This week, we sat down with Dylan O’Donnell, managing director of LPC Victoria, to discuss the topic of lease management and the process of portfolio optimisation.
What is lease management and who is it aimed at?
“Lease management is the process of actively managing a business’ real estate so that it supports and drives the business’ goals and objectives. When these goals and objectives are understood, clearly defined real estate targets can be put in place to track and measure them against the business’ goals. Many clients we work with have previously stored their business’ leases on an Excel spreadsheet. While a simple spreadsheet usually captures the main critical dates and financials, it does not necessarily put the systems in place to proactively review and manage them, rather these businesses typically take a reactive approach when deadlines such as lease expires are looming. Depending on the type of business and sector, these targets might be average cost per desk or person for an office user, occupancy cost to revenue for ratio for a retail user or tied to production capacity or pallet movements for industrial users.
There are also many hidden costs and risks in leases, beyond just the headline terms of rent and outgoings, and these secondary terms should not be overlooked by those with only a modest understanding when a lease is being negotiated. With all this in mind, it is then about using every opportunity and key event within the lifecycle of a lease and the lifecycle of the entire leased portfolio to optimise and move closer to achieving these targets. Every lease has triggers such as expiries and rent reviews, and every market has different dynamics which can trigger the need to renegotiate, restructure, or relocate. Lease management is understanding what those triggers are, leveraging them, and moving step by step towards the overall business objectives.”
What are some of the processes and benefits?
“First and foremost, we start with a deep dive into understanding what the overall business plan is and what it is trying to achieve. This allows for clearly defined real estate targets to be put in place. Then all leases are audited, and all relevant information is entered into databases so that it can be managed effectively. Through the auditing process, the hidden costs and risks are brought to light and uncovered. Regular reviews and monthly reporting with the business’ management team begins to consistently report how the portfolio’s performance sits against targets, and key triggers such as upcoming lease expiries or rights of termination or contraction allow negotiations to occur to restructure leases. The benefits of this are quite clear. If you have full alignment across the business, decision making should allow you to capitalise on the market conditions or opportunities that arise. Where there is a lack of direction or targets are not clearly articulated, it lends itself to more reactive thinking and decision-making. Decisions are put off and quite often you see businesses going into a holding pattern or delaying decisions and ultimately missing opportunities or losing leverage in a negotiation. If decisions are not made on time, a business starts moving in the wrong direction away from portfolio optimisation, starts paying premiums for leases, and potentially missing out on opportunities to create a step-change in their journey towards optimisation.”
How has Covid changed the way tenants are approaching leases?
“It is really sector and industry specific. Overall, though, there is a lot of more awareness of the importance of getting the right lease to suit the business, and to be more mindful of some of the external factors which might impact on the use of the premises, or even the need for the premises entirely. There are many businesses currently going through internal reviews to determine what the next phase of their real estate looks like. Different sectors such as industrial and office have been impacted in completely different ways, but regardless of what we are seeing is that the trends happening pre-covid have been accelerated. For industrial, we are seeing the acceleration towards online shopping increasing the demand for transport and logics, for office, there has been greater need for flexibility, while retail has seen online shopping alter the requirement for bricks and mortar. The common theme in this is a greater awareness that a lease can be an enabler or an inhibiter to what a business is trying to achieve.”
What are some innovative ways to achieve optimisation of lease portfolios?
“For retail tenants, there is the opportunity to negotiate leases collectively when stores are located within shopping centres under the same ownership. We’ve seen great success in driving down occupancy costs nationally, rather than just on a case-by-case basis. Once again for retail tenants, building far greater protections around a centre or high street location’s performance into leases has been important in a world impacted by Covid. We have quite detailed data published by CBD councils on pedestrian traffic, and this third-party information can be used as a measure to tie rent to certain thresholds of high street or centre performance.
Additionally, optimisation should not just be about reducing operating expenses, it should also be seeking to free up capital to invest back into the business, accessing government grants or incentives, boosting productivity of a workforce or accessing new customers. Best practice demands that the performance of a real estate portfolio is viewed through the lens of the business and its objectives”
What role will data and technology play in the future of lease management?
“Data is and will continue to play a significant part in lease management into the future. There is a considerable amount of property related data that could be pursued, but the key is keeping it to data which will help you understand what you are trying to achieve. This data can then be tracked effectively and accurately, rather than trying to catch everything. A simple example is retail client who requires a 12% occupancy cost ratio for their business to be profitable. That then informs all other data we should be collecting and measuring around sales and centre performance. It also provides us with a clear target - if a site can’t achieve 12%, it’s ultimately not feasible for the business and provides for clear decision-making. Every business should know their equivalent numbers or targets and establish a data and technology strategy around what they are actually trying to solve for”
As part of our theme for this year on “Good Advice”, what is the best piece of advice you’ve received in a personal or business context?
I have always valued strong written communication and the ability to craft a message. In the early stages of my career in real estate, I was working as an Assistant Property Manager and was tasked with resolving a dispute between a retail tenant and their landlord. I had drafted a letter and shown my boss who was, shall we say, quite economical with his feedback, always delivered with a red pen or a strong Scottish accent. On this occasion he had simply put a red line through the letter and said, “What are you actually trying to say here?” That simple message written in red pen is a visual I have whenever I am writing to or on behalf of a client. Who is the audience? What do they know already or need to know about what is being communicated? Is there another agenda or perspective to be considered? What outcome is needed from the written communication– is there a call to action and if so, has it been made clear, or is the communication for information purposes only and, if so, has that been made clear? A well-considered piece of written communication knows its audience and addresses their objectives, removes ambiguity and, ultimately, says what it is actually trying to say.
How LPC can help?
At LPC, we help tenants across Australia and New Zealand with their commercial real estate needs, including transaction advisory, portfolio management and project management. In summary, we make sure tenant interests are protected and that our clients enter into tenant friendly lease agreements.
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