Site consolidation: how to tell when a site no longer pays its way
Site consolidation makes sense when a site consistently costs more than it contributes to operations and its work can be done more cheaply elsewhere. Whether that applies only becomes clear from a calculation that covers transition costs, people and dependencies as well as rent and floor area. This article groups the site decision criteria into four areas, sets out the costs that many calculations leave out and uses an example to show how much the remaining lease term shifts the result.
What is site consolidation?
Site consolidation means reorganising a network of sites so that space and costs match actual needs. It covers merging sites, making better use of existing space, closing sites, and converting or selling buildings.
Why companies are reviewing their sites now
Hybrid working has reduced office utilisation, raising the question of how much space the busiest days need. Cost pressure highlights sites that are expensive per square metre in use. Sustainability targets mainly affect older buildings with high energy consumption, because every closure or refurbishment changes the footprint of the whole portfolio. After an acquisition, there are often two sites doing the same job in the same region.
The trigger determines which data you need first: duplication after an acquisition, utilisation over the week with hybrid working.
Site decision criteria: four areas to assess
A site decision based on cost alone misses what a site contributes to operations. The criteria fall into four areas:
| Area | Typical metrics and questions |
|---|---|
| Financial | Cost per m², cost per m² in use, upcoming investment in building and equipment, remaining lease term |
| Operations | Utilisation, spare capacity, supply links to other sites, condition of building and equipment |
| People | Employee commutes, skilled labour in the region, knowledge held by individual people |
| Strategy | Growth plans, sustainability targets, ties to customers, suppliers and permits |
The metrics in the first area are explained with formulas in our article on real estate portfolio KPIs. For consolidation, cost per square metre in use is especially revealing because it exposes sites that are cheap but half empty.
The four areas can pull in different directions. A plant with a high cost per square metre may be indispensable for strategic reasons. A low-cost warehouse that serves as the only buffer for a plant is hard to replace operationally. A sound decision paper shows all four areas side by side and states which takes priority.
Closing a site: the hidden costs
The savings from a closure are quick to calculate: rent, service charges and running costs disappear. If you are planning to close a site, you also need to know what it costs to get there.
A lease ends on the agreed date, regardless of when the move is finished. Until then, rent and service charges keep running, often alongside extra costs at the receiving site. Under German law, if the premises are not handed back on time after the lease ends, the landlord can claim compensation equal to the agreed rent or the local market rent for that period (section 546a of the German Civil Code, BGB).
Reinstatement is usually set out in the lease: whether fixtures have to be removed and in what condition the space is handed back. In industrial halls, this can mean racking, machine foundations or floor markings.
On the people side, there are severance payments and social compensation plan benefits, plus relocation support or higher travel costs for employees who move. Loss of knowledge is the hardest cost to quantify, because people who do not move take their experience with them. In warehouses and production, this shows up in the first months after the move as more errors, longer lead times and time spent on training.
Worked example: consolidating two warehouses
A company wants to consolidate two sites by moving the stock from West Warehouse (6,000 m², costing €55 per m² a year, or €330,000 a year) into North Warehouse, which still has spare capacity. This adds €60,000 a year at North Warehouse for extra shifts and longer delivery routes. Once the West Warehouse lease ends, the net saving is €270,000 a year. The move is completed twelve months after the decision. The calculation compares two cases: the lease ends 18 months after the decision, or it still has five years to run. All figures are fictitious.
| Item | Lease ends after 18 months | Lease ends after 5 years |
|---|---|---|
| West Warehouse costs from move to lease end | €165,000 | €1,320,000 |
| Extra costs at North Warehouse until lease end | €30,000 | €240,000 |
| Reinstatement and handover of West Warehouse | €120,000 | €120,000 |
| Fit-out at North Warehouse (racking, fire safety) | €250,000 | €250,000 |
| Move and transport | €80,000 | €80,000 |
| Severance and social compensation plan | €300,000 | €300,000 |
| Productivity loss during ramp-up | €70,000 | €70,000 |
| Total one-off costs | €1,015,000 | €2,380,000 |
| Years to payback after lease end | 3.8 | 8.8 |
In the first case, the consolidation has paid for itself just under four years after the lease ends, a little over five years after the decision. In the second, it takes almost nine years after the lease ends, nearly 14 after the decision. With the same building, fit-out and staff, the remaining lease term alone makes the difference.
