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5 Signs You May Be Overspending on your Real Estate Portfolio

August 25th, 2022 | 8 min. read

5 Signs You May Be Overspending on your Real Estate Portfolio

Fernanda Belo

Fernanda Belo leads Workplace Strategy and Insights at VergeSense, helping clients maximize the value of their spaces.

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In a post-pandemic reality, many businesses could be overspending on their corporate real estate portfolio, and leaders may not even know it. 

There has been a dramatic shift in the way that people work, which has significantly impacted space planning and led to a need for new systems and data points. Planning real estate demand based on the number of employees in a region or expected office use is no longer a sustainable option. Today, a spatial intelligence technology in the workplace that captures how people are truly using spaces is essential. 

Real estate is one of the top expenditures for corporate businesses — and most are overpaying for unused space due to outdated space planning strategies.

Looking ahead, leaders are seeking out ways to optimize their real estate spend. Fortune 500 companies alone hold almost 3B square feet of real estate and many are rethinking their CRE portfolios as space was and continues to be underutilized during the pandemic. Additionally, the actual economic scenario is driving leaders to evaluate spending more closely and look for ways to cut major costs.

Today, company leadership teams need to work closely with facilities, workplace design, real estate, and workplace strategy leaders to develop right-sized portfolios that are capable of adapting to the future workforce needs. The risks of falling short in this cross-team collaboration are endless, with budget waste, negative employee experiences and a poor environmental impact at just the tip of the iceberg. 

So, how can leaders uncover areas of wasted real estate?

The Impact of Outdated Corporate Real Estate (CRE) Management

If workplace strategy and CRE management teams are still designing their portfolios based on a historical average of 150 square feet per employee without factoring in:

  1. How frequently employees want to or plan to use a given office
  2. How much they actually use the office
  3. How they use the office and which spaces they prefer

…they likely are leaving millions of dollars on the table. Plus, when spaces aren’t designed for what the employee needs, it leads to a poor workplace experience and decreased productivity among the workforce.

Let’s break it down.

How much do businesses potentially waste on unused or underused real estate?

The short answer — more than $13,000 per occupant per year, or $3.25M+ per year for a 1,000 occupant office. 

If companies allocate an average of 150 square feet per employee in an office (based on recent estimates), we can estimate that an organization with 1,000 occupants in a given region would traditionally invest in 150,000 square feet of space for them to use.

You may ask— Why am I using the word “occupants” and not “employees”? 

Most companies are now moving towards a hybrid way of working and not all employees are expected to be in the physical spaces all the time.

With an average lease cost of about $35 per square foot of corporate office space per year, plus an average of $9/square foot for operating expenses and utilities, this company would spend around $6.5M per year for this space designed for 1,000 occupants. 

Let’s say the true occupancy of the space is around 30% expectation - 300 occupants (factoring in passive use of space), they would only be effectively using 45,000 square feet of space, and overpaying for more than 50% of the space. The example company above would be wasting $2.6M/year on their real estate lease, $500K+ per year on operating costs, and over $150K per year on utilities. This also leads to a less than ideal workplace experience, where employees come to the physical space and find it “empty”. If the space is intended to foster collaboration and connection between people, achieving that would be challenging. 

How can companies right-size their real estate portfolios based on data?

Leaders usually look at the demand for space in relation to forecasted employee growth. If they have true occupancy data, they can understand the occupancy patterns for their physical spaces in relation to employee headcount. Instead of assuming a % of employees will occupy the space, they would make a more accurate assumption based on trends. This differentiation is key to optimize the cost per occupant and space needed per occupant while boosting employee engagement. 

But maybe this company is also seeing rapid growth and plans to substantially add more headcount over the next 2 - 3 years. Spatial intelligence can help them plan to accommodate this growth to the existing footprint, reducing the “unoccupied” space and consequently their costs / sq ft overall. 

Hypothetically this company could grow their headcount in that region up to 2,700 people and continue to use the existing space. This move would reduce their cost per occupant from $21,937 per occupant per year to $8,226 per occupant per year. 

Without the right technology to see how employees are truly using spaces, it is challenging to measure space utilization accurately. This leads companies to rely on employee surveys and qualitative information when making real estate decisions, which can be inaccurate in the uncertain and unpredictable scenario we live in.

Real estate decisions aren’t small budget items and failures cost a lot  — using unreliable information could lead to poorly informed lease commitments, frustrated employees working in an “empty” space, higher turnover rates, and a negative impact on ESG goals and sustainability. 

5 Signs You Are Overspending On Your Corporate Real Estate Portfolio

1. Your real estate portfolio strategy is based on the number of employees in your organization, not true understanding.

For years, the most common way of conducting space planning was to forecast and invest based on how many employees were assigned to a given office location, under an assumption of flat occupancy ratio. 

For example, if your company hired 2,000 employees in New York City, HR would assign all of them to the NYC location at a 1:1 ratio of employee:desk or dedicated office space. 

