Corporate real estate occupancy costs and its correlation to company performance

Abstract

Real estate owned by non-real estate firms represent a substantial portion on most corporate balance sheets, yet they are often being overlooked with a lack of investment strategy and treated as the necessary evil for operating the core businesses. Corporate real estate generally involves activities such as long-term leasing, acquisition, in some cases ground-up developments, management, and disposal of real estate assets. Due to the long lasting nature of real estate, corporate real estate decisions are non-easily reversible. Different industries approach corporate real estate in ways that best support their operational needs. This paper quantitatively compares the relationship between the share price, occupancy costs per employee, and net income during the period 1999 to 2013 for U.S. Fortune 500 financial and technology companies. The first part of the paper explains our data collection methodology. We collected share prices and extracted data from 10-k filings submitted to the U.S. Securities and Exchange Commission. The extracted data consists of firm gross revenue, net income, total full-time employee number, plant, property equipment (PPE), real estate PPE, rental expense, and occupancy costs. The derivation of occupancy costs is also explained in this part. The second part studies the relationship between share price, occupancy costs, and net income for the two sectors. Consistent with our expectations, there is positive and significant correlation between share price and net income for both sectors. On the contrary, the market punishes technology firms for higher occupancy costs per employee but not as much for financial firms. The third part of the paper examines the relationship between occupancy costs and net income per employee. Contrary to common belief that occupancy costs per employee would negatively affect the net income generated by each employee, we discover a positive correlation between the two which we believe is a result of reversed causality.