Five ways to reduce real estate cost exposure

Jack Moroney from TM Insight’s Commercial Property team shares five tips to reduce cost exposure in commercial real estate.

Revenue and costs are critical in establishing the profitability of any business. For many businesses, commercial real estate is a key driver of cost. TM Insight has seen firsthand the importance of minimising cost exposure in real estate and it specialises in helping businesses manage this cost.

So what is cost exposure in commercial real estate? Put simply, cost exposure refers to the risk of paying too much for your commercial property, or failing to extract maximum value from your commercial property (for example, through inefficiency or poor systems). Cost exposure can arise when a tenant has committed to an amount of rent for a set period of time, then the market rate drops below the agreed amount, so the tenant is paying above market rates.

Jack Moroney from TM Insight’s Commercial Property team shares five tips to reduce cost exposure in commercial real estate.

1. Timing

Be sure to negotiate early. As a tenant, the closer you get to the end of the lease, the less bargaining power you have.

Regardless of whether you will be relocating or renewing, TM Insight recommends allowing 12 – 36 months to prepare a business case. Factors that will impact your decision may include:

• Your existing vs. desired warehouse size
• Your broader logistics and supply chain requirements and objectives
• Whether or not you require automation
• Your future business objectives, for example growth, consolidation, etc.
• The nature of your business
• Local market conditions

Allowing a longer timeframe to manage the planning and negotiation process will help you make the best decision for your business, and retain a strong bargaining position.

2. Strategic alignment

Ensure that your focus extends beyond the lease negotiation and transaction. It is important to take a holistic view of your strategic business objectives, and ensure your commercial real estate activities are aligned with your strategic requirements. It is also important to take a bird’s eye view of your logistics and supply chain activities, in order to maximise synergies with your commercial real estate and warehousing. TM Insight has deep expertise bringing together these strategic and operational considerations.

3. Prevent conflict

It is critical that tenants make sure they understand who their service provider is representing. Corporate real estate agencies (such as CBRE, Colliers and JLL) represent institutional and private land owners. Put simply, their job is often to derive maximum income for landlords, from tenants like you.

In order to take advantage of current market conditions and reduce your cost exposure, it is imperative that your service provider’s sole purpose is to represent your best interests. TM Insight brings a unique combination of experience in commercial real estate, supply chain management and warehouse development. Moreover, we are fiercely independent when it comes to representing our clients needs.

4. Future-proof your lease agreement

Your lease agreement should not only meet your current needs, but also adapt to meet your future needs, even in the face of shifting market conditions. TM Insight’s Commercial Property team regularly conducts rent reviews which frequently uncover instances where tenants are paying above market rates at the back-end of their lease. Not only is this an unnecessary financial cost, it also exposes the tenant to a number of additional risks, such as absorbing rent drops of sub-tenants and increased pressure to discount. The Commercial Property team at TM Insight can your business help manage this risk by negotiating a clause into the lease during the negotiation (or front-end) phase.

5. Plan for automation

With land prices in many markets soaring in recent years, the impact of occupying a smaller footprint which has a greater cubic capacity (due to the increased warehouse clearance) and implementing automation can have a significant impact in reducing real estate costs. TM Insight specialises in helping businesses maximise the efficiency of their warehouse by planning, designing and implementing state of the art automation solutions.

The warehouse area is only one component to the operational functionality of an asset. With TM Insight’s holistic expertise, you can ensure that the external hardstand areas of your warehouse are achieving optimal flow and integrating seamlessly with your broader supply chain operations.