With a distant lease end, the move is therefore usually timed to finish shortly before it. Another option is to negotiate a sublease or an early surrender with the landlord.
When an expensive site still pays off
Some expensive sites are still the right choice. A plant close to a major customer saves on transport and keeps response times short. A region with plenty of skilled workers trained in a particular technology is hard to recreate elsewhere. Facilities that need an official permit are tied to their site, and a new approval elsewhere takes time and is uncertain. Suppliers who deliver in step with production often rely on being close to the plant.
A counter-calculation makes these factors tangible: what revenue and what delivery capability depend on the site, and what would an outage cost?
Consolidating sites, densifying, closing or converting: four scenarios
| Scenario | Suitable when | Largest cost item |
|---|---|---|
| Keep and densify | utilisation is low and the building and location fit for the long term | conversion work during operations |
| Merge two sites | two sites of the same type are close together and one has spare capacity | fit-out at the receiving site and staff costs |
| Close | the function is no longer needed or can be spread across other sites | severance, social compensation plan and remaining rent |
| Convert or sell | the building is owned and the location is in demand for other uses | conversion work or a discount on the sale price |
Densifying needs no lease end and usually no job cuts. It does require the building to cope with the extra use, for example floor loads, fire safety and escape routes. A conversion may need approval for the change of use, and the time this takes belongs in the schedule.
Works council and communication: what German law requires
Under the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG), closing, relocating or merging an establishment or a substantial part of it counts as an alteration (section 111). In companies that normally have more than 20 employees with voting rights, the employer must inform the works council about a planned alteration in good time and in full, and consult it. In companies with more than 300 employees, the works council may call in an adviser.
Section 113 BetrVG matters for the cost calculation. If an alteration is carried out without first attempting a reconciliation of interests with the works council, employees who are dismissed can claim severance pay in the labour court. For other financial disadvantages, the Act provides for compensation covering up to twelve months. These payments come on top of the planned costs.
In practice, a fixed order for communication works well: the works council first, then the workforce, then customers and service providers. Rumours start once agents or landlords are approached, so communication belongs in the project plan from the outset. This is a summary of German law, not legal advice for individual cases.
The first step: an overview of all your sites
A good starting point is an overview of all sites across the four areas, using the data you already have. Gaps are flagged and closed over time. Sites where cost and use diverge and whose leases end in the next few years go into the detailed calculation first.
With spaciv's portfolio analysis, you can compare the costs and utilisation of all your sites based on consistent definitions, grouped by site type. With our site strategy solution, you can simulate alternative scenarios in the same model before capital is committed.
Frequently asked questions
How long does site consolidation take?
Notice periods and remaining lease terms set the pace, along with works council consultation in Germany and fit-out work at the receiving site. In the first case of the worked example, 18 months pass between the decision and the handover of the space.
What are the benefits of consolidating sites?
Merging sites cuts running costs: the rent and operation of one site disappear, shared functions such as reception or building services are only needed once and the remaining space is better used. When this outweighs the one-off costs depends mainly on the remaining lease term.
Does the works council have to agree?
Under German law, the works council has no veto over an alteration. The employer must, however, attempt to reach a reconciliation of interests, meaning an agreement on the planned measure itself. The social compensation plan, which offsets or mitigates the financial disadvantages for employees, is treated differently: if no agreement is reached, the conciliation committee generally makes a binding decision (section 112 BetrVG). Section 112a BetrVG sets out exceptions, for example for pure job cuts below certain thresholds and for newly founded companies.