Modern Workplace Planning: Solving for Experience Part II: Budget and Schedule
Last week we established the importance of defining “the purpose” behind your workplace, especially those elements of the workplace which are expressed through physical spaces. This is the first (and vitally important) step companies must take before they begin a real estate process (e.g., the process of acquiring space). Once established, the next step is to think carefully about budget and schedule. These considerations, much like the discussion of purpose, are greatly aided by working closely with your real estate advisor. Here, again, companies must shift how they think about the engagement of real estate advisory services. Having the right real estate partner on board from the very beginning facilitates access to critical data and insights. The process of properly defining the budget and schedule are both areas in which the advisor can play a key role.
Establishing a budget before market engagement is important for several reasons. Firstly, a good budget will detail a range of total occupancy cost outcomes (low to high), comprised of estimated costs for each facet of the project, including the following:
cost of consultants (architects, contractors, brokers, lawyers, etc.)
cost of space (range, low to high based on broker-provided market data)
cost of FF&E
other related costs (AV, Security, Move, IT)
cost for tenant improvements
As we’ve noted previously, the right approach to the workplace requires input from leaders in all key segments of the business. The objective is to establish agreement on the projected outcome up front so that when we go to market, we have the clarity to execute cleanly, to avoid misfiring on important financial aspects of the mission and having to backtrack. Believe it or not, we see this happen time and again. One of the most common mistakes companies make is the failure to bring everyone to the table, day one. In particular (and this is a “head scratcher”), they fail to fully consider the financial implications of acquiring physical space (cash, balance sheet, P&L). Companies always have financial priorities. For example, a company may be preserving cash to fund acquisitions and therefore be sensitive to real estate transactions requiring a lot of cash. Or maybe the finance team is primarily focused on EBIDTA because they’re preparing to sell the company and valuation is a multiple of EBITDA. Real estate solutions can be tailored to meet virtually any essential financial outcome, but the parameters must be known in advance.
Getting the schedule right adds significant value to the overall project, as execution is either enhanced or constrained by schedule. Most real estate projects are sensitive to the exercise of market leverage, a dynamic that fluctuates with the passage of time. This graph shows how leverage declines over time. To ensure full access to market leverage, terms must be negotiated during the optimum window. When working from a future lease expiration date, for example, the project schedule must be established such that ample time is given to the consulting, market engagement, lease negotiation, design, and construction phases. The design and construction phases are limited as to how much they can be accelerated, and the cost of such acceleration is high. Hence, those aspects of the schedule are more fixed. When too little time is allocated to the schedule, market engagement and negotiation are the 2 areas which suffer the most. Compromising these phases of the schedule results in lost value. You must do all you can to provide adequate time for these phases to play out. The schedule is provided by the broker-partner at the very beginning of the project, with full consideration of strategy and the market dynamic.
Establishing the right budget and schedule is the 2nd topic of our 7-part series, Modern Workplace Planning: Solving for Experience. Next week, be on the lookout for Part III: The Right Strategy.