Commercial Office Real Estate Value Engineering.

Commercial real estate is a type of asset that can give multifold results on an investment or can prove to be a real disaster in your portfolio. Traditionally, the yield on commercial real estate used to come purely from rentals, but today's dynamic economy call for placing multichannel strategy to engineer greater marginal value from a single piece of real estate by opening and managing multiple possible channels and alternative uses of same square footage.

We will try to break down above thought to most fundamental parameters of value in a real estate.

Parameter 1 - Actual Square Footage Available

The actual square footage available in a particular captive real estate holds a value. The square footage is primarily measure in in a 2-dimensional sense. This is primarily the case of a single floor available for use in a real estate.

However, there can be linear increment available and square footages can be added once we start adding floors on top of one another. This requires investments in terms of licenses as well as materials and labor cost in building those additional floor. As long as marginal increase in square footage leads to a better marginal revenue compared to the investments, further investment in this direction makes sense.

Parameter 2 - Time

Time is an important parameter in the in any real estate. Time is required to be look at from two vantage points. One is time taken to make a real estate ready for use. The shorter this time is the earlier the real estate piece can be made available for doing business.

The second parameter is time utilisation. This is an extremely critical factor to look at. Let's look at it from the perspective of time available in a week. An office space in a commercial real estate is usually given out on a rental basis and the tenant (the company) that is paying rent on a particular floor. We will leave this out from the discussion at the moment with the assumption that the company paying rent on the floor has full discretion over amount of time it spends on floor to keep its business running (may be across the world). And when this company chooses to keep the office closed, no one else can use it for any other purpose.

Let's look at other pieces of allocated real estate in a commercial building.

Parking Spots

Parking spots pose a great opportunity for incremental revenue. Some of the reasons to support this thought is that parking spots do not have 100% utilisation rates. The parking spots in a building usually are filled up during daytime and even then the overall utilisation depends on the attendance rates in the offices in the building. Further, almost all the offices (maybe except a few) are usually empty on Sundays, the number of parking spots available for alternative uses is huge on such days.

Thus, on a time parameter, the paring spots in a commercial office building has a very low utilisation rate.

An alternative usage is installing Electrical Vehicle Chargers in parking spots and scheduling their availability for usage as per the availability of the parking spot itself for usage. While that can be dedicated parking spots for charging EVs but other parking spots can also be utilised on weekends or on official closure days of offices.

Retail Spaces

Every commercial office space can have areas carved out for retail use. This can lead to marginally higher rentals because of demand and competition amongst retailer. Some of the big real estate companies have also been experiencing greater yield from minimum guarantees on rentals plus a share of revenues from retailers.

Advertising

The walls in a building can generate further marginal revenue from advertising and marketing. Businesses can be allowed to put up advertisement in designated areas and can be charged on monthly or annual basis from the advertisers.

Thus, an incremental value can be engineering from a single real estate piece by unlocking additional revenue generation areas on both on actual square footage parameter and time parameter.

We shall covering more insights into real estate value in upcoming articles.

Best

Team 10B Insights