A Look at Tenants' Decision-Making As They Rationalize Their Real Estate

Increasingly companies are evaluating their real estate holdings to see if they are still cost effective and align with larger business goals. This is not welcome news to landlords—although net lease companies will be happy about the increase in sale leasebacks—but it is reality and the best way to address this trend is to understand how these companies are thinking.   

Two leaders at Colliers Capital Markets—Ron Zappile, Senior Vice President, Portfolio Strategy Consulting, and Connor Faught, Executive Vice President, Head of Corporate Capital Solutions—give their take on some of the strategies that they see clients considering.

Study what’s in the portfolio. A first step is to look at real estate holdings because of the price of debt and decide how to apportion funds to cover strategies, says Zappile. As an example, he cites a client whose growth strategy is rooted in developing new technology. Doing so requires a huge proportion of its available funds. The client also has other assets to maintain that require more monies. When taking a deep dive, owners/operators can identify inefficiencies. Excess real estate holdings might be an alternative capital source, he said.  

Cut costs. Paring expenses is always wise but taking specific time to do so and analyzing carefully is prudent, according to Faught. Optimizing a portfolio involves cutting away fat and what’s not necessary and possibly detouring in another direction. Faught suggests disposing of surplus properties, both buildings and land, which also helps raise capital. “Some companies see that the value of their real estate can generate more capital than their core business today,” he said. In some cases, real estate has more flexibility than historically capital-raising areas, he said. 

Factor in current circumstances. In the current cycle, there’s good utilization data to identify opportunities. Faught said that many of his company’s clients now are seeing vacancies in their headquarters or campuses, which could lead them to pare square footage and take money from sales or sale-leasebacks to upgrade remaining space. Funds could also be used to recruit and retain staff.

Keep plans flexible to revise and pivot. There was a reason why the term “pivot” became so popular and even overused during the pandemic. Companies have always known the wisdom of making changes to improve long-term planning goals and capital needs, Faught said. But now, post-pandemic the need may be greater. In analyzing portfolios, they can decide if they need to control a site, have the best exit strategy after completing a lease term or if the buyer’s term aligns with their real estate plans and capital needs. If not, time to pivot and change.

Analyze according to the type of holdings. Public corporations have public disclosure requirements and are less inclined to take write-downs, Zappile said. Decisions also take longer to make due to shareholders having a say. In contrast, private corporations (including family businesses in many cases) have greater flexibility to move faster because there’s less red tape and internal bureaucracy to wade through. The bottom line is that annual capital funding planning exercises are more “baked in” for public than private corporations, he said.