The Real Return

Feb. 1, 2004
Marvin Manlove

Analyzing real estate from an employee-based perspective—notcost per square foot— may provide a view of the real return on the investment.

FEATUREThe Real ReturnAnalyzing real estate from an employee-based perspective—not cost per square foot— may provide a view of the real return on the investment.If office buildings and their knowledge worker occupants have become the factories of today, aren't individual workspaces the key to benefitting overall productivity? Evaluation of office buildings historically has been based on cost per square foot. Considering the impact an employee's space can have on performance, there may be another way to assess building efficiency. A fresh look at evaluating investment per employee can provide a viable "third leg of the stool" and allow a full 360° view of the real return on a real estate investment. For designers and architects in the early stages of creating an office plan, cost is the most critical data. How this real estate investment cost is determined usually is calculated by cost per square foot. Yet, because we are creating space for employees, why aren't we measuring the cost of that space by employee? This shift in thinking represents a transition from real estate monitoring to human resource needs that are at the core of designing for productivity. The prevalent REI formula analyzes a project's cost by summarizing land, development, architectural, construction, tenant improvements and financing costs in a per-square-foot formula. The result fails to address the individual employee working in the building. Great disparities can exist in business culture and strategic objectives from one business type to another. Square-footage calculations do not take into account the wide-ranging ways that space is utilized in various industries and professions. Employees of law firms, corporations, ad agencies and call centers each use space according to the specific needs and objectives of their organizations.Recent trends in law firms, for example, tend to reduce the square footage allocations to each attorney, but business and technology trends also are changing attorney/administrative/paralegal ratios. In the past, it was not unusual to compare overall square footage per attorney, but as advancing trends make their impact it becomes more important to evaluate on a per-total-employee basis. These spaces are also often being expected to become more flexible for long-term benefit of space use and employee changes. Flexibility can create a cost difference depending on the furniture and wall systems being specified. The cost for modular flexibility often is greater than a drywall solution, but in most cases can prove to be the best financial investment. Using cost per square foot as the only comparative tool in analyzing real estate creates other problems. The approach does not take into consideration the dramatic differences in suburban and urban locales and in construction markets. Setting up benchmarks using investment per employee as the common denominator tends to level out the disparities.A new formula for analyzing a project's total cost would use the same list of factors, but would divide by number of employees—instead of total square feet. The result could raise some important questions:
  • Is there a relationship between employees with higher com- pensation and a higher investment of real-estate assets?
  • By making a comparative cost of compensation to cost of space per person, this kind of question could be answered. Measuring the cost of real estate per employee as a basis of compensation and/or as a percentage of operating cost is another benchmark to consider. Continuing to find appropriate benchmarks to more specifically compare the wide variety of building and user types is imperative to making benchmarking an accurate comparative tool.
  • What benefits would employees receive from changing the REI formula?
  • Once the value of space per employee is known, investments in employees can be made more wisely and strategically. The results can include improved employee performance, satisfaction and productivity—all powerful factors influencing profitability. Questions of this nature can be answered fully only if the real estate of like industries and businesses is compared. Avoiding the current apples-to-oranges attitude of the square footage model and instead grouping organizations with similar benchmarks will better address the actual functions of employees—and the space in which they work. Shifting to a cost-per-employee comparison also levels the playing field by industry type, while recognizing the benefits of designing more efficient work environments. This employee-based approach benefits all involved.

  • Marvin Manlove, founder and managing principal at CDFM2 Architecture, leads the firm's efforts in interior design, workplace strategies, facility planning, programming and space planning for both new construction and renovation projects. He can be reached at: [email protected]
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