Real Estate: The Surprising Cost of Inaction 

Are executives overlooking the real cost of underperforming real estate and facility assets? 
by Tammy Carr

With real estate and facilities as two of the largest expenses (and assets) for the average organization, it may be surprising to learn a sizable portion of that spend is going toward wasted energy and lost productivity associated with unsuitable and inefficient performance of the physical work environments. This is not just an issue for Fortune 500 companies; increasingly, “middle market” companies, institutions and agencies are finding that conducting assessments of their holdings yields valuable data and results in actionable plans that have a significant impact on their bottom lines. Across industries and commercial real estate (CRE) segments, leadership is paying closer attention to the composition, scope, condition and value of their real estate portfolios.

How can executives minimize the drain on capital and expenses associated with the underperformance of their commercial corporate real estate portfolio and its impact on employee attraction and retention? A comprehensive portfolio assessment will analyze both the visible and hidden costs to an organization. Fundamentally, with this knowledge, executives are able to develop and implement strategies that will optimize their portfolio and maximize return on their facilities and real estate footprint.

Too often, however, executives are paralyzed by the initial financial investment and/or staff investment that may be required to engage in reversing the trend, even if the internal rate of return may meet or exceed their requirements.

The truth is, inaction can quietly kill a bottom line. In fact, hundreds of examples exist that illustrate a variety of ways in which a facility upgrade/renewal/replacement can positively affect a company’s profitability by contributing to overall operating cost efficiency, employee productivity and worker retention.

Ignored cost drivers: operations & maintenance

The cost of maintaining a space that has deferred maintenance and/or higher-than-average operations and maintenance (O&M) costs, can be surprisingly high. During a recent real estate and facility assessment for a corporate customer, our analysis uncovered inefficiencies within its 10-year-old building resulting in $1.09/square foot annual costs, simply due to subpar energy and systems performance.

A renovation or new space investment offers the opportunity for businesses to take advantage of the latest technology to lower utility costs. LED lighting, daylight harvesting techniques, high-efficiency boilers and other mechanical system improvements should all be reviewed for potential ROI. With one of our clients, for example, a small step such as implementing new daylighting controls for a four-floor corporate office reduced energy use from lighting by 45 percent over standard code, with a three-year payback period.

It is important for firms to conduct the necessary legwork to benchmark their own performance for O&M costs against their peers. Factors such as location, age, size and type of facility must be considered in the calculation. For the majority of our customers, we typically find they are meeting expected targets in one area, only to be underperforming in other areas. Rarely do firms exceed benchmarks without having begun their operational renewal process with a specific plan and targets in place. Without this understanding, businesses are missing a big piece of the puzzle required to determine the true costs of waiting to make investments with attractive returns.

Underappreciated cost drivers: productivity, innovation, recruiting & retention

Additionally, while the initial investment involved with a project may seem overwhelming, the truth is it can pale in comparison to an organization’s employee-related costs, which typically amount to 70 to 90 percent of a company’s overall operating costs, according to Gensler Consulting in The LEADER magazine.

But do employee-related costs have anything to do with a potential facility project? In short, they have everything to do with it, as numerous studies have shown that office design can have a positive impact on both the productivity and wellbeing of employees. Undertaking a new project offers a business the opportunity to leave outmoded environments behind and construct modern office spaces that can improve employee health, productivity and retention.

According to the GSA’s Innovative Workplaces report, businesses lose approximately $1 million per year for the average office building (370 employees) due to poor space planning alone. And those aren’t the only costs. In fact, Gensler’s U.S. Workplace Survey 2016 found that innovative businesses are five times more likely to prioritize modern workspace best practices, and employees operating in these modern workplaces are more likely to innovate.

Investing in the workplace does not just pay off in employee performance; it can also help businesses keep those high-performing employees around, as a 2012 study in the Journal of Vocational Behavior found that changes to the work environment can increase an employee’s commitment to the organization.

This is important because labor market growth is slowing in the U.S., and constantly recruiting and training new talent is costly. In the US, the labor force is expected to grow only 0.5 percent between 2014 and 2024, according to the Bureau of Labor Statistics, which means the supply and demand shift will be favorable for employees to seek out the best possible workplace environment.

Meanwhile, the cost of turnover for average workers making less than $75,000 a year, which covers 9 in 10 workers in the U.S., is roughly equivalent to 20 percent of the worker’s salary. Expect the price tag to increase to 150 percent of salary for turnover of knowledge workers earning around $75,000. Rather than paying those costs over and over again, businesses need to focus on improvements that incentivize employee satisfaction and loyalty.

A study commissioned by HASSEL also found that an appealing workplace can double a business’ chances of landing potential employees and a “modern workplace aesthetic” can triple an employer’s appeal.

Not only can an organization drastically reduce the costs of turnover, but additionally increase productivity and engagement in employees by providing them with a workspace that suits their needs. Knoll found in a study that a $200,000 investment in workspace capability upgrades, including the quality of meeting spaces, can substantially reduce annual costs with total payback after two years.

Identify the true cost of inaction

Today, employees may sit in cubicles or half partitions; they may work in an activity-based design or have their own private office — the options are abundant. Each company has different needs and objectives, and it’s essential to find the workplace environment that aligns with the firm’s objectives, while ensuring employee satisfaction and retention within its industry.

A facility conditions assessment done right — coupled with benchmarking data and expert analysis — will deliver visibility into hidden annual expenditures, provide insight into potential future surprises, and identify information critical to market valuation for underutilized facilities or properties. Whatever the situation, it’s important to know what underperforming space is costing relative to the income statement. This analysis is essential to planning investments for maximum effectiveness and ROI.

Tammy Carr is a principal with Mortenson, a national leader in building, development and real estate optimization services, leading its business development efforts in the Arizona marketplace. With more than 18 years’ project experience spanning multiple markets — including municipal, healthcare, manufacturing, industrial, hospitality and corporate sectors — she mentors the team on business acquisition and clear, consistent and effective messaging.

Among the numerous Valley organizations with which she is involved are NAIOP Commercial Real Estate Development Association, Greater Phoenix Economic Council, Urban Land Institute’s Women’s Leadership Initiative and Arizona Association for Economic Development. Among her industry awards is NAIOP’s 2014 Principal Member of the Year.

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