Small and mid-market companies are at an inherent disadvantage in their ability to utilize real estate as a strategic driver of their business. Where large, global companies employ departments to provide deep expertise and infrastructure to manage the process, small and mid-market companies have neither the expertise nor the ability to sustain such infrastructure.
As a result, they treat it as an expense to be minimized, rather than an asset that can support and leverage their efforts to grow their business, increase profits and maximize the enterprise value of their business.
Over the years, we’ve learned some of the most common—and most damaging—mistakes made by small and mid-market organizations. We share these with you to help you avoid them. And, of course, if you’d like some help, please don’t hesitate to reach out to one of our advisors to learn more about The Strategic Real Estate Advantage™.
The most important thing you must keep in mind when engaged in a business real estate decision is that the decision you are making isn’t about real estate… it’s about your business. You’re not leasing/purchasing space—you’re growing your business.
The biggest mistake made by small and mid-market companies is the failure to fully align and connect real estate decisions with overall business strategy. Even companies with as little as 2,500 sq. ft. of space can gain significant operational, financial and marketing advantages by taking a strategic approach.
The failure to connect real estate to you overall business strategy not only has the direct impact of higher occupancy costs, it is likely to have measurably adverse effects on cash flow, the flexibility and control of your business, productivity, and your ability to compete.
With the Internet today, it is easier than ever to think you have an understanding of the market. In a matter of seconds you can see what space is available and even how much the space is leasing or selling for.
This has had two negative consequences:
- Armed with this information, business owners and executives have been lulled into a false sense of confidence.
- And, frankly, real estate brokers have gotten complacent. It’s easier than ever to pull reams of data, print out tons of pictures, and present the appearance of knowledge. While this has helped real estate agents close business, it’s hurting their clients.
The reality is that while the transactional information about real estate is easily available, the knowledge about real estate and how it strategically aligns with your business is as difficult to access and disseminate as ever. The ecosystem that comprises the commercial real estate industry is fraught with complexity and fractured service providers. Understanding the market and utilizing your project’s appropriate industry tools is paramount to a successful and timely real estate services.
It seems simple enough; add up your annual rent/mortgage payments, add any build-out, and add the cost of utilities and upkeep. Once you add up these factors you find the space that fits your needs and has the lowest “cost.” As with most business principles, what appears simple and obvious is usually not effective.
We call the calculation above The Direct Cost of Occupancy. Far more important is The Total Cost of Occupancy; which could also include costs such as furniture, Internet connectivity, employee commuting time/gas, landlord pass-throughs, etc. This is THE critical number that shows all the underlying costs of real estate instead of just the direct cost. The Total Cost of Occupancy must be understood to ensure that your real estate decisions move you toward success. Countless times, we’ve seen that the lowest direct cost represents the highest total cost.
Over the last 10 years, one of the most frequent questions we’ve gotten from clients is about the pros and cons of buying vs. leasing. While the issue can appear to be relatively simple and straightforward, the reality is that the entire issue is fraught with complexity.
It is impossible to clearly and confidently address this issue without there first being clear alignment with the overall business strategy (see mistake one above). The decision to buy or lease impacts an almost infinite number of variables, some of the most important being:
- Cash flow
- Total cost of occupancy
- Restricting funds
- Income statement & balance sheet
- Company valuation
- Personal wealth creation
Making the buy vs. lease decision isn’t really about making a right/wrong decision. It’s about understanding the trade-offs incurred with each decision, and ensuring that you make the one that best fits your strategy and investment goals. It requires scenario planning and a comprehensive review of financial impacts.
While the entire real estate process can be complex and disruptive, the build-out process stands out at the extreme. While large, global organizations employ entire departments to manage the process, small and mid-market companies don’t have the infrastructure or permanent need to manage the process professionally.
This leads companies to typically choose between two less-than-desirable approaches: rely on the landlord to manage the build-out, or do it themselves.
Doing it yourself will typically yield far better results, but it also multiplies the disruption, the indirect costs of the process as well as opportunity costs. Additionally, it can add significant risk in the near and long-term.
It is far more effective to utilize construction management services to ensure the process works smoothly for you. At first blush, this approach may appear to “cost” more, but it is certain to reduce the total cost of occupancy. This frees you to focus on your primary business while leveraging our experienced professionals to manage your project’s complexities and risks.
Anyone who has negotiated a lease understands just how difficult the process can be. It’s disruptive, emotional and high impact. When your real estate decisions are integrated with your business strategy (see mistake one above), you have a full understanding of the market (see mistake two above), and you understand the needs of the other party. If you combine these elements with a clear negotiation process, you gain a tremendous advantage that can have a multi-million-dollar impact on your business.
Real estate decisions are fraught with complexity and risk. The decisions you make today will have a direct impact on what you are able to do in the future, as well as the results you will enjoy.
Make good decisions and you’ll see your business grow and your business enterprise soar.
Make ineffective decisions and you’ll find your business hamstrung, and your business will become more volatile.
Real estate is typically the second-largest controllable expense for small and mid-market businesses. As any executive of a growth business understands, the decisions you make about cash and capital will have a disproportionate impact on your business results.