A surprising way to cut real estate costs
When you’re looking for a new office space, what’s on your short list of considerations? You’ll likely prioritize things like location, layout, amenities, lease flexibility and—perhaps most importantly—rental rates.
Then you’re looking for a new office space, what’s on your short list of considerations? You’ll likely prioritize things like location, layout, amenities, lease flexibility and—perhaps most importantly—rental rates. You can probably save a couple bucks per square foot in comparing leases.
But what if you look at it from another perspective? What if that $3 to $4 in space savings actually lost you money elsewhere? What if that cheaper office on paper is really more expensive because of its negative impact on employee engagement and well-being?
There’s a better way to evaluate your building’s true costs when you’re considering a new lease, and it can save you far more than $3-$4 per square foot—productivity potential.
A holistic view of your real estate considers both the hard costs like rent and utilities as well as their residual impact on your employees.
We know pretty instinctively that better productivity saves money, but how can we prove it? Moreover, how can we prove that it’s more impactful than rent savings?
Let’s compare their annual costs. The 3-30-300 rule illustrates the average order of magnitude between a company’s costs for utilities, rent and payroll (all per square foot, per year).
- $3 for utilities
- $30 for rent
- $300 for payroll
While actual figures will vary across locations and organizations, 3-30-300 is a solid rule of thumb. For example, where a 10 percent increase in energy efficiency would yield $0.30 savings per square foot and a 10 percent decrease in rent would save $3.00, a 10 percent gain in productivity is worth $30.
How can space impact your people’s productivity?
“Business or work units that score in the top half of their organization in employee engagement have nearly double the odds of success (based on a composite of financial, customer, retention, safety, quality, shrinkage, and absenteeism metrics) when compared with those in the bottom half. Those at the 99th percentile have four times the success rate compared with those at the first percentile.”
In addition to having the right types of space for various tasks and job functions, office layouts that promote chance encounters and interactions between employees can greatly improve satisfaction, performance and productivity.
This can also enhance employee engagement, shown to be a true competitive advantage according to Gallup’s 2012 research, which examines nearly 50,000 business units and 1.4 million employees in 192 organizations.
A 2013 World Green Building Council report integrates dozens of studies on how sustainable building design affects employee health, well-being and productivity. It has identified eight specific factors that, when optimized, result in bottom-line business benefits due to their positive impacts on occupants. The eight factors include natural light, good air and ventilation, temperature control, views and green space. Multiple case studies were compiled and showcased the following average increases in productivity:
- Individual temperature control: +3%
- Improved ventilation: +11%
- Better lighting: 23%
- Access to natural environment: +18%
And this doesn’t even touch workplace environments that cause Sick Building Syndrome (SBS). Affected buildings are estimated to affect up to 20 percent of workers, while improvements to air quality, reductions in air pollutants and better ventilation can reduce symptoms by 70–85 percent. In fact, a 2010 paper by the American Journal of Public Health found that LEED Certified buildings reduced perceived absenteeism and work hours affected by asthma, respiratory allergies, depression and stress, and showed self-reported improvements in employee productivity.
Choosing greater efficiency over lower costs
Efficient workplaces save energy while boosting productivity, which may worth potentially higher rent rates. It stands to reason that selecting a space with a smart design and green attributes will yield far greater employee performance than a substandard space at a lower price.
While this makes sense, can you actually calculate returns?
The short answer is yes.
Knowing that capturing significant savings was possible, three JLL real estate brokers developed an algorithm to calculate their clients’ savings on a case-by-case basis.
Their 3-30-300 calculator takes a company’s real input values for things like rentable area (that’s square footage), rent rates, employee salaries, average sick days and employee retention, then spits out their true 3-30-300 and total cost of occupancy (TCO). From there, you can play around with attributes to calculate cost savings.
Using this tool, we find that a company with a TCO of just over $60 million per year and a human capital cost of $54 million can save:
- $1.50 p.s.f. per year with a reduced absenteeism rate of 10 percent
- $11 p.s.f. per year with 10 percent improvement in employee retention
- $65 p.s.f. per year with a 10 percent improvement in productivity. (For reference, World Building Council studies show that 18–20 percent can easily be achieved in the right environment.)
Even if you cut that same company’s improvements down to just 2 percent across the board—you’re still looking at $13 per square foot savings annually.