Occupancy costs encompass all of the expenses you pay in exchange for the right to use a facility—primarily rent, utilities, insurance, and common area maintenance (CAM) expenses. Some occupancy costs are fixed, and others are variable, but they’re all defined in the terms of your lease. And there are always ways to lower them—now, and in the future.
Whether your business operates out of stores or offices, occupancy costs will always be one of your largest operating expenses. As a leading provider of IWMS software, we equip retailers, enterprises, government agencies, and nonprofits with a number of solutions that help lower occupancy costs, primarily by improving their:
In this article, we’ll explore several key strategies for reducing your occupancy costs. We’ve also labeled each strategy based on which type of organization it applies to.
Rightsize your portfolio
First and foremost, if you want to reduce your occupancy costs, the biggest lever you can pull is adjusting the amount of real estate your organization occupies is the biggest lever you can pull. Depending on your goals and circumstances, this may mean closing or relocating existing locations, renting less space in your current location, or even subletting some space to another organization.
For retailers, the most obvious solution is to close underperforming stores, reducing your overall occupancy costs and improving the relationship between these costs and your overall sales. However, relocating a store to a nearby site with lower occupancy costs will help salvage your investment in a given trade area. The challenge is coordinating your move with lease terms and sales forecasts to ensure the lower occupancy costs aren’t offset by penalties or decreased performance.
To fine-tune your real estate portfolio on a more granular level, you need visibility into how your space is currently utilized, which is more common (and actionable) in an office setting. Space utilization insights generally come from some combination of IoT sensors, badge scans, office reservations, and manual walkthroughs, which help reveal spaces that aren’t being used efficiently. Offices, meeting rooms, floors, or amenities that are rarely occupied represent opportunities to shed excess square footage, especially when that space is consolidated.
Over the last few years, numerous organizations around the world have drastically reduced their occupancy costs by rightsizing their portfolios and only renting the space they actually need to operate.
Repurpose underutilized space
When you’ve identified underutilized space, downsizing isn’t the only way to reduce your occupancy costs. Repurposing your existing space can enable you to downsize (by consolidating buildings or floors, for example), or it can prevent you from needing to rent additional space to meet your goals. If you need additional storage or room for more workstations and there’s already space that isn’t being used consistently throughout the workweek, that underutilized space may allow you to grow without increasing your occupancy costs.
It’s not uncommon for organizations to accumulate more space (and thus, greater occupancy costs) than they need over time simply because they haven’t made optimal use of the space they already have.
Leverage your portfolio in lease negotiations
The larger your organization and more sprawled your operations, the harder it is to recognize the nuances of your real estate portfolio and use your lease information to negotiate more favorable terms. Landlords often come to the table with a more detailed understanding of comparable locations, market rates, and what terms they can expect than corporate tenants do, simply because they have better visibility into their larger portfolio. But when you have hundreds or thousands of locations, you can use numerous points of comparison to lower your occupancy costs by negotiating better terms.
With a centralized system for your entire portfolio, you can easily compare and analyze any leases you have with a specific landlord, in a particular city, in similar markets or trade areas, or in facilities with similar specifications.
Perhaps there are CAM expenses your landlord hasn’t charged you for in other leases you have with them. Or you can demonstrate that a particular lease is on the high end of cost per square foot, but doesn’t have the foot traffic or other characteristics to justify that. With more data and points of comparison at your disposal, you can negotiate from a position of power, secure more favorable terms, and lower your occupancy costs.
Exercise your tenant rights
Right now, there could be break options or other lease terms that limit particular expenses, give you opportunities to reduce rent, or even let you exit an expensive lease early to reduce your occupancy costs. And even if your current lease doesn’t have break options or early termination clauses, you have every right to discuss them with your landlord anyway.
Retailers in particular may have co-tenant clauses that tie your rent or right to exit to a particular cotenant. Since you may have chosen a location based on who else was there, and their absence can significantly alter foot traffic, co-tenant clauses can help safeguard your business (and your occupancy costs) against changes beyond your control. You may also have break options or early termination clauses tied to sales performance or traffic so that if a store doesn’t perform as projected, you can reduce your occupancy costs by paying lower rent or exiting the lease altogether.
With larger portfolios, understanding the unique tenant rights contained within each lease can seem overwhelming. But when all the documents associated with your portfolio live in the same searchable database and get organized intuitively, your lease department can find all kinds of opportunities to lower your occupancy costs.
Perform CAM audits regularly
CAM is a collection of occupancy expenses that are easy to overpay for simply because you (and your landlord) aren’t checking them against the specific terms of your lease, or don’t have a shared definition of expenses like “parking lot maintenance” or “cleaning services.” Your landlord may have numerous tenants, and as much as possible, they’ll standardize common area maintenance clauses to save time.
If your lease includes special exclusions, caps, or direct payment arrangements, it’s not uncommon for your landlord to miss these when they apply their templated approach to CAM charges, causing you to pay twice for the same service or pay for expenses you aren’t responsible for. CAM audits are your opportunity to reconcile what your landlord has charged against what you’re actually responsible for, and it’s common for simple oversights to result in unnecessary occupancy costs.
Some organizations rarely perform CAM reconciliation, but this is an annual opportunity to ensure your occupancy costs are as low as possible according to your lease.
Find more affordable locations
In some cases, the most straightforward way to reduce your occupancy costs may be to simply find a comparable location with lower rent. This is generally easier when your customers don’t have to physically visit your location. And for organizations with remote workers, moving to a more affordable location doesn’t necessarily mean losing access to labor pools.
But if you’re a retailer, finding comparable locations can be more challenging—because your location’s success depends on so much more than the facility. You have to build comprehensive site models that incorporate a wide range of factors relating to both the site itself and the trade area it occupies, and then weigh your desire for lower occupancy costs against your sales forecasts .
Use an alternative workplace model
Over the last few years, businesses all around the world have implemented variations of hybrid work, where employees typically alternate between working in the office and working remotely. Since these models allow more employees to share fewer resources, they enable organizations to rent less space while accommodating the same number of employees.
Any office-based organization looking to reduce occupancy costs should consider implementing some form of hybrid work. And if you already use a hybrid model, the closer you get to fully remote, the less office space you need to operate.
Flexible office spaces offer another way to reduce your occupancy costs. Instead of furnishing and maintaining your own space, you pay a membership fee or sign a short-term lease to access a fully furnished, dedicated office space designed to accommodate office workers from a wide range of industries. These low-cost solutions can be particularly helpful for distributed organizations that want to provide employees with dedicated office space, or those that wish to avoid the significant investment in real estate without losing the benefits of working in the office.
Find more cost-saving opportunities with The Lean Rent Playbook
Whether your lease portfolio is packed with stores or office buildings, these complex legal agreements can be difficult to navigate, and it’s easy to miss crucial terms, clauses, and dates, costing you money every year. In The Lean Rent Playbook: How to Avoid the Hidden Costs of Rent, you’ll learn about key areas where you could save hundreds of hours and thousands of dollars annually by improving your lease departments access to information and empowering them with new capabilities.