Rule of Thumb

By Ken Ashley

(DENVER) September 16th, 2010

While perusing the most recent edition of the CoreNet Leader magazine, this piece on performance measurement in a real estate portfolio by Mark Jervis and Glenn Corney caught our attention. The article, and indeed, the real estate trade organization CoreNet Global, supports real estate professionals that work on very large portfolios and have teams of people to support the real estate function. They regularly perform complex analysis of almost every imaginable factor related to a lease.

It’s not surprising that those responsible for many millions of square feet would want to let top-level executives in a company know what they are accomplishing. After all, real estate is usually the second largest cost after payroll, and decisions can have major impact on the company (and the real estate executive’s career).

Less Is More, More or Less

But what if you don’t have a squad of folks assigned to real estate? How should a mid-cap company approach measuring real estate issues? As Jervis and Corney suggest, if one can determine and communicate what the company is trying to accomplish first, then measurements can follow that support goals and objectives. Many times the opposite occurs, which can lead to executive overload and the dreaded shoulder shrug. The article aptly calls this the “so what” factor. In case you are not familiar with this phenomenon, then ask a teenager to clean up his room.

The art here is not in creating strategy; every business leader worth his or her corner office can do that. The issue is translating that strategy into the practical so that those involved in real estate make decisions that align with and support the strategy you set, instead of allowing local or unit level decision makers to act on a whim. In the absence of direction and accountability, we have seen local managers locate the office near their home without regard to other factors, pay more than needed and overdecorate new offices. These are a few of the many sins of the unwatched, but, why not, if you have no direction and little accountability?

Measure Twice Cut Once

Once the strategic direction of the company and its real estate is clear, then one can begin to develop dashboards replete with KPIs (Key Performance Indicators) to give feedback on metrics that matter. And yes, less is most certainly more.

So, if you as an executive at a mid-cap company don’t have a big real estate team, what are measurements that can help evaluate and guide the company’s use of real estate?

In mid-cap companies, the measurements typically fall into four major categories:

  1. Benchmarking  – Do we spend more on our facilities than our competitors? What are the industry trends, and are we on the right side of the curve?
  2. Space Utilization – How does the enterprise use the space it leases? This is commonly expressed as square feet per person in the office world.
  3. Portfolio Planning – Look at the whole basket of leases and determine if you are spending more or less, year over year.
  4. Transaction Management – If you have more than a few deals going on in a year, then you will want to know how fast they get done (cycle time) and develop standards so that you have consistency from deal to deal and city to city.

Say That Again?

We talked about keeping it simple, but how often should one present the stats? Of course, this is largely dependent on corporate culture and the desires of senior leaders. GE, which is well known for its “six sigma” approach to everything in corporate life, would be one extreme. An entrepreneurial and fast growing company might be the opposite.

A good rule of thumb is to do an annual achievement review at a minimum (we call this the “State Farm” discussion, in honor of my cheery insurance agent that comes around once a year). If your portfolio is dynamic, large, or fast changing, then you may need more frequent attention to measurements.

So, keep it simple, keep it reasonable, and your real estate portfolio will surely hum right along. Now, if only we could get this economy to adjust to our growth metrics!

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