Prioritizing Capital for CRE Projects*
10 High-Impact Moves to Reduce Total Cost of Occupancy
Prioritize business-critical plans and bundle recurring projects to increase leverage on cost and schedule. Consider a turnkey approach to mitigate risk and hedge inflation.
As corporations plan for economic uncertainty, one of the first areas they review is capital spend across the enterprise. From a Corporate Real Estate & Facilities (CRE&F) perspective, capital spend includes facility upgrades and refurbishment, asset and equipment replacement, and new construction—all across a wide range of asset classes (e.g., office, industrial, retail, manufacturing, medical, data centers).
With such a wide range of potential capital expenditures, it is imperative for CRE&F to prioritize business-critical projects, while non-critical projects are reserved for times when capital flows more freely Capital planning tools can be leveraged to assist CRE&F in making fact-based business cases to the Line of Business (LOB) incorporating cost, risk, timing, and more.
Once decisions are made on which projects to maintain, CRE&F can explore advanced delivery methods to drive further capital budget reductions. Examples include:
- “As a Service,” which converts typical capital projects to operating expenses through third-party financing.
- Turnkey solutions that leverage principal project and construction management with a set price, mitigating risk and hedging against further inflation.
- Program bundling, which achieves economies of scale through bundling of small and/or recurring projects (e.g., roof replacements).
- Early commitments to account for long-lead items on fulfillment of equipment orders to stay on schedule and ultimately lower costs.
- Carbon pricing models that can be integrated into business decision-making for sustainable workplace solutions based on the net cost of carbon.
How to Begin?
Working in collaboration with your LOB and functional CRE&F teams (particularly Real Estate Strategic Planning, Project Management, and Facilities Operations), review your existing capital plan through three lenses:
- In-flight projects: Review ways current projects can be streamlined across design, cost and schedule.
- Upcoming projects: Determine which projects are truly critical to meet the company’s strategic objectives.
- Major facilities assets: Review “asset condition assessments” to determine business-critical building systems that directly impact human experience and/or product creation and develop “repair versus replace” cost scenarios to mitigate risk across the portfolio.
Once you have identified your focus, CRE&F teams should:
- Implement a holistic Program & Cost Management (PMO) approach to initiate the relevant high-impact moves outlined in this paper and to positively impact capital plans (e.g., space transformation, energy efficiency, decarbonization strategy, smart FM solutions).
- Consider implementing workplace technology modifications instead of capital-intensive changes (e.g., refurbishments, renovations) until economic pressure eases and utilization steadies.
Capital planning tools should be considered to integrate equipment condition assessment reports with estimated project costs, ranked by urgency and criticality. Such tools can quantify the actual business impact by using algorithms for repair, replace or defer recommendations.
Using strategic tools and techniques to prioritize projects, coupled with new delivery models to reduce costs, is critical for withstanding economic downturns and taking immediate advantage of improving conditions, particularly when capital begins to flow again.
When your CRE&F team can quickly and confidently react to changes in allocated capital, improve financial reporting with cash flow accuracy and maximize the efficiency of the resources within the capital plan, your team’s credibility with the overall business is enhanced.
CBRE is working with clients to reduce capital costs by an average of 10%-30% by leveraging the following guidance:
- Complete a review of the capital plan and reprice/reforecast any project that has aged 6+ months to account for inflation or supply chain impacts. Make this a recurring evaluation.
- Consider design standard alternates to source equivalent equipment with shorter lead times and lower costs (e.g., lighting fixtures, ancillary furniture, doors), as many design standards were established or refreshed in different economic environments.
- Prioritize the projects driving client strategic initiatives and ESG goals, while looking for cost and schedule efficiencies through the use of alternative delivery approaches (i.e., programmatic bundling projects; turnkey delivery to mitigate risk; or external “Energy as a Service” (EAAS) or Redaptive programs to support cost saving and financing options.
* Updated strategies and lessons learned since publication of the 2022 report.
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