Years ago in graduate school, my commercial real-estate investment professor said, “the best metric for comparing the worth of commercial real estate is the cap rate.” I cannot claim that was insightful to me at the time, but that single idea stayed with me. As I gained experience with designing Lean Sigma Janitorial Service processes and the idea of only delivering what the customer values, I later understood that a cap rate can also be used as an indicator for how efficient a building is being managed (when compared to like facilities). In this post, I will share eight ways facility and property managers can boost their building’s cap rate.
What is My Cap Rate?
Before I jump into the eight ideas, here is a quick refresher on cap rates. A cap rate tells you the profit yield a facility generates relative to its value. You calculate a cap rate by dividing the property’s net operating income (NOI) by the properties purchase value. So if I have $60,000 in annual net operating income , and a property was purchased for $1,000,000 my cap rate would be 6%. The base calculation is: NOI = Building Revenue – operating cost. Holding the property’s value constant, If you reduce your operating cost, you improve NOI, and you boost your cap rate.
Well-informed facility and property managers know that boosting NOI is largely about reducing operating costs. This is where the eight ideas come in to play. These eight ideas are not mine, though I have spearheaded their use to help lean sigma janitorial services reduce cost. They are not esoteric, trade secrets reserved for only the brightest in operations and commercial real estate. They are born from the “poor man’s” proven discipline referred to as “Lean Management”.
To boost your facility’s NOI, put your focus on reducing your Facility’s D.O.W.N.T.I.M.E:
- Defects: Actions or activities that require rework in your facility.
- Over Production: Services and actions go beyond what is needed and what the building owner will pay for.
- Waiting: Actions or activities that cause delay in managing the facility
- Non-Use of Talent: Failure to use the talents of your facilities staff and of contractors you outsource to.
- Transportation: Inefficient movement of people, parts and equipment in servicing the facility.
- Inventory: Carrying too much inventory of products needed to service or maintain the facility
- Motion: Motion of people or services within your facility that causes added time, energy or exposure to risk.
- Excess Expectations: Expectations from building occupants or owners that add cost without improving the NOI or the value of the property.
Lean practitioners call D.O.W.N.T.I.M.E. the eight “wastes,” which turns out you can find in any process regardless of the industry. Using a structured way to analyze a process for the eight wastes can improve well-defined processes as much as 5%, and as much as 30% for a poorly defined/followed process. In designing lean sigma janitorial processes, I have seen as much as 35% waste removed from a janitorial service. That represented a 35% reduction in a facility’s janitorial budget (and the janitorial service budget was 35% of the facility’s total operating budget).
Even if you lack a structured process for analyzing the 8 wastes in your facility, mere understanding and awareness can help you make instant changes within your facility. For your outsourced facility services, find contractors like janitorial companies that deliver value beyond the facility services such as expert lean sigma janitorial services.
The next time you look at your NOI bottom line with dissatisfaction, take eight deep breaths while counting to eight. Then systematically review the eight wastes seeking to eliminate D.O.W.N.T.I.M.E. in your facility. The exercise will help you find clarity and opportunity that will result in an improved NOI and cap rate.
[Look for part 2 of this two-part post to get details behind each of the eight wastes.]
In 2011, Marc's team won the large company category, "Best in the Industry" marketing materials from the Building Service Contractor Association International (BSCAI). Marc also directs Varsity's proposal writing, sales process and tools development, marketing campaigns, corporate website SEO performance and customer support center.
Marc has spent his career developing strategic capabilities that enhance value to customers and the company. A Lean Sigma Green belt himself, he developed the company's Lean Sigma offering, providing an innovative solution to customers' need to lower cost while raising quality. He led the development of JanOPS, an industry-leading janitorial operating system, which brings standardization and service consistency to large campus and geographically disperse national accounts.
Prior to this position, Marc was responsible for strategic management at Varsity. He has initiated or directed multiple strategic technology initiatives, ranging from a corporate website, a corporate intranet, a web/smartphone based quality control system, a learning management system, a corporate content manager and knowledge wiki, salesforce.com deployment and customization, and an Android app which facilitates the GROW sales process he has developed.
Marc is the author of several leadership and management training manuals, field guides, marketing collateral and case studies. He speaks Portuguese and Spanish and holds a bachelor degree in English/Technical Writing and a Masters of Business Administration in Finance from Idaho State University. Marc enjoys mountain biking, skiing, fishing and golf. He is happily married, and he and his wife Victoria enjoy raising and spending time with their four children.