10 Ways to Lower Your Real Estate Occupancy Costs

This article was updated on 6/03/2024

Between stubbornly high interest rates, a competitive labor market, and the shift to remote work leading to low occupancy in many office portfolios, many landlords and tenants alike are looking to lower occupancy costs in this market.

If you need guidance, CBRE Institute recently outlined 10 ways to lower occupancy costs across real estate portfolios in its report: "10 High-Impact Moves to Reduce Total Cost of Occupancy." According to report author Mary O'Connor, a senior vice president at the institute, this advice applies across all asset types, and to everyone from mom-and-pop shops to global conglomerates.

"There's a similar approach to all; it's just on different scales of course," she said.

Based on the report, these are the 10 most effective ways to reduce your real estate occupancy costs.

1. Transform your approach to space.
2. Develop space consolidation strategies.
3. Unlock trapped capital.
4. Relocate to more favorable markets.
5. Use business analytics.
6. Prioritize capital.
7. Invest in EV charging and renewables.
8. Develop a comprehensive decarbonization strategy.
9. Use technology to manage your facilities in a smarter way.
10. Transform real estate delivery models for a new era.

LoopNet spoke with O'Connor to explore these methods more in-depth.

1. Transform Your Approach to Space

This may read like "cutting space," but it's more nuanced than that. O'Connor said utilization data can help you revisit space standards and prioritize capital to reflect hybrid work realities. It's likely your office will need less private workspace and more shared workspace in the future. CBRE's occupancy management benchmarks reveal a 40% increase in collaboration or "we" space across the globe since 2021.

Badge swipes are still probably the easiest data to determine your workplace's utilization, O'Connor said.

"This knowledge will help mitigate the risk of giving up too much space only to have to re-lease at higher rates, while equipping companies with the right data to thoughtfully consolidate locations to drive occupancy cost reductions," the report stated.

2. Develop Space Consolidation Strategies

Right-sizing space can be overwhelming. One key step is to answer the "why" of the space.

"If you ask any director of real estate for a big company 'What are your big three initiatives?' It's cost savings, it's carbon reduction and its employee experience," O'Connor said. "When you think of those three things, they don't have to be exclusive to one another."

Here are two examples:

• A professional services firm decreased its footprint by 45% through the adoption of "event-based" future office work, where employees only come to the office primarily for special meetings and events.
• A financial institution is reducing its total footprint by over 50% in one metro area by consolidating multiple older office facilities into two modern hub offices, one downtown and one in the suburbs, in response to a new remote and hybrid work model.

3. Unlock Trapped Capital

If applicable, exploring sale-leasebacks of aging buildings is a good way to reduce operating expenses while improving cash flow and strengthening the balance sheet.

While investor and lender demand for office assets has cooled, other assets like data centers and industrial facilities can secure financing and deliver significant proceeds that can be reinvested in your core business.

4. Relocate to More Favorable Markets

Emerging markets offer talent pools for less cost and with less competition. Having the right workforce in the right locations can produce millions of dollars in long-term savings while improving performance, CBRE said.

"Migration patterns brought on by the pandemic have opened up new, lower-cost locations that offer deep pools of talent in less-competitive environments," the report said. "U.S. cities such as Phoenix, Raleigh, Columbus and Kansas City, along with international markets, such as Ottawa, Buenos Aires and Barcelona, can provide significant labor costs savings and greater access to talent in less competitive labor environments."

5. Use Business Analytics

Collecting data is good but can quickly get confusing when working with what CBRE called a "patchwork quilt" of analytics.

"Leaders can make better decisions when they have a single view of occupancy, expense, capital projects and operations data," the report stated.

For example, integrated analytics helped one company decide which sites to divest after a merger of two large-cap telecommunications companies, resulting in $50 million in savings.

6. Prioritize Capital

Once decisions are made on which business-critical programs to maintain, leaders can pursue various options to further reduce expenses.

Examples include:

• "As a Service," which converts typical capital projects to operating expenses through third-party financing. There are firms that invest their own capital into facilities upgrades, technology and other CRE initiatives, and in turn price the solution as a service (which would fall under operating expenses, rather than capital expenses). One example is the installation of solar panels.
• Turnkey solutions that leverage principal project and construction management with a set price, mitigating risk and hedging against further inflation. These turnkey solutions free up time for real estate occupants, who are able to leverage the service provider's economies of scale and expertise to reduce the overall capital outlay.
• Program bundling, which achieves economies of scale through bundling of small and/or recurring projects (e.g., roof replacements).
• Making early commitments for equipment orders to account for long-lead items, staying on schedule and ultimately lowering costs.
• Carbon pricing models that can be integrated into business decision-making for sustainable workplace solutions based on the net cost of carbon, lowering energy usage and utility costs.

7. Invest in EV Charging and Renewables

O'Connor said that "the greenest square foot is the one you don't need." But absent cutting space, there are other ways to decarbonize your property.

Exploring electric vehicle (EV) charging and solar solutions can decrease costs and energy consumption, capture utility incentives, reduce exposure to community pricing and lower technical labor requirements.

"HVAC equipment with less than five to eight years of remaining useful life are prime candidates for replacement, given the high maintenance spend required and significant energy efficiency degradation," the report said. "Similarly, buildings with lighting and controls systems older than 10 years offer a prime opportunity to explore the quantitative and qualitative benefits of retrofitting."

8. Develop a Comprehensive Decarbonization Strategy

If nothing else, the failure to drive decarbonization could soon become a business liability, O'Connor wrote.

For example, CBRE helped one client avoid more than $2.5 million in environmental regulatory fines by jointly establishing meticulous compliance and reporting protocols.

A comprehensive strategy includes:

• Establishing your decarbonization strategy.
• Continuously improving energy efficiency.
• Electrifying real estate and transportation.
• Transitioning to renewable energy and carbon-free fuels.
• Decarbonizing your supply chain.
• Offsetting your carbon balance.

9. Use Technology to Manage Your Facilities in a Smarter Way

Building automation, artificial intelligence and advanced analytics can all help reduce occupancy costs.

For example, security, janitorial services, building engineering, site landscaping and some HVAC can be calibrated to match space utilization. The use of badge-swipe data and Wi-Fi/network connection data can verify occupancy levels for setting Service Level Agreements (SLAs).

In particular, CBRE worked with a financial services client to identify pockets of vacancy across multiple floors and business units, and then installed deck-level sensors that provided heatmaps to pinpoint underutilized space. The assigned business units relinquished the underutilized capacity, resulting in a $3 million annual savings in a major Asia-Pacific market.

10. Transform Real Estate Delivery Models for a New Era

If there's one lesson to glean here, it's to view your real estate portfolio holistically, instead of through siloes using multiple service providers with different technology systems.

"While appropriate at one time, the traditional, fragmented service delivery model is no longer viable," the report said. "Working with a global service provider to create real estate delivery models for a new era — with complementary roles and responsibilities, clear delegation of authority and end-to-end operational processes — will reduce bottlenecks while improving speed and compliance."