What to Consider When Establishing Commercial Real Estate KPIs
When it comes to commercial real estate, businesses and investors must consider a number of risks, including economic uncertainties, inflationary pressures, and even business growth itself.
Brick-and-mortar retail, for example, is on solid footing right now. But, a shift in consumer confidence and economic growth stagnation could lead to a downshift in the market. Retail sales growth saw some softening in the fourth quarter of 2022, and further slowdowns are expected in most major markets throughout the year. Although laying off personnel, limiting stock on hand, and enabling other cost-cutting measures can help retailers weather an economic storm, the physical space itself can get pricey when in-store sales are on the decline.
Inflation can also be problematic for the real estate side of almost any business. When inflaction rises, escalations in rent and the construction costs of new builds aren’t out of the norm. In 2021, lumber prices hit $1,000 per thousand board feet, which slowed the pace of new construction and limited real estate inventory. As you well know, a low supply of anything can drive prices up. And if a specific property is in high demand, the price can increase astronomically, placing added financial pressure on a business—retail or otherwise.
But it isn’t just the market that poses risk in commercial real estate. Consider business growth. Scaling a business means increasing the organization’s real estate footprint. Growing too quickly or expanding into the wrong market can easily lead to a cash shortage.
Key to mitigating any of these risks is establishing and tracking key performance indicators, or KPIs, that are aligned with your business goals. To decide which KPIs to establish and track, you must ask one question: How does your organization’s real estate strategy align with its strategic business goals? Depending on your real estate business’s goals, you can begin to build out the KPIs your team should be tracking.
Let’s discuss KPIs by using retail as our example. Fortunately, real estate KPIs follow a similar line as any other business’s KPIs.
Growth Per Store
An e-commerce retailer looking to build out its brick-and-mortar real estate footprint would focus on commercial real estate KPIs aligned with growth: ROI per store, revenue growth, in-store purchases, shopper foot traffic, and so on.
Tracking your revenue growth curve per store enables your real estate team to better identify and predict risks and opportunities. Hitting your growth goals starts with having a real estate strategy that supports scaling.
Cost of Operations and Capital
Remember, a lease portfolio is both a cost center and a revenue center. So, your real estate team needs to understand the costs associated with each lease, in terms of both operating expenses and capital expenses.
KPIs tied more closely to the real estate itself include number of new leases, cost of building out new stores, and the cost of operating new stores.
The first step is to unlock the data points in each lease contract. The most important are base rent, free rent, rent escalations, tenant improvement allowances, consumer price index adjustments, and the operating expenses themselves.
In fact, the cost of operating new stores can be an especially beneficial real estate KPI for brick-and-mortar retailers. Each storefront will have different operating expenses (i.e., payroll, maintenance, base rent, etc.). Subtracting these expenses from revenue will give you net operating income, or NOI, for any given store. The NOI provides clear transparency into the performance of a specific storefront. Thanks to a combination of real estate and data analytics, you will know which stores are performing the best, and you can make changes to other locations based on your findings. Having the data to make those changes improves your chances of overall success.
Managing the Data
The key financial data points vary for each lease and provide critical insights into the costs associated with your real estate contracts. Once you have captured the unique data within each of your leases, your real estate team can be more strategic with its KPIs. Centralizing your real estate information into a single digital platform can help your real estate team be more strategic and proactive with the commercial real estate KPIs it tracks and make more data-driven decisions.
Commercial real estate and data analytics go hand in hand. When you and your team can work from an informed position, it becomes much easier to identify an area of focus and look at things through a more predictive lens. Economic uncertainties and inflationary pressures—as well as business growth—pose a bit less of a risk then. The data provides you with a better understanding of the sustainability and viability of a location, and then you need to make adjustments to respond to market conditions.