In reality, occupancy ratios are variable among different locations, and therefore a “one-size fits all” approach will likely fail. For instance, data might reveal that only 500 employees regularly use the New York City office, but the Hoboken office is constantly overcrowded. The space potential to accommodate growth is different between the two locations and therefore the supply and demand model is different.

If companies aren’t adapting their supply and demand models to be occupancy data driven, they’re leaving money on the table. That can mean keeping spaces that are underutilized, or adding new spaces based on inaccurate data.

As you grow and identify the real need for more space, it is important to leverage true understanding to make investments that matter to your employees.

2. You conduct space planning and evaluation based on people’s intentions, which can be very different from actual utilization. 

It’s easy for employees to say they plan on using the office three or four times per week… in theory. But in reality, they didn’t end up having childcare when they expected, they moved the team meeting to a different day because the team leader is going to be in town, and they needed some deep focus time away from home because they’re doing construction in their apartment. 

Workplace teams at many companies are getting business requests from all different departments for more space because their teams are growing, and intentions of going to the office are high. But there’s a big difference between intention and utilization. 

Dive into the workplace data to understand — how many people book workspaces and don’t use them? Meeting room booking and desk booking data can definitely support people’s intention.

It feels good to ease that anxiety and secure a desk to work for the day and some meeting rooms for the meetings. But does it all happen according to plan? It depends. 

The same person might come to the office and find a colleague that is working on the same project, and then decide to work together for the day. They find available desks in a different floor and have their meetings in different places of the office (it is just so nice to meet in person, right?)

Some of the booked meeting rooms get actually used and some don’t. The reality of actual utilization is a bit different than the intention planned. And it is nobody’s fault! 

The workplace design is purposefully created to foster collaboration and connection. It just happens in many different ways and there is no wrong way to collaborate. On the downside of this situation, the previously scheduled rooms are no longer available for other employees to us, as they appear “occupied” in the reservation app. The intention data doesn’t reflect the actual reality. 

The VergeSense Spatial Intelligence Platform provides true understanding of space use by reconciling what employees say they want versus what they actually need. Without insight into active occupancy, passive occupancy, and people counting data, you will likely overestimate space needs and leave employees unsatisfied without the facilities they need.

3. You aren’t measuring or adjusting space utilization by space type (individual workspace, collaborative area, etc.) or using micro insights.

If you don’t know whether people are using individual workspaces, collaborative areas, classrooms, or socialization areas more, you’re not continuously improving and evolving your workplace design. Employees appreciate design guidelines, but expect a level of personalization from their work environment, where they can resonate with the space. 

Design guidelines typically are based on space type ratios per occupant. This includes individual spaces, collaborative spaces, meeting rooms, dining areas and so many others. But there’s no one-size-fits-all ratio or magic formula for any workplace.

And space types take space, so if you create too many individual spaces, and not enough collaborative spaces, you can easily overspend on unnecessary square footage and see low utilization numbers because the space doesn’t meet employee needs.

Workplace design should be connected to the real estate budget, and most existing designs are probably not aligned with today’s hybrid work model needs. If you aren’t measuring utilization by space type, and observing variances by role, team, and geography, your space calculator and the ratio of space types is likely not aligned with your needs.

4. You are scoping your facilities contracts without factoring in space utilization. 

Historically, facilities management contracts were based on a series of assumptions covering a given area on a certain schedule, without factoring in how much or how little a space was used in that time period. Best practices guided the calibration of those assumptions, but they always have been assumptions.

If companies base their facilities management scope on a linear interpretation of the space, they’re likely overspending on contracts, and wasting resources. There is an opportunity to reprioritize contracts and re-scope services based on actual utilization, optimizing your service costs and improving sustainability in the workplace.

5. You’re paying for too much space overall, negatively impacting your ESG goals.

“You have a family of 2, but a big house with dozens of bedrooms”. Although everyone likes and deserves comfort, the space is more than necessary. And you are heating, cooling, and cleaning the space, even though you rarely use some of the bedrooms. This scenario may be within your budget and you may be happy but the environment is definitely not happy with you. 

If companies continue to invest in far too much space that isn’t being utilized, it’s not different from that analogy. It has a negative business impact — you’re heating, cooling, maintaining, and servicing a space with no function — and a negative environmental impact. Ineffectively prioritizing spaces is damaging to ESG goals and employee engagement. 

The first step towards redesigning your office spaces and restructuring your real estate portfolio for efficiency is understanding your office utilization and micro insights. The future of real estate is sustainable, and companies are seeking to right-size their overall footprint in a big way.

VergeSense is the leading provider of spatial intelligence solutions and provides businesses with a true understanding of workplace utilization, for reporting and workplace and facilities management. Gain confidence in your workplace decision making and find out why 130+ global companies trust VergeSense to solve their key space needs with spatial intelligence