Miss capital plan targets for office real estate by $12.2 billion every year, a monstrous-sized figure. 72% of that money is underspent...
JLL also found that the world’s best companies manage their capital spend to within +/- 2 percent to plan. These companies have three things in common that have helped them to achieve this level of precision—allowing them to allocate the right capital to the right projects at the right time.
Building accurate, credible plans, and operating them as living documents brings in greater ROI, including improved asset value and the capacity to collect higher rents.
Imagine this: a company finds itself in Q4 of its fiscal year with unallocated dollars in the capital budget. Capital projects build revenue by making assets more competitive in the marketplace, allowing them to draw higher rents. Capital projects also reduce operating costs by managing the cost of running those assets. While unallocated cash might represent a windfall in personal finance, underspend against the capital plan suggests insufficient insight or confidence in the plan to operate accordingly.
For all of the time and effort commercial real estate owners devote to building and maintaining capital plans, this surplus is not good news. What does this lack of confidence say about the plan and their efforts? Did the acquisitions team fail to sufficiently underwrite and evaluate the asset? Did the asset management team make incomplete recommendations regarding improvements? How could this happen?
Organizations operating without credible capital plans risk considerable loss. Failing to take advantage of vetted, planned opportunities to create value and maximize returns through prudent capital deployment over the property’s lifecycle risks hundreds of thousands of dollars, or more.
Owners who demonstrate the capacity to track costs as they occur make better risk assessments and adjustments as necessary. Failing to leverage committed resources could be considered a dereliction of their fiduciary responsibility.
Was the company anticipating, conservatively, that material supply, costs, and availability would likely improve if they waited for more opportune circumstances? Or, might the hesitation be the result of a lagging capital plan?
Why Bother with a Capital Plan?
Holding back on scheduled, budgeted investments defeats the purpose of a well-executed capital plan. Furthermore, when those plans are static rather than dynamic and responsive, unlinked to real-time data, or lacking quarterly or more regularly updating and reassessment, there is no clear way to accurately assess how they compare with other projects in the budget or opportunities that may arise.
THE Capital Plan as A Living Document
As a living document, a flexible capital planning process can be updated based upon current data and adjustments, to consistently provide an accurate portfolio view. Historically, real-time data is not routinely updated to permit the modeling of multiple outcomes based on adjusting one or more variables.
Plans created in one moment in time and locked for quarterly, semi-annual, or annual review and reforecasting contribute to excessive conservatism; failure to deploy allocated budgets for capital projects will result in inhibited longer-term growth.
By comparison, in a living document, as projects are completed ahead of schedule or under budget, projections reflect adjusted data. Only when capital plans are updated regularly, do they reflect the immediate impact of what happened compared to what is planned. Fresh data entered regularly leaves organizations less likely to fear their plans, freeing them to take actions based on accurate assessments.
Working with a Live Capital Plan
The difference between a spreadsheet and a database, a live plan allows visibility into all asset-related activity in the pipeline. This transparency helps ensure that expenditures can be tracked and modeled collectively, in a central location. All appropriate parties and stakeholders have access and visibility.
None of this information is new. In 2015, JLL reported that failing to sufficiently administer a capital plan adversely impacts not only the value of the asset but also an organization's bottom line.
Who Contributes, and How?
Acquisition managers contribute by undertaking diligent financial and value analysis and assessing market competitiveness to take possession of assets at the most competitive cost. Making recommendations aligned with longer-term capital plans for both individual assets as well as the segments of the portfolio under their control ensures proper capital allocation.
Asset managers cultivate long-term value within an owners’ portfolio over the course of its holding period for investment purposes. They maximize value-building opportunities by creating accurate capital plans, executing projects accordingly, and reforecasting regularly based on cash flows throughout the asset’s lifecycle.
In both cases, these teams safeguard owners’ investments by assessing and limiting liability, ensuring that costs don't overrun budgets, AND that money which could be allocated elsewhere isn't left on the table through underspend.
When owners, acquisitions, and asset management do not align at the onset of capital planning, there is no clearly articulated way for them to understand the plan in detail. This missed opportunity sets the stage for disconnects and misalignment that may follow the asset throughout its lifecycle.
So much is at stake when organizations underspend, potentially damaging the lifetime value of a commercial real estate portfolio.
Fortunately, best-in-class data and analytical platforms, particularly those purpose-built for owners, can play a major role in mitigating roadblocks and communication gaps, creating a more transparent handle on capital planning, project management, as well as construction costs.