7 ways your facility eats your profits

In the 1986 classic, “The Money Pit”, Tom Hanks and Shelly Long fall in love with an old  house, and buy it believing that they can renovate it and make it the home of their dreams.  They find that each improvement that they make reveals more defects, and a cost spiral runs out of control.

While this scenario can certainly occur in the world of commercial real estate, it is far more likely that your facility is eating your profits in other, more subtle ways.  You and your team work hard to deliver quality, to be efficient, to provide superior service … while your facility is working against these efforts and eating your profits in the process.

  1. Workforce – Attracting and retaining talent is the number one key to any company’s success today.  Your facility, its location, its appearance, its features, and its cleanliness are vital to how employees and candidates measure you against their other employment options.  The costs related to falling short in this area are huge.  They are seen in inflated wage rates, employee turnover and general productivity.
  2. Transportation costs – Inbound and outbound freight costs are significant in most businesses.  Sometimes they are paid directly, other times they are a burden placed on suppliers and customers.  By running logistics models, these costs can be quantified and locations can be optimized.  It is important to understand that this is not just about cost-reduction.  Your customers are increasingly sophisticated and are constantly evaluating the total cost of doing business with your company.
  3. Layout inefficiencies – Imagine building the perfect facility from scratch.  Draw your process on a blank sheet of paper.  Remove the constraints of walls, columns, utilities, and other existing structural elements.  Optimize the pathway that your product travels, minimizing the handling, labor, product loss, damage, etc.  How different is that from your current operation?
  4. Vertical constraints – Real estate costs are often expressed on a cost per square foot basis.  For many situations this may be appropriate, but the cost per cubic foot can also be a very useful metric.  Taller warehouses allow for a greater storage density and a reduced facility footprint. This not only reduces overhead, but shortens the travel distance of your material handlers.  Using racking and mezzanines, vertical space can be leveraged to increase the capacity and extend the life of a “maxed-out” facility.
  5. Outdated features – Are your offices modern, with proper wiring for today’s technology?  Downtime, data loss, and unreliability loom as risks for the heart of your business.  In the industrial areas of the building, antiquated dock equipment, fire systems and power infrastructure are an ongoing source of risk to your business’ sanitation, security and safety programs, while quietly inflating your maintenance costs.  Meanwhile, substandard employee areas fuel discontent in your workforce and drive your best employees to your competitors.
  6. Energy inefficiency – Being green isn’t just about being a good corporate citizen, it’s about saving some green as well.  New LED Lighting fixtures can produce significant energy savings, while improving the quality of the work environment and virtually eliminating bulb replacement.  Likewise, modern HVAC systems are designed to deliver greater comfort with less energy and less maintenance.
  7. Scaring away business – When your clients and prospects visit you, what impression is your space making?  Does it scream “QUALITY” and “EFFICIENCY”.  Does it reflect the same message that your marketing and sales teams are delivering?  If your facility falls short of client expectations, they may decide to take their business elsewhere.

Of course, some of the items above can be cost-effectively remedied through system upgrades, while others are may require relocation.   Universally, the first step is a full and thorough facility assessment.  This allows a strategic approach to quantifying, prioritizing and addressing the issues that affect your business.  Also, if you have a multitude of issues, relocation may be a better option than writing your own version of The Money Pit.

Where’s your Sherpa?

Arguably one of the toughest physical and mental challenges that one can undertake is to climb Mt. Everest.  Less than 4,500 individuals have accomplished this feat since Sir Edmund Hillary first did so in 1953.  Since his historic feat, 282 people have died in the quest to the top.  Interestingly, of the 7,646 successful summits, over half of them (3,861) have been accomplished by Sherpas.

Sherpa are an ethnic group from the Himalayas, who serve as guides for climbers.  Their experience in dealing with the unique hazards of Everest can be the difference between success and failure; without exaggeration, between life and death.  They prepare the route, affix the  ropes to assist the climbers, carry the heavy loads and provide expertise in the event that the unexpected occurs.

Looking over the most recent quarter’s industrial real estate statistics, I was struck by the number of transactions in which the tenant was unrepresented.  By contrast, in most of these transactions, the landlord had chosen to have broker representation.  These Landlords, who had the experience of completing many, perhaps hundreds, of transactions in their careers, knew the value of having a guide at their side.

