Applying Analytics to Real Estate Assets

Economic Pulse
October 19, 2015

By Nathan Brzozowski, as seen on CFO.com

For most companies, one of the biggest commitments they will make — both in regards to cost and flexibility — is in the form of corporate real estate. The purchase or lease of office space can represent not only a significant expense but also an ongoing legal and operational liability. As the global business environment becomes increasingly analytical across all industries, many firms have adopted alternative financial modeling methods and metrics, finding creative ways to analyze corporate real estate holdings to justify decisions.

Historically, most decisions about the purchase or lease of office space have come down to standard financial analysis regarding a project’s direct impact on “bottom line” figures like net operating income or EBITDA. Recently, a shift has been occurring. Companies increasingly see the benefit to analyzing their real estate decisions through the lenses of operations and quantitative finance. Top analysts are taking a more nuanced approach to understanding how corporate real estate decisions can serve as indirect drivers for productivity, profitability, and risk management.

It may surprise some to learn that it has been the industrial and retail firms that have been on the cutting edge of real estate analysis for more than a decade. Those sectors seem to share little with traditional office-space occupiers. However, the applied analysis and quantitative modeling associated with industrial and retail leases is now gaining merit in the corporate real estate realm.

Industrial and retail firms look at real estate costs to better understand the effects on shipping costs, foot traffic, transit times, and myriad other variables, equating each to a real dollar value. Office space may not be able to utilize all of the same variables, but it has its own unique traits which can and should be converted into dollar metrics. Firms are realizing that the geography, sustainability, IT infrastructure, lease optionality, and cost structure intrinsic to an office asset all can be quantified as drivers of profitability and growth.

One example which has seen an explosion of popularity in recent years is the detailed consideration of commutation to and from offices — both for employees and clients alike. Using new mapping software and statistical models, many companies are now seeing the validity in placing offices where they know they will lose the least number of employee work hours to traffic or mass-transit interruptions. That translates directly into productivity and adds real dollars to the bottom line.

Firms are also creating yield metrics for their office real estate based on unit productivity (clients served, goods sold, or hours billed). These metrics create a meaningful determinant for required output to cover fixed real estate costs. I’ve already run several more granular analyses for a number of legal and professional services firms who not only recognize the validity of this type of model but come to fanatically embrace the new metrics. They also have gone further to proactively seek ways to make it a more and more useful bellwether for business decisions.

Creative risk management is perhaps the most exciting frontier of future savings and flexibility. Analysts are constantly developing new models and formulas, using advanced mathematics and quantitative analysis to value real estate strategy and optionality. Incorporating and adapting models which have been honed on Wall Street and in the insurance industry, analysts are providing a new level of predictive analytics on financial impacts which had only been dreamed of in the past.

The result of all these new analytics is an increasing number of executives who, once left to make “gut decisions” about their office assets, now can make these same decisions in a rational, informed, and justifiable manner. The ability to execute a lease which you can feel comfortable with three, five, even ten years down the road is now becoming reality by ”quantifying uncertainty” through creative financial analysis. Sensitizing a wide range of quantitative variables is allowing firms to leverage office space as a real strategic advantage in a highly competitive business environment.

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