Real Estate Strategy for Fast Growth Companies

Let’s consider the corporate headquarters of a fast growth service business. Suppose that 1) they have a preference for keeping everyone together in one contiguous space, 2) they desire to strategically minimize cost and risk, and 3) growth rate is a variable based on many factors. What is the smart way to scale facilities?

A first exercise is an assessment of current space utilization and capacity. From this, we can also get some interesting metrics such as real estate cost/staff member, cost/seat, SQFT/seat and SQFT/staff member. These metrics will be useful in extrapolating future demand. It is also worth considering the absolute constraint in expanding the maximum number of accommodated staff. For example, depending on industry and culture, in the short term it may be possible to put 2 or even 3 people in a single office, but at some point even another single person becomes unfeasible. Sometimes, and especially in suburban locations, the constraint becomes parking. In any case, you’ll want to understand this in order to create an expansion timeline.

The next step is to perform a growth sensitivity analysis. This is a projection based on anticipated growth and variances within two standard deviations of expectations. At this point you should also consider sensitivity to four external forces, 1) Economy, 2) Competition, 3) Technology and 4) Government Regulation, which could potentially impact your forecast. Using these projections and dividing by the desired SQFT/seat metric, you can anticipate minimum and maximum space demand. In general, you’ll want to define requirements in annual increments and ideally be flexible enough to cover both high and low space requirement estimates. In a perfect world, the company is paying for only the seats needed for each year, with the guaranteed ability to take additional space as necessary.

It is not always a perfect world, of course, and real estate is often inflexible and requires a high cost of construction. However, it is possible to design an occupancy strategy to be reasonably flexible and support a high growth or variable growth company. Here are a few strategies:

Buy or Build Large: The company designs or acquires a multi-tenant property that can accommodate significant growth over a long horizon. It then leases out the excess space until needed, including perhaps options to terminate the other occupant’s leases if necessary.

Lease Large: Rather than own, the company acquires space in a much larger project and secures expansion rights. These could be a series of outright “free” options, paid “reserve” options, Right of First Refusals, Right of First Offers, Guaranteed Takedowns, Right of Contractions and possibly even a direct lease of space with liberal sublease rights. Each has various advantages and risks, and every landlord will have a different tolerance for each, so they are often used in combination based upon the user company confidence on their absolute future need and timing.

Most companies will favor leasing rather than owning because it shifts a portion of the risk to the landlord, reduces both upfront and expansion construction costs, and often provides much greater expansion flexibility. Favoring a very large institutional landlord, such as a well-capitalized REIT, typically improves these benefits even further to protect upside expansion needs (although may fare worse if the user ever needs to downsize).

Finally, realize that while you cannot always cover an absolute ideal scenario at every level of possible growth rates, you can always have a plan for each. Smart companies ask, “What if…” and make sure they have a logical answer for each potential outcome.