Real Estate Profitability

Why real estate profitability deteriorates (and how to see it coming)

The deterioration is rarely sudden. It sets in gradually, almost imperceptibly, through signals that many companies normalise.

The first signal is the empty Friday. When an entire floor is deserted every Friday, it is not an anecdotal detail: it is 20% of the week during which you are heating, lighting and paying for nothing. Multiply that by 50 weeks and the figure becomes significant.

The second signal is the lease nobody looks at anymore. Many companies sign a lease and never open it again until the triennial review date, and even then, sometimes they miss it. The terms negotiated 4 years ago no longer match the market, but nobody has taken the time to check. Tacit renewal becomes the norm, and with it, the invisible surcharge.

The third signal is the unchallenged service provider. The cleaning contract signed in 2019, never renegotiated. Maintenance billed at a flat rate while interventions have halved. Service charges paid without ever auditing the reconciliation. Taken individually, each item seems trivial. Cumulatively over 3 to 5 years, they represent a significant erosion of profitability.

The fourth signal is the building that ages without investment. Common areas deteriorate, the energy rating worsens, potential tenants become rarer. For an owner, this is an accumulating asset write-down. For a main tenant, it is a working environment that pushes employees towards remote working, further aggravating under-occupation.

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Three ways to measure real estate profitability

Gross yield is the simplest calculation: annual rents divided by the value of the asset. It is a useful first filter, but misleading: it ignores charges, vacancy and works.

Net yield integrates non-recoverable charges, management fees, property tax and recurring works. It is the relevant indicator for an investor, the one that reflects what actually ends up in their pocket at year-end.

Cost per productive employee is the indicator that speaks to occupying companies. Divide your total real estate OPEX by the number of people actually present each day (not the registered headcount). It is often this calculation that brings the reality home: when the cost per person present is 40% higher than the cost per registered person, 40% of your real estate is serving no one.

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Levers to regain control

The good news is that real estate profitability is one of the few areas where the margins for optimisation are still very wide. Most companies have never truly optimised their real estate, they have endured it.

Start by measuring. This seems obvious, but it is the step everyone skips. Installing sensors or analysing badge data for a few weeks is enough to face reality. Without data, discussions remain theoretical and decisions are not made.

Adjust the surface area to actual usage. If your offices are running at 60% capacity, there is a gap between what you are paying for and what you need. Moving to flex office allows you to consolidate usage on a smaller surface. The freed-up square metres become a lever.

Add value rather than return space. This is where the thinking changes nature. Returning surface to the landlord reduces costs, but it also means losing flexibility and financing reinstatement works. Adding value to those same surfaces via an operator like Sora means transforming a cost centre into a revenue source. The financial analysis carried out by the operator (rent, charges, taxes, OPEX) determines the optimal positioning and achievable coverage rate, often between 50% and more than 100% of the rent on those surfaces. The company retains its lease, keeps the flexibility to recover its spaces, and generates revenue in the meantime.

Renegotiate at the right time. The triennial lease review dates are negotiating windows that must never be missed. The current market, with high vacancy rates in many areas, gives tenants real negotiating power. But you need to anticipate: start discussions 9 to 12 months before the exit date, not 3 months before.

Manage charges like a budget, not a fatality. Auditing service charges, putting service providers out to tender every 2 years, optimising energy consumption. These "basic" actions are rarely carried out in SMEs. Yet they can generate 10 to 20% savings on non-rent OPEX. Not spectacular, but cumulatively over 5 years, the total is considerable.

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The CAPEX vs OPEX trade-off: a question of timing

Investing to improve (renovating, refitting, upgrading) can be very profitable, but only if the time horizon justifies it. Injecting €200,000 of works into a building whose lease expires in 18 months is lost capital. The same €200,000 on a lease with 6 years still to run can generate a rent increase that pays back the investment in 3 years.

For companies with a short or uncertain horizon, the pure OPEX model (operated office, service contract) eliminates this risk: no investment to depreciate, a predictable monthly budget, and the ability to exit without asset loss.

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What real estate profitability says about your company

Ultimately, real estate profitability is not just a financial indicator. It is a mirror of the company's ability to adapt.

A company that has optimised its real estate, that occupies the right surface area, that doesn't pay for empty space, that has negotiated its terms at the right time, sends a signal of rigour and agility to its investors, employees and partners.

A company that endures its real estate, that pays an oversized lease, that has never audited its charges, that leaves floors empty without adding value, reveals a management blind spot that will, sooner or later, weigh on its competitiveness.

Real estate profitability is a choice, not a constraint. The tools exist. The operators exist. The levers are identified. All that remains is to use them.