Small and mid-market companies are at an inherent disadvantage in their ability to utilize real estate as a strategic driver of their business. Where large, global companies employ departments to provide deep expertise and infrastructure to manage the process, small and mid-market companies have neither the expertise, nor the ability to afford such infrastructure.
As a result, they treat it as an expense to be minimized, rather than an asset that can support and leverage your efforts to grow your business, increase profits and maximize the enterprise value of your business.
Over the years, we’ve learned some of the most common—and most damaging—mistakes made by small and mid-market organizations. We share these with you to help you avoid them. And, of course, if you’d like some help please don’t hesitate to reach out to one of our advisors to learn more about The Strategic Real Estate Advantage™.
Mistake 1—Failure to Connect Real Estate Decisions to Overall Business Strategy
The most important thing a business must keep in mind when engaged in a real estate decision, is that the decision you are making isn’t about real estate… it’s about your business. You’re not leasing/purchasing space—you’re growing your business.
The biggest mistake made by small- and mid-market companies is the failure to fully align and connect their real estate decisions with their overall business strategy. Even companies that have as little as 2,500 square feet of space, can gain significant operational, financial and marketing advantages by taking a strategic approach.
The failure to connect real estate to you overall business strategy not only has the direct impact of higher direct occupancy costs, it is likely to have measurably adverse effects on cash flow, the flexibility and control of your business, productivity, and on your ability to compete.
Mistake 2—Failure to understand the market
With the Internet today it is easier than ever to think you have an understanding of the market. In a matter of seconds you can see what’s space is available and even how much the space is leasing or selling for.
This has had two negative consequences:
- Business owners and executives have been lulled into a false sense of confidence (or frustration that none of these things actually matter), and
- Well, frankly, real estate brokers have gotten complacent. It’s easier than ever to pull reams of data, to print out tons of pictures and to present the appearance of knowledge. While this has helped real estate agents close business, it’s hurting their clients.
The reality is that while the transactional information about real estate is easily available, the knowledge about real estate and how it strategically aligns with your business is as difficult to access and disseminate as ever. The ecosystem that is the commercial real estate industry is fraught with complexity and fractured service providers. Understanding the market and applying the project appropriate industry tools is paramount to a successful and timely real estate services.
Mistake 3—Confusing direct costs with total cost of occupancy
It seems simple enough, add up your annual rent/mortgage payments, add any buildout, and add the cost of utilities and upkeep. Find the space that fits you needs and has the lowest “cost.” As with most business principles, what appears simple and obvious is usually not effective.
We call the calculation above The Direct Cost of Occupancy. Far more important is The Total Cost of Occupancy; this is THE critical number that must be understood to ensure that your real estate decisions move you towards to success. Countless times, we’ve seen that the lowest direct cost, represents the highest total cost.
Mistake 4—Buying when you should be leasing and leasing when you should be buying
Over the last 10 years, one of the most frequent questions we’ve gotten from clients is about the pros and cons of buying vs. leasing. While the issue can appear to be relatively simple and straightforward; the reality is that the entire issue is fraught with complexity.
It is impossible to clearly and confidently address this issue without there first being clear alignment with the overall business strategy (see mistake one above). The decision to buy or lease impacts an almost infinite number of variables; some of the most important include:
- Cash flow
- Total cost of occupancy
- Restricting funds
- Taxes
- Risk
- Income statement & balance sheet
- Company valuation
- Personal wealth creation
Making the buy vs. lease decision isn’t really about making a right/wrong decision. It’s about understanding the trade-offs incurred with each decision, and ensuring that you make the one that best fits your strategy and investment goals. It requires scenario planning, and a comprehensive review of financial impacts.
Mistake 5—The Failure to Integrate Buildout and/or Construction Management
While the entire real estate process can be complex and disruptive, the buildout process stands out at the extreme. While large, global organizations employ entire departments to manage the process, small and mid-market companies don’t have the infrastructure or permanent need to manage the process professionally.
This leads companies to typically choose between two less than desirable approaches: rely on the landlord to manage the buildout, or to do it themselves.
Doing it yourself will typically yield far better results, but it also multiplies the disruption, the indirect costs of the process as well as opportunity costs. Additionally, it can add significant risk in the near and long-terms.
It is far more effective to utilize construction management services to ensure the process works smoothly for you. At first blush this approach may appear to “cost” more, but it is certain to reduce the total cost of occupancy.This frees you to focus on your primary business while leveraging our experienced professionals to manage your project’s complexities and risk.
Mistake 6—Failure to utilize a clear negotiation process
Anyone who has negotiated a lease understands just how difficult the process can be. It’s disruptive, emotional and high impact. When your real estate decision are integrated with your business strategy (see mistake one above), you have a full understanding of the market (see mistake two above), you understand the needs of the other party and you combine that with a clear negotiation process you gain a tremendous advantage that can have a multi-million dollar impact on your business.
Mistake 7—Failure to effectively and efficiently use your capital
Real estate decisions are fraught with complexity and risk. The decisions you make today will have a direct impact on what you are able to do in the future, as well as the results you enjoy.
Make good decisions and you’ll see your business grow and your business enterprise soar.
Make ineffective decisions and you’ll find your business hamstrung, and your business will become more volatile.
Real estate is typically the 2nd largest controllable expense for small and mid-market businesses. As any executive of a growth business understands, the decisions you make about cash and capital will have a disproportionate impact on your business results.