Time to lose some weight in Corporate Real Estate - but how?

Despite the decreasing interest rates throughout the Western hemisphere (Europe and US) the economic outlook remains challenging. The US market has the headache of renewing CRE loans worth trillions in the coming years 2025-2026, whereas in Europe the situation has been characterised by sluggish real growth. 

It seems that a lot of European industrial groups are forced to go through a painful transformation from analog to digital and this, coupled with other issues, like high inflation, has led to a lot of cost pressures. Many large (industrial) enterprises are facing a reality where they simply need to lower their cost base. 

The cost cutting exercises and group wide programs typically start from sourcing, indirect spending, fixed costs and headcount. Sometimes the painful solution is staff layoffs. 

However, there is one item, which is typically not in the prime focus when looking for ways to cut spending. That is corporate real estate. The characteristics of real estate is that it is a fixed asset, and even if leased, it is booked as such due to accounting principles. You can lose some weight by sale-and-leaseback manoeuvring but you cannot escape the cost and the lease as a long term liability. Real estate brings costs with it, either direct or indirect. Even if completely unused and deserted, one has to pay the property tax as a landowner.

Yet, instead of regarding real estate only as a cost and as such how to decrease it, we should take a bit more holistic approach, as illustrated below.

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We can divide the real estate portfolio according to four dimensions: Owned / Leased, Operational / Non operational. Operational is the space you need for the business, Non operational is what you don’t, simply put. Then, you either own or lease the real estate you need.

The key is firstly 1) to identify and secondly 2) to treat each segment differently by applying policies and actions accordingly. Production sites are often historically owned real estate, which is needed for (industrial) operations, whereas e.g. sales offices or customer service sites are leased from the commercial market on market terms. However, due to developments in the business and/or changing circumstances some of the owned real estate may have become redundant (eg. closing / moving a production site) or the leased space (e.g. offices) may become excessive, so that part of that becomes de facto non operational. This is especially true now after Covid when WFH (Work From Home) has dramatically decreased the need for office space.

The non operational, owned real estate can in the best case scenario be developed into something which can be divested or leased to a 3rd party. For the non operational leased space which is no longer needed, the answer is clear. Get rid of it! This, however, depends on the lease terms, which are not always explicit, up-to-date and known. This is especially true when the leases are in another country in the local language under the local legal framework - possibly done by people who no longer work for the company - and the original contracts are not properly archived anywhere.

Nevertheless, the biggest obstacle to conduct all of this, is that there is seldom comprehensive data available for the whole real estate portfolio. How often does corporate real estate have, for example, a complete list of all leased premises with the key facts of the leases, pretty much the way commercial real estate manages its rent roll? (And honestly that it is not always as complete or up-to-date as it should be either).

So, given all of this, let’s do a reality check. We can start by asking the following questions: 

• Do you know the total cost of your corporate real estate?
• Expenses and cost of capital?
• Do you know the utilisation ratios of spaces in use?
• Do you have excessive / redundant space?
• If you need to reduce leased space, do you know the lease terms across the portfolio?

In short, can you “drive” your real estate portfolio?

These are just a few examples of how to approach the issue and answer the question posed in the beginning “It’s time to lose some weight in Corporate Real Estate - but how?”. To get the answers requires building a centralised view of your real estate portfolio. This is where Assetti can help.

As we navigate these challenging times, it’s clear that a proactive, data-driven approach to Corporate Real Estate management is more crucial than ever. By leveraging the right tools and strategies, we can unlock significant value, even in a challenging market. We at Assetti are happy to help you with that.

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