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21 August 2009

Effects of Reducing Office/Size Costs – Current vs. Future

Building expense is a formidable, recurring fixed cost for real estate organizations and the fact that office size increased dramatically between 1990 and 2005 only added to the severity of this situation. During the same period of time, real estate agents were becoming increasingly less and less attached to the idea of working in a ‘formal’ office environment and were progressing toward ‘home’ and other ‘remote-type’ office arrangements. The result of these combined factors for many companies has been a super-developed real estate infrastructure that exceeds capacity requirements.  Given all of this, the time for a new approach to managing physical office space is clearly upon us.

According to Steve Murray, Editor of Real Trends, the average size for all of Real Trends Top 500 companies during 2007 was 124 square feet per agent with an average number of 41 agents per office. This works out to approximately 5000 Sq ft. per-office on average. Making the assumption that this remained relatively constant during 2008, I have based all calculations using 5000 SF as the status quo office size.

The table below demonstrates the ‘before-change’ and ‘after-change’ effects of reducing office size. I have used 1,500 Square Feet (SF) as a typical size for an “Urban” location and 3,000 SF for the “Suburban” model. This is in harmony with my observations that progressive urban offices (such as the Intero’s Andare office in San Jose, CA and @properties in Chicago) tend to be eficient and highly technological, while suburban locations may require added scale along with technologies in order to maintain a competitive image.

Current vs. FutureSo what?

What is the current relationship between square footage and building costs? How are ratios currently tracking? Where are the opportunities for positive change?

The spreadsheet below shows the “Benchmark Ratio Range of the relationship between company dollar and building expense as it exists in today’s pre-change real estate environment. Note the heavy toll that building (aka Occupancy) costs are taking on real estate operations. When building costs absorb an average of 24.3{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} to 28.2{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} of company dollar, it is challenging for many companies achieve a positive return on revenue.

Building CostsWhat if?

What if companies were to restructure their building costs according to urban and suburban square footage sizes described above? What would be the result?

These questions can be answered by determining how building costs would change when reduced by the same percentages shown in the tables above. Then, using this new concept of office size, calculate the new relationship between company dollar and building costs, and then determine how company dollar retention would change.

As you review the visual below, please recall that the typical current building costs average as high as 28.2{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} of company dollar. After adjusting for reduced office size, the new range for building cost changes from a low of 7.3{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} in urban areas to a high of 16.9{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} of company dollar in suburban areas, thus reducing Building Expenses between 40{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} and 70{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} as targeted in our model.

Future Building CostsWhat is the result?

When former building costs are replaced with the newly calculated range and placed into the financial model, the resulting differential in company dollar committed to building costs is dramatically lowered.  But how does all of this really help? Here are some thoughts:

  • Reducing office size in this manner could, in itself, create a positive ROR for real estate companies, providing all other expenses remain constant.
  • Additional revenue could also be used to fund home-office programs, offer additional marketing and provide managerial support where needed.
  • Steps as outlined in #2 could bolster talent attraction results
  • Proper reallocation of resources in this way should also bolster agent retention.
  • Since consumers typically visit only reception and conference areas, office size reduction will in most cases, be seamless to buyers and sellers.

Steps to consider in getting started

  • Perform a risk assessment – It is critically important to have a grasp on company culture and to understand risk factors before proceeding with this.
  • Create a new vision around building size – How much reduction is enough for the culture? How much is too much? How much change is required in order to ‘right the ship’?
  • Renegotiate current leases – Given the current economics of the commercial real estate market, many firms have reduced building expense through lease renegotiation alone.
  • Sublet portions of existing buildings – This is self explanatory, but a key advantage of subletting is the ability to remain in the same location, albeit with lower building costs.
  • Seek out new locations – Once your vision is clear and building needs are determined, embark upon the mission of seeking out new and better-suited situations.

12 thoughts on “Effects of Reducing Office/Size Costs – Current vs. Future

  1. Thanks to every agent having their own laptop, our office has only two “kiosk” like machines to share between everyone. It actually works very well since the iPhones and laptops pretty much make the desktop computer and desktop phone in the agents office rather obsolete. Especially since most agents prefer our comfy orange couches to the desks.

    -Tyler

    1. Good point about the iPhones and desktop phones. If you believe current predictions, even laptops will be pretty much obsolete in a few years and will be replaced by high powered mini-computers that fit into the palm of your hand.

      – Bob

  2. It’s good that this topic is now being openly discussed. The challange is that as owners we really need to think outside the box. Have you done an assessment of what portions of your office or offices are truly being utilized. Look at conducting time and motion studies to see just where you can create some efficiencies. Are you looking at your surrounding environment. As an example, are you looking at where your agents are actually meeting with their clients. Conversely, have you asked the clients where they would like to meet? Could you function in a smaller space if you were near a couple of resturants or coffee shops? Wouldn’t it be just possible that those facalities are already acting as an office annex for your associates? The per square foot cost for the actual time the space is utilized is pretty attractive, when it’s measured by the cost of a cup of coffee. Besides, who paid for the coffee? When you compare the cost of the same time to square foot measurement of your current conference rooms, or the agents office, and their actual time usage in relation to the cost of the space for that same amount of meeting time, how do these values compare. Which is more effecient in your market place? How did each type of environment contribute to the clients and agents overall experience in the transaction? Now that’s an interesting cost analysis. Just watch those special drink orders though.

    Have you ever thought to look at on office as a “Timeshare” or “Fractional Ownership”. Have you considered how to adapt some of those concepts to your business. Stop saying – “It will never work” and start asking yourself some questions.

    It’s great that this discussion is taking place. It’s time that questions that were once considered off limits are moving to the foreground. Keep up the conversation.

    1. Keith, I really like your idea about time and motion studies. This is often overlooked and can provide a way to assess office space need in an interesting way. Thank you for your comment

      Bob

  3. Dear Robert,

    While I have a small office in downtown San Diego, 99% of my business with Clients is in my car, at showings, or meeting them at a local coffee house. Since I service a wide area this works much better than a central office space. If it is a listing opportunity I meet them at the subject property.

    Since I have started using Docusign it is rare that I meet face to face with Clients for actual signatures. Contracts and addendums can be e-mail to the Clients – many that are in two different places – and signed when schedules allow.

    An iPhone eliminates the need for a laptop for the most part, but the nearest Starbucks will provide me with high speed internet for access to MLS and contacts.

    I long ago gave up a land line. With unlimited voice my cell phone is the only phone I need. I do use a fax service that send them directly to my e-mail.

    I find for the most part that meeting potential clients at a neutral location is much more preferred than dragging them into a real estate office – so why pay for the expense of maintaining them?

    1. Jeffrey, thank you for your comment. I have heard of Docusign and understand that it provides electronic means for signing and sending legal documents. I am certain that some of our readers are not familiar with it however. Could you please explain how it has helped you and provide some examples?

      Thank you…keep selling

      Bob

  4. Dear Bob,

    I can say that using Docusign with our electronic contract platform is one of my favorite time saving tools.

    For instance, a while back I was representing a young couple buying a lower priced home in San Diego. The price range that we were on required multiple offers since most were Bank owned or Short sales which took weeks to hear back on.

    While the husband was in San Diego, his wife was out of state. Both had conflicting schedules when they were available.

    Using electronic signatures it was very easy to e-mail contracts off for signatures. A few times we had signed contacts back in less than 15 minutes for urgent offers/counters.

    Other advantages include clear electronic copies vs. 3rd generation faxed copies. I find that my Clients love how quick and easy it is. Also as long as you do a good job marking where all the initials and signatures go the Client cannot return until they have completed the full signing.

    You can find out more about them at the link below:

    http://www.docusign.com/

    1. Jeffrey, Thank you for this excellent example. With your explanation, I am sure that our readers can see the distinct advantages of using such a system. Congratulations on embracing this new technology and best of luck in the coming months

      Regards

      Bob

  5. Interesting comments. I have been speaking with an interesting firm called Retel Tech that specializes in providing detailed analysis using video cams of retail operations. Their reports are amazing and very inexpensive.

    With physical space being one of the largest costs in our business Retel’s reporting will not only give us the reports that we need to make informed decisions, but also show our agents on how we are basing our decisions.

    Their website is http://reteltechnologies.com/

    1. Mike, you hit on an something that I believe is key here, and that is the area of communication. Leaders should not be shy about making decisions that forge new directions, but we should always be sure to bring our people into the thought process. Doing so provides many benefits, too many, in fact, to list here. However, when this type of communication is lacking, negative results can often be felt in the company culture.

      Thank you for your comment…Bob

  6. Great discussion Bob!

    Another key point is that top producers thrive in environments that support their style of business. They are drawn to productive companies with vision, leadership and solutions to their needs.

    Offices cultures that embrace early adoption of changing technology are not weighted down with those who choose not to keep up. Weeding out the people who can’t produce in today’s market saves resources and reduces the need for costly office places to house them.

    If you want to see what real estate will look like tomorrow, watch the top producers today… if you can find where they are working.

    1. Carol, Good points here. Highly productive real estate agents absolutely want to work with progressive companies. Consumers expect cutting edge technologies from their agents, so agents clearly gain market share by working with companies that help them to keep abreast of new developments.

      Thank you for your comment.

      Regards, Bob

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