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19 May 2010

Lease Renewal Analysis

How much square footage do you really need? How many walk-ins do you get anymore?  The old math dictated that we allow 100 square feet per agent, but this has become less and less relevant and less and less practicable.  To the extent that you are running a “traditional office” with desks, your focus needs to be on maximizing EDO (Effective Desk Occupancy).  The primary guideline should be to achieve 80{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} EDO in your organization. [EDO directly correlates to profitability; it is impossible to have high EDO with low profitability.]

At the end of each lease renewal, ask yourself whether or not you would open up a new office in this location, if you had to do it again.  Depending on the strength of the local commercial real estate market, inquire about subletting rates to see if it’s worth staying or if there are better options “out there.”  Also look into the possibility of renegotiating your lease. This is especially important, if you’re assessing the possibility of closing a given location. Since occupancy is one of the largest fixed expenses in a real estate organization, renegotiating a lease could help to regain margin needed to sustain a viable business operation.

For multi-office firms, map out locations and determine where business is coming from, in order to analyze if and where opportunities for consolidation exist. Analyze costs savings less expected breakage (attrition of agents) vs. staying the course.  Determine what the payback period would be. Consider the 6 office company below:

If the above represented your company, here are a few questions that you might consider.

  • Will office 5 continue to be profitable given current market conditions?
    • Why was only .34{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} ROR generated in office 5, given $4,297,685 in GCI?
    • Is Office 5 located near enough to another location to consider consolidation?
    • How much breakage might occur in Office 5 if agents were asked to move?
  • Can Office 2 be far behind Office 5’s situation, or are there mitigating circumstances that make office 2 different?
  • How much could operating costs and profit be impacted through lease renegotiation?
  • Which managers are performing well and which are underperforming?

Do you consider your space to be a “showcase”? Is this important enough to justify the amount of space that you currently occupy? Business realities have changed rapidly, and as a result, leaders need to give serious consideration to redesigning offices that have fewer desks and less square footage. If there is excess space that cannot be eliminated, consider leasing desks to a mortgage company, title company, a home town bank, insurance person or some other relationship that offers ‘core service’ benefits.  This will help mitigate rent cost and may also provide trailing dollars.

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