Total Cost of Ownership: To a Man With a Hammer, Everything Looks Like a Nail

In the real estate industry we tend to think a lot about bricks and mortar but not so much about how that bricks and mortar combines with other costs over the life of the building to create (or reduce) value for our customers and shareholders. We’re focused so much on our hammer that everything looks like a nail.

The IT industry has done a better job of tackling this question, looking not only at first costs but at hidden costs, related costs, and total life cycle costs. The US Green Building Council has also explored total cost as it justifies green investment by citing greater productivity and lower turnover.

When we run the numbers in real estate, though, we have a tendency to look at first costs and operating costs of bricks and mortar and not much else. That limited view can paint the wrong picture, though. Consider this hypothetical:

You need to build a call center and found sites in City A and City B. The real estate costs are a higher in City A but the labor is much cheaper and just as competent as that in City B. Which city do you choose?

For any kind of investment there are hidden costs (maybