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November 29, 2022
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CBRE: 10 High-Impact Moves to Reduce Total Cost of Occupancy

In the current economic context, marked by rising inflation, low sources of capital, but also by multiple business challenges, CBRE specialists come up with recommendations and suggest companies 10 initiatives to reduce expenses/costs with office spaces.

“We are living through a challenging economic period, marked by uncertainty and an increasing cost of living. Beside the impact of inflation felt at a personal level, businesses are struggling with increasing risks, declining market performance and with an increase in operational costs. The real estate portfolio representing one of the main three cost drivers for most businesses is also directly impacted by uncertainty and the increasing inflation rate. Based on local and global experience and data, CBRE consultants have identified 10 impact changes for businesses to get through the current challenges and render their model as crisis-proof as possible. We are gladly sharing our expertise and know-how  for the business ecosystem in Romania in another exercise of solidarity”, says Andrei Gavrilovici, Senior Consultant, Corporate Real Estate at CBRE Romania.

Transforming the Approach to Space. Corporate offices must be adapted to the realities of hybrid work schedules but only after a correct analysis of the available data on hybrid working styles and the usage pattern of a company’s premises. A trend we are seeing in the market consists of a need for less private workspace (“space for me”) and more common areas – team collaboration (“space for us”) in the design of the office. In this regard, CBRE studies observed a 25% reduction in space “for me” at a global level over the last year. Understanding how hybrid work impacts space requirements will allow companies to make smart changes in space standards. This knowledge will help companies take the right decisions, such as mitigating the risk of reducing too much their footprint only to expand later on at less competitive commercial terms. Educated and data-backed decisions will allow businesses to optimize their real estate footprint, improve the overall experience of their human capital as well as generate savings.

“In Bucharest, there is an additional risk for businesses to be considered from a real estate perspective. This is generated by a limited number of new office buildings to be delivered in the upcoming years and an increase in demand for central locations which reduces the availability of well-located Class A office spaces. In order to secure competitive commercial terms, it is strongly recommended for businesses to start analysing their real estate portfolio 18 months prior to lease expiry, to consider creative solutions such as the decentralization of their offices according to operational needs, to consider entering pre-lease contracts with professional real estate developers, and if transacting in an aging building, to contractually ensure that owners undertake to constantly upgrade the property and  deliver modern technical standards “, adds Andrei Gavrilovici, Senior Consultant, Corporate Real Estate at CBRE Romania.

Shedding Space from the Portfolio. Another strategy to adapt to the current economic conditions is to develop space consolidation strategies that begin with line-of-business considerations, labor availability, space market conditions and sustainability priorities, resulting in both cost savings and carbon footprint reduction. Right-sizing the real estate portfolios will create better employee experiences that encourage employees to return to the office and improve overall business performance.

Unlocking Trapped Capital. Company-owned buildings can become a liability as they get older due to operational inefficiency and outdated design features and amenities that don’t help businesses’ hiring and retention capacities.  The phased sale of real estate assets and sale-leaseback solutions do represent a solution since they transfer the risk of vacancy, future capital requirements, functional obsolescence and deferred maintenance to real estate investors. Such an approach leads to the reduction of operational costs, improves the cash flow of the company and strengthens its financial balance sheet.

“The sale and lease back process allows companies that own real estate assets to unlock capital and generate an important source of income to be redirected in the company’s core business”, explains Andrei Gavrilovici, Senior Consultant, Corporate Real Estate at CBRE Romania.

Relocating to More Favourable Markets. In order to optimize labor availability, skillsets, affordability and incentives, emerging markets could futureproof a business’s workforce, provide resiliency against climate risk and grant greater access to green power. In other words, multinational companies can relocate their activities to markets that are more favorable to them. Emerging markets are usually those that can provide a long-term workforce, resilience under conditions of economic risks as well as provide access to green energy.

