portfolios and facilities for maximization of yield and return is Tammy Carr, principal at Mortenson, with 18 years of experience in the industry.
She uses her insights and expertise to help her clients in exploring the best strategies and tactics for planning and assessing these conditions based on each business’s unique needs and conditions with the same goal in mind – maximization of yield and return through asset optimization services for her clients. Carr, one of 2016’s “Most Influential Women in Commercial Real Estate,” shared some of those insights with AZRE.
AZRE: Explain why corporate executives need to focus on commercial real estate (CRE) optimization services from a financial perspective: return on investment (ROI), return on equity (ROE) and return on assets (ROA)?
Tammy Carr: Corporate real estate is the second or third most expensive line item for Fortune 500 companies. An organization’s cash ROA ratio is utilized as an internal benchmark for operational and financial execution, as well as to compare business performance among industry peer members. The ROA is also one of the most examined financial ratios by analysts and potential and current investors.
As a business, there is a financial imperative in fully understanding the composition of corporate real estate assets including underperforming sites or facilities negatively impacting ROA. This is specifically pertinent relative to ensuring maintenance costs of facilities are not adversely affecting operating expenses (OP-EX).
AZRE: Are optimization assessments and analysis about: valuation, OP-EX, CAP-EX or some combination of these elements?
TC: The most recent data from Mergers & Acquisitions indicated that third quarter 2016 merger and acquisition (M&A) activity for completed deals expanded at a faster pace over quarter two, reaching $1,704.4 ($Bil) in volume. Industry experts predict an even stronger 2017 transaction record. In this context, for organizations considering future acquisition, OP-EX benchmark execution is a key performance indicator (KPI) in an investor’s calculus. In terms of enterprise or institutional CRE asset footprints, Real Estate Optimization assessments can be laser-focused exclusively on OP-EX for organizations who want to ensure their portfolio is performing, not only against their internal benchmarks, but also outpacing relative to their peer set.
From a strategic perspective, if executive leadership is flying blind without at least a 5-year CAP-EX and OP-EX roadmap for their real estate and facilities assets, it will be hard to manage a level annual cash flow, plan for growth or retraction, or for corporations who seek maximum return from their real estate asset composition, a balanced combination including asset valuation.
AZRE: How does an optimization solution apply to decisions on CRE assets: build, buy, renovate, lease or maintain?
TC: Having the right cost benchmarks in place begins to frame whether it is more cost-effective to maintain structures or build new. Recommendations on action items typically range from basic risk mitigation to truly maximizing long-term ROI, and what those implications have for present and future financials. A company’s overall investment strategy prioritizes decisions with analysis results categorized into actionable intelligence options: “do nothing”, “renovate”, “buy or lease” and “build new” options.
AZRE: What size company: Fortune 500, SMB should consider utilizing a CRE asset portfolio optimization service? Does the methodology change based on company size or asset footprint?
TC: Benefits of CRE Asset Portfolio Optimization services are as diverse as the size of the companies that utilize them.
In commercial real estate, only 15-20 percent of the spend is discretionary, driving the majority of Fortune 500 companies to outsource their planning, property management and facilities management to industry experts for the purpose of maximizing returns.
SMB’s benefit through understanding the condition and value of their commercial assets to mitigate unforeseen capital expenditures, manage OP-EX, prepare for growth, control cash flow, and maximize company valuation.
Multiple factors impact the methodology for optimization strategy efforts: KPI’s, workforce attraction/retention goals, age of assets, growth plans and consolidation or merger considerations. However, company size or asset footprint do not significantly impact the decision process, only the scale and scope of the examination.
AZRE: Discuss optimization services for CRE and Corporate real estate from a highest and best use vantage point.
Real Estate Asset Optimization services provide full visibility into a CRE portfolio. To unlock the value of assets, it is necessary to take a phased approach in addressing all sites and facilities. Research should include current state due diligence, feasibility of future desired state, ROI results, market valuations, decision toolkit and funding plan. Executives must ensure the CRE portfolio mix meets the level of flexibility needed to effectively implement company strategy.
In a recent case study for a large utility, Mortenson discovered a $129 million property valuation for a severely underutilized site and subsequently devised a capital expenditure plan, a capital improvement plan and a new facility growth plan. These methodologies allow a company to capture real value that otherwise would have been missed, designated improperly or positioned incorrectly.