Make an Informed Commercial Real Estate Decision by Reviewing 4 Fundamental Factors
- Many executives in charge of warehousing operations have a knee-jerk reaction to market downturns. They see some Key Performance Indicators (KPI) take a hit and immediately think, “We need to downsize to a smaller warehouse.”
- After all, real estate is expensive, so on the surface, such a decision may seem like a prudent decision. A deeper dive into the numbers may, however, indicate otherwise.
First of all, the market is going to recover at some point, so while downsizing now may save money in the short-term, it may end up costing money in the long run by restricting your operations to a smaller space in a healthier market.
Short-sightedness can be avoided by thoroughly reviewing four fundamental factors regarding commercial real estate: the lease, your proposed property’s physical condition, your current operations, and of course, the market.
After understanding a little more about each of these factors, you’ll be sure to keep the longevity of your business in mind when making corporate real estate decisions.
Reviewing the Current Lease
The lease contract is the list of rights and responsibilities the tenant and landlord have during a specific time. Reviewing the lease document will allow you to analyze your company’s rights and financial obligations.
It’s important to review the entire agreement. Check to make sure you have the initial lease, the first, second, and subsequent addendums, and any work letters. Changes are often made in subsequent agreements, such as roof repairs, months of free rent in exchange for extensions, and so forth. Also collect records of large repairs, replacements, and security deposits.
You want to make sure you know about everything, especially agreements that might date back to before your time in charge of your company and its real estate. By reviewing the lease, you’ll have total clarity of the remaining obligations from you and your landlord.
Pay particularly careful attention to the following terms:
- Double check the original commencement date.
- Review each lease extension.
- Match the rent figures against your accounting records.
- Review any changes made during each extension that modified the original agreement.
- Verify the security deposit amount.
- Confirm the expiration date.
- Make note of the renewal notice date.
- Examine the options for extension.
- Identify the penalty for staying in the property post-expiration.
- Understand what’s expected of you to move out of the existing space.
After you have reviewed the lease, make a list of outstanding issues and concerns. For example, was there a maintenance request that never resulted in a satisfactory repair? Does the lease state you have to repave the parking lot or replace the roof before you move out?
Reviewing the Property’s Physical Condition
After you understand the ins and outs of the lease, you should apply a white-glove inspection to the physical condition of your property.
Start with the office and move to the warehouse. Look at the ceiling, walls, and floors in each space. Then walk around the outside of the building. Look at the landscaping, the parking lot, the truck court, the drainage areas, the roof drain spouts, the joints in the tilt-up panel, the dock doors, the dock bumpers, the truck well sump pump, the roll-up doors, and everything else.
Think about its condition when you first moved into the building. If you cannot remember or you were not there, simply evaluate it as though everything is in good working order right now, because that is the condition the property will need to be in when you return it. Discuss your internal expectations for normal wear and tear with your colleagues.
If you decide you would rather not move, you will use this assessment to help the landlord understand the improvements that are necessary for you to extend your lease.
Reviewing Your Operations
With a solid understanding of your total property’s physical condition, begin soliciting feedback about office space from team leaders and employees.
How do your team members feel about the layout of the office space? What image do they think it portrays to customers? What do they like, and why? What would they do differently if they were to design it from scratch?
Next, turn your focus to the warehouse. Focus on the flow. Your operational concerns will depend largely on your industry, but you likely need to get materials to the building, bring those materials inside the loading bay, and move them within the warehouse to where these materials are stored. Then those materials are either assembled, consolidated, broken down, picked, refrigerated, tested, sewn, printed on, packaged, or palletized, and then stored again. Finally, these finished products are taken out of the building, put on a truck, and taken to customers.
Once again, solicit feedback from leaders and workers. Ask questions about how the operations flow could be improved. Check for bottlenecks or friction points. Ask about how they would redesign a facility if it were up to them. Find out what their highest priority for process improvements would be.
Reviewing the Market
At this point of your review process, you should know all about your lease situation, your current property’s physical condition, and be fully aware of how to optimize your operations. Now, it’s time to look at the market.
This is a gut check moment where you see if your initial intentions for your next commercial real estate decision line up with the realities of the current market.
If you find there are plenty of properties available that fit your need and budget, you will have the confidence you need to proceed. On the other hand, if you find that your needs will only be satisfied by finding a needle in a haystack, you might want to think about budgeting extra time, looking in a larger geographic area, revising your budget, or renewing and forgoing a relocation at this point in time.
It is likely that the properties available today will not be the same properties available once you are ready to engage in the market. But this property availability review still provides insight into what the current market environment looks like.
No More Knee-Jerks
Knee jerk reactions are simply a symptom of short-sightedness, which will no longer afflict your commercial real estate health.
By reviewing your current lease, the physical condition of your current property, your operations, and the current market, you’ll be able to exercise patience when it’s needed most. Then, whenever the time for a move is right, you’ll be ready to make a well-informed decision, rather than doing anything in haste or with a sense of panic.
For more advice on reviewing the fundamental factors of the commercial real estate market, you can find Industrial Intelligence on Amazon.
Written by Justin Smith, Senior Vice President at Lee & Associates and author of Industrial Intelligence: The Executive’s Guide for Making Informed Commercial Real Estate Decisions.
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