Organizing to Systematically Lower Total Cost of Occupancy. It is important for companies to deflect an accurate perspective on total occupancy expenses so that managers can analyze the health of their portfolios, ensuring that they make impactful business decisions with complete information and on time. The challenge for most in-house real estate teams lies in the fact that portfolio data is often distributed among various enabling technologies, service providers, and global regions. By integrating data in a secure way, standardizing processes, and benefiting from comprehensive data governance and analytics, a better understanding of occupancy costs can be achieved globally and regionally. Better decisions can be made when companies have a full overview of employment, expenses, capital projects and operations data.

Preparing for Capital Scarcity. CBRE’s recommendation for businesses is to consider a possible capital shortfall in the near-future and therefore to prioritize essential business projects. As companies prepare for economic uncertainty, one of the first areas of focus is that of capital expenditures across the organization. From a real estate perspective, this type of expenses includes the modernization and refurbishment of facilities, the replacement of assets and equipment, as well as new constructions – across the entire class of available assets (for example, offices, industrial, retail, manufacturing, medical, data centers).

Investing in Energy Efficiency and Onsite Renewable Energy Sources. Investment in energy efficiency and renewable resources is essential: businesses should explore electrification of fossil-fuel HVAC and aged lighting systems to decrease costs and energy demand, capture utility incentives, reduce exposure to community pricing, lower technical labor requirements—all while leveraging third-party financing as appropriate. For example, the replacement of HVAC (heating, ventilation and air conditioning system) can lead to savings of 20-30% and thus help achieve the objectives of reducing operational costs and improve the carbon footprint. CBRE went through such processes with various partners and a notably such project is undergoing with a financial services company.  The partnership focuses on reducing the environmental impact and energy consumption of this bank. One of the projects carried out involved the change of lighting systems in over 1,450 administrative and retail locations, which generated an annual reduction of 11.5 million euros associated with reduced energy costs and additional savings in operation and maintenance. Moreover, the investments made so far have reduced 59K tons of emissions and saved 83.4M KWH.

Developing a Comprehensive Decarbonisation Strategy. Businesses around the world are making sustainability commitments and implementing a series of complex strategies to reduce their carbon footprints as well as to  reduce their total occupancy cost. One solution is to look for new ways to purchase energy and to move to wholesale contracts in the context of a volatile market and increased demand for renewable energy. For businesses it is no longer all about “how much can I save” but more and more about “how do I mitigate exposure to future price increases”.

Implementing Smart Solutions for More Efficient Building Management is becoming a must-have. Increasing the level of hybrid work reduces office occupancy, which in turn reduces the required level of maintenance services. The adjustments to the services should correspond to the actual use of the space. The resources allocated for security, cleaning, building engineering, landscaping services and certain aspects of the HVAC system can be calibrated to suit the use of space. It is advisable to have an umbrella contract on the entire real estate portfolio, given the fluctuating degree of occupancy of the premises. The property management platform approach of CBRE offers to clients and partners a centralised and standardised service level that leads to savings for building owners of up to 23%, savings that are reflected in the service charges payable by tenants which can also render property owners more competitive on the market at a commercial level.

Adapting to the New Reality in the Commercial Real Estate Sector. A complex and comprehensive organizational analysis is needed to globalize an efficient model, strengthen the portfolio of suppliers, eliminate redundant positions, restructure the organization and ultimately develop an optimal model for all partner organizations. For example, the top priorities of today’s tenant companies include important initiatives to reduce costs, reduce carbon emissions, improve the employee experience, and reduce the real estate portfolio. They require the creation of roles of change agents, such as Net-Zero program managers, Workplace consultants, Change Management and Portfolio Strategies experts.

“There are very few consulting companies with first-class experience, complete services and  specialized internal resources able to solve these challenges. Therefore, it is crucial for companies to carefully select the partners with whom they collaborate on this segment.”, concludes Andrei Gavrilovici, Senior Consultant, Corporate Real Estate at CBRE Romania.

 

 

 

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