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FOMO: Missing Out on ROI by Underspending Capital Budgets

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Companies must improve the way they manage capital to boost competitiveness and support emerging growth. In the long-term, companies building strategic-thinking contemporary real estate teams aligned workplace goals with C-level vision will take corporate real estate “from Good to Great.”

Tame the Capital Monster

In an article entitled “Tame the Capital Monster,” JLL argues that today’s largest companies drive competitive advantages through intensive capital programs. Capital allocation comes in many forms. Typical corporate real estate projects include office space renovations that incorporate modern design (more conference rooms or flexible workspaces) for improving employee productivity and increasing recruiting competitiveness. Banks earmark budget to expand branches in key target markets or reposition existing branches to boost brand and attract clients. Emerging businesses build new or expand on existing locations to grow their footprint and potentially, revenues.

For large corporations with over 5 million square feet of real estate, some companies undertake 50+ projects per year. An analysis of capital and facilities projects run through the Procore Technologies platform, shows that 95% of project budgets are $1 million or less. Compared to building an office campus or a distribution facility, these projects have smaller unit costs. However, when aggregating small projects, cost overruns or missed deadlines can have severe impacts on companies’ capital plans. In fact, JLL’s analysis indicates that,

On average, Forbes 1000 companies miss their capital plan targets for office real estate alone by US $12.2 billion annually.

Furthermore, 72% of the total represents underspent funds; by not deploying all of the funds in their capital plans, companies miss out on opportunities to see an ROI from capital projects. Given this information, what actions can the largest companies take to more efficiently allocate capital over their competition?

JLL Recommendations

1. Leverage Historical Data to Build Capital Plans

Aggregating historical data is essential to building credible capital plans. Because of the large project volume that corporate real estate teams oversee, access to historical data in a usable format makes comparison and analysis far simpler than hunting for spreadsheets and shared drives. This proprietary database becomes an additional arrow in a real estate team’s quiver, as they can be more confident in their budget over a competitor who estimates costs from an external consultant.

The largest companies also have offices spread out across different domestic and international markets. The per square foot cost of a fit out in New York is different from Calgary and Santa Fe. Access to this data allows teams to more accurately track to their budgets across their entire footprint.

2. Increase Transparency and Team-Wide Collaboration on Projects

Spreadsheets, while helpful for underwriting, are not designed as collaborative project management and capital planning software. Traditionally, to get status updates on a project, corporate real estate executives have used email to navigate layers of project managers. Spreadsheets are not dynamic and require heavy lift from project management teams to periodically update key milestones and budget to forecast variances.

3. Centralize Workflows

At the beginning of the fiscal year, corporate real estate asset managers mine the company server to pull out past years’ capital plans typically built in spreadsheets. A chief problem that asset managers face is determining the most updated version of the capital plan, as capital plans sometimes have over 50 versions of the file. Considering that corporate real estate managers oversee company assets longer than a typical 5-year CRE hold period, this amounts to even more XLS files to filter through on a company server.

A centralized capital plan with “live reforecasting” enables unforeseen issues that might knock a project off schedule or off budget, such as large change orders, to automatically surface. This reforecast empowers corporate real estate managers to proactively investigate project health.

Companies effectively plan capital by leveraging dynamic technology, increasing collaboration, and amalgamating data. Today, some corporate real estate teams might be “all set” with their current processes and feel no impetus for change because they have not experienced cost overruns.

In the long-term, companies building strategic-thinking contemporary real estate teams which align workplace goals with C-level vision will take corporate real estate “from good to great;” allowing organizations who rely upon PropTech to operate more efficiently, making data-driven decisions more consistently in less time and with greater insight.

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