As revenues come under pressure from external shocks, such as COVID - 19, it’s important that organisations closely look at how fixed costs impact their cashflow.
Identifying and quantifying the components of your fixed occupancy cost enables you to focus and prioritise your organisation’s response to the opportunities and challenges to your ways of working.
In this article, we help you identify and benchmark your fixed occupancy costs. In a later article, we’ll show you how to prioritise and adjust your fixed occupancy costs for better organisational performance.
For occupiers of commercial property, fixed costs have three key elements – Gross Rent (rent plus outgoings – including insurances), Depreciation (a function of fitout costs), and Facility Operations (energy, cleaning, heating, ventilation, air conditioning, mechanical, electrical and fire services, repairs + maintenance, waste).
Levels, trends, linkages, and benchmarks are important components in analysing your results. However, given the significant differences in the types and standards of accommodation for property occupiers, benchmarking occupancy costs is more of an art than a science. With this in mind, (and using data from our analysis of occupancy costs of small, medium, and large organisations across Australia) here are some benchmark ‘rules of thumb’ for your consideration.
‘Rules of thumb’
Typically, for commercial occupiers with a premises in excess of 2,000 square metres, Gross rent comprises approximately 65% of fixed costs, Depreciation costs relating to fitout comprise some 20% of cost, and operating the facility comprises approximately 15% of your fixed costs.
When you remove fitout from the equation (via landlord contribution, sublease, etcetera), Gross Rent rises to more than 80% and maintaining the physical asset increases to almost 20% of total fixed costs.
Why it matters
Partitioning fixed costs into three categories identifies the material levers for management – rights and obligations under the lease (including rent), fitout, and asset maintenance – and enables you to prioritise and adjust your fixed occupancy costs.
But fixed costs are only part of the Total Cost of Occupancy. Fixed costs focus, primarily, on asset quality. A more complete analysis of total cost includes variable costs and its focus on service quality.
Accordingly, a disciplined approach to your total cost of occupancy requires an integrated approach to Corporate Real Estate, Workplace, and Facilities services to capture your total expenditure on fixed and variable costs.
This systemic approach also enables a meaningful discussion about cost vs. value.
Please let us know in the comments below how closely your fixed costs align with our benchmarks / rules of thumb.