In my opinion, the proclivity of industrial tenants to represent themselves in transactions is in itself a reflection of the typical character of the industrial business leader.  To use the Mt. Everest metaphor, many gained experience climbing smaller mountains on their own.  Along the way, they charted their own path, set their own ropes, carried their own loads and dealt with the unexpected.  They are confident that they can do it themselves and are ready to handle for what lies ahead.  These business leaders have gained their confidence through a history of success in handling all kinds of things on their own.  Purchasing materials, machines, dealing with clients…these things are all best done directly.  They believe that introducing additional players to the transaction adds another layer of cost, results in a loss of control and cuts into their razor thin margin.

As I represent industrial tenants in real estate transactions, I find myself in the role of the Sherpa.  My first priority is the well-being of my client.  I invest considerable time in getting to know their business, their challenges and their goals.  Great transactions improve the fundamentals of a business and provide competitive advantages that propel the business forward.  

First, I prepare the route.  A good strategy is essential to success.  Real estate strategy is not just based upon “market knowledge” but in integrating that market knowledge with the client’s business priorities.  Real estate can hold more power for a business than is evident from the surface.  Location analysis can provide advantages in attracting the human capital needed to make a business run successfully, provide access to a better supplier base, or improve the inbound and outbound logistics.  Identifying the optimal building features and configuration, prospective facilities can be weighed objectively and differences quantified for objective comparison.  A strong financial strategy expands the analysis beyond the cost per square foot, projecting a holistic view of the costs and benefits of each location on the business.

Just as the Sherpa affixes the ropes for the safety of the climbers, as the tenant representative, I provide protection for my clients throughout the transaction and throughout their occupancy.  Whether it is offering guidance to avoid risky decisions, or negotiating options and protective covenants during the term of the lease, “a good deal” is more than just the lowest possible lease rate. 

It seems obvious that summiting Mt. Everest is an incredible feat…one that is not diminished by the assistance of a Sherpa.  In fact, the success of the expedition is dependent upon the diligence of each member of the team.   Similarly, a successful real estate transaction requires the collaboration of many role-players and is not diminished by the size of the team.  A good broker lightens the load for the team and enables them to be focused on serving their individual roles to their highest capability.

Finally, a broker provides guidance in the event of unexpected surprises along the way.  Many of the risks that can derail a transaction can be anticipated, prepared for, and possibly avoided.  However, some situations seemingly come out of nowhere.  Using the experience of a wide variety of transactions, the ability to leverage their industry relationships and a thorough knowledge of the current market , a tenant broker brings a perspective to these situations that help create the best strategy to minimize its impact and return to a positive pathway.

Thankfully, a successful real estate transaction is not as difficult as reaching the summit of Mt. Everest (usually!).  While you may not risk hypothermia, hypoxia or being buried by an avalanche, there is wisdom in having the best possible guide for your real estate journey.

5 CRE Lessons from the Cleveland Browns

The Cleveland Browns management have become the laughing stock of the sports world by botching a trade with the Cincinnati Bengals for back-up quarterback AJ McCarron.  It seems that the deal was agreed to with 5 minutes left before the trade deadline and the Browns failed to deliver notice to the NFL before the deadline.

Much has been written about the football ramifications of this blunder, about how inept the management of the Browns must be, and even about how a young backup quarterback goes on with his season, knowing he lost his shot to start over a paperwork snafu.  But there are lessons to be learned here…and not just for NFL owners.

In commercial real estate, every deal is on the clock.  We don’t always have the luxury of knowing the exact deadline as the Browns management did.  Sometimes the time runs out on a deal, even on a deal that you thought was done.  And the ramifications can be just as severe to your organization as those faced by Cleveland.  So here are 5 CRE lessons from the Cleveland Browns:

