Beyond the obvious occupancy break-even rate, or a building’s vacancy rate and basic rent metrics, there are several other factors that affect your true occupancy cost, including Common Area Maintenance (otherwise known as CAM) and other hidden building fees.
To explore this further, let’s take a closer look at the true occupancy costs that you should consider. Here’s what you should know so that you can fully understand true occupancy cost.
When it comes to commercial real estate, it’s no secret that many executives and those in upper-level management tend to remain “hands off” when it comes to the details of a transaction. But have you ever wondered why? Some may feel that they can’t have a real impact on the physical, brick-and-mortar level of the company. More often, however, these executives choose to focus their attention and efforts in other areas of the business, and may possibly even regard occupancy costs as trivial or insignificant.
However, what many people actually don’t know is the true impact that rising occupancy costs can have on your company’s bottom line — leading to hindered earnings, share values, and more. And, as the saying goes, “a penny saved is a penny earned” — meaning that reducing occupancy costs can actually be a sound strategy to help make the company more profitable, since every dollar saved adds to the bottom line.
However, that isn’t to say that managing occupancy costs is easy — in fact, most people would tell you that it’s anything but easy. Most of the necessary decisions fall across multiple departments of an organization, and many require the input and collaboration of a number of executives.
So, then, where do you begin? How can you uncover these types of expenses, so that you know where to begin in cutting back? Let’s take a closer look…
So, then, how can you best understand true occupancy cost to maximize your profit? Let’s look at 2 questions to ask to help uncover your hidden occupancy costs.
Let’s break this down by using an example. Let’s say you have a 2,000 square foot space that charges $50 in rent and $20 in Common Area Maintenance charges per square foot. By doing some simple calculations, it’s easy to see that this space charges $70 per square foot, for a total occupancy cost of $140,000 each year.
But, to take it one step further, it’s important to remember that all space isn’t created equally. Let’s say that you have two 2,000 square foot spaces, and both are built out to accommodate 20 people. One of these spaces is at full capacity at 20 employees, but the other is only operating with a staff of 15, due to a number of seasonal positions leaving. Did you know that, in this scenario, the latter workspace is actually more expensive, due to its wasted space?
Once you know to look for this cost, you can start to really identify where your CRE dollars are being wasted, and then begin to trim down those spaces — and simultaneously, your costs.
Another sneaky area when it comes to hidden occupancy costs is the costs incurred to build out a new space. When leasing new space, most companies will immediately build it out to suit their organizational needs and standards — it’s just common practice. However, you should always compare your build-out costs to the averages in your area. While these standards aren’t always a hard and fast number to stick to (after all, there are cases in which higher than average build-out costs are justifiable), it’s important to remember that any money spent on unnecessary construction costs add to your occupancy cost — and come off your bottom line.
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