Commentary

A surprising way to cut real estate costs

Comparing leases can save a few dollars per square foot. But what if that lost you money elsewhere? Here’s a better way to look at costs and saving opportunities.

September 25, 2016

When you’re looking for a new office space, what’s on your short list of considerations? You’ll likely prioritize things like location, layout, amenities, lease flexibility and - perhaps most important - rental rates.

In comparing leases, you can probably save a couple of bucks per square foot. But what if that $3-$4 in space savings actually lost you money elsewhere? What if that cheaper office on paper is really more expensive because of its negative impact on employee engagement and well-being?

There’s a better way to evaluate your building’s true costs when you’re considering a new lease, and it can save you far more than $3-$4 per square foot: Productivity potential.

A holistic view of your real estate considers both the hard costs like rent and utilities as well as their residual impact on the people who work there.

The 3-30-300 rule

We know pretty instinctively that better productivity saves money, but how can we prove it? Beyond that, how can we prove that it’s more impactful than rent savings?

Let’s compare their annual costs. The 3-30-300 rule illustrates the average order of magnitude between a company’s costs for utilities, rent and payroll (all per square foot, per year).

  • $3 for utilities
  • $30 for rent
  • $300 for payroll

While actual figures will vary across locations and organizations, 3-30-300 is a solid rule of thumb. For example, where a 10% increase in energy efficiency would yield $0.30 savings per square foot and a 10% decrease in rent would save $3.00, a 10% gain in productivity is worth $30.

How can your space impact your people’s productivity?

Workplace configuration
In addition to having the right types of space for various tasks and job functions, office layouts that promote chance encounters and interactions between employees can greatly improve satisfaction, performance and productivity.

This also enhances employee engagement, which Gallup’s 2012 research examining nearly 50,000 business units and 1.4 million employees in 192 organizations showed to be a true competitive advantage. According to the study:

Workplace wellness
A 2013 World Green Building Council report amalgamates dozens of studies on how sustainable building design impacts employee health, well-being and productivity. It has identified eight specific factors—including natural light, good air and ventilation, temperature control, views and green space—that when optimized result in bottom line business benefits due to their positive impacts on occupants. Multiple case studies were compiled and showcase the following average increases in productivity:

  • Individual temperature control: +3%
  • Improved ventilation: +11%
  • Better lighting: +23%
  • Access to natural environment: +18%

And this doesn’t even touch workplace environments that cause Sick Building Syndrome (SBS). Affected buildings are estimated to impact up to 20% of workers, while improvements to air quality, reductions in air pollutants and better ventilation can reduce symptoms by 70-85%. In fact, a 2010 paper in the American Journal of Public Health found that LEED Certified buildings reduced perceived absenteeism and work hours affected by asthma, respiratory allergies, depression and stress, and showed self-reported improvements in employee productivity.

Efficient workplaces save energy while boosting productivity, which may be worth potentially higher rent rates.

So it stands to reason that selecting a space with a smart design and green attributes will yield far greater employee performance than a substandard space at a lower sticker price.

OK, this all makes sense. But can you actually calculate returns?

Short answer: Yes.

Knowing it was possible to capture significant savings, three JLL real estate brokers developed an algorithm to calculate their clients’ savings on a case-by-case basis.

Their 3-30-300 calculator takes a company’s real input values for things like rentable area (that’s square footage), rent rates, employee salaries, average sick days and employee retention, then spits out their true 3-30-300 and total cost of occupancy (TCO). From there, you can play around with attributes to calculate cost savings.

Using this tool, we find that a company with a TCO of just over $60 million per year and a human capital cost of $54 million can save:

  • $1.50 p.s.f./year with a reduced absenteeism rate of 10%
  • $11 p.s.f./year with 10% improvement in employee retention
  • $65 p.s.f./year with a 10% improvement in productivity. (For reference, World Building Council studies show that 18-20% can easily be achieved in the right environment.)

Even if you cut that same company’s improvements down to just 2% across the board—you’re still looking at $13 per square foot savings annually.

That’s a lot better than $3-4, don’t you think?

 

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