  1. Time Kills Deals.  It’s that simple.  The longer a deal takes, the less likely it is to be completed.  The world changes, values change, motivations change, new prospects enter the field and new options become available.  Sometimes someone gets a funny feeling that this deal isn’t right.  Maybe someone goes to a cocktail party and comes away with a whole new outlook on the deal.  You can’t delay your decision – because the decision not to act is a decision in itself.  This is not to say that you shouldn’t negotiate, but that it is important to maintain the proper pace to your negotiation and that letting time pass comes with a risk.
  2. You may not have as much time as you think.  Deadlines in real estate mean nothing… and they mean everything.  It is very important to be fully committed to the process.  A fast response can win a deal, or create momentum in the pace of negotiations.   Don’t ever let yourself believe that you hold all of the cards.  All of the sudden, a new player comes on the scene and you’ve lost the deal, before the deadline that you thought you knew.
  3. Never underestimate the other guy’s ability to screw up the deal.  The Bengals have to share a little of the blame.  They reportedly delivered the signed document just 5 minutes before the deadline.   Both sides of a transaction need to be focused on setting the other party up for success.  Timely delivery of information and documents build a foundation for success.  Anticipate all of the details that can derail your deal and work to address each of them.  Regardless of blame, when the deal crashes, both parties are damaged.
  4. Don’t celebrate until its done.  There are reports that the reason that the Browns missed the deadline is that they were too busy high-fiving each other.  I have no way of knowing what really went on in Cleveland’s office , but I know there are a lot of real estate deals that go off the rails after the parties agree to terms.  There will be plenty of time to celebrate after the ink is dry.  Until then, FOCUS.
  5. When it blows up, have Plan B ready.  You are going to lose one.  Maybe more than one.  Plan ahead.  Keep your options alive and never burn a bridge that you may need later.  Understand that your Plan B, C & D may not be available as time passes.  Additionally, be sure to leave yourself enough time to pursue and execute Plan B.  This is just one more reason to move deliberately throughout the process until the very end.

I can’t help but think about the loss in credibility that the Browns’ management team has experienced due to this situation.  They have suffered immeasurable damage in the minds of their fans, players, and their peers around the NFL.  The Browns will feel the ramifications financially, on the field and potentially in their ability to make future trades.  Real estate transactions are not as publicly visible as pro sports trades, but I believe a failed transaction can have similar effects in your organization.  Play to win.

Can you lead your business to be strategic about real estate?

What if you could make your real estate a strategic advantage to your business, instead of just a cost center? What if your facility could open up new markets, drive revenue growth, become a catalyst for more efficiency and better quality, attract a better workforce, and lower your inbound and outbound freight?

Taking a longer view to your real estate delivers benefits well beyond reduced facility costs. Real estate affects every aspect of your business and can be the key to transforming your organization and unlocking new top and bottom line growth.

While real estate may represent your largest single monthly disbursement, it is likely to be third or fourth on your list of monthly expense categories. Depending on your industry, labor, raw materials and transportation typically account for larger shares of an industrial business’s costs.

Strategic real estate planning recognizes that your location and your facility each play a key role determining those costs.  By optimizing your location for your specific requirements, you can create a sustainable advantage over your competition that will serve as a foundation for long term success.

Beyond achieving cost reduction, location strategy can improve service response times and improve your access to new prospects, suppliers and distribution channels. Because of this, you may be able to reduce raw material or finished goods inventory levels to positively affect your cash flow.

Your location also impacts your ability to recruit and retain the best employees. By studying the workforce demographics, competitive employment opportunities and current wage environment of the labor draw area, sites can be evaluated against one another and against industry standards.  As workforce issues become more prevalent across the country, this analysis has become a vital aspect of site selection. Conversely, choosing the wrong location can inflate your labor costs significantly and create challenges in finding new employees with the skills and experience that you need to run your business.

Inside your facility, your efficiency, quality, safety and security are impacted by your real estate decisions. Facility design should provide for an efficient flow of goods while maximizing the utilization of the entire cubic space of the building.  High space utilization can be achieved through racking, mezzanines, material handling equipment and most of all a thoughtful approach to designing your space. The payoff to this approach is seen in raising your revenue capacity per square foot as well as a reduction of material handling labor per unit of throughput.

The end goal is to create a separation between your company’s position and that of your rivals. In today’s hyper-competitive business environment, the difference between success and failure is razor-thin. Attracting and retaining better employees, being closer to your customers, having lower costs, producing better quality, or achieving tax savings could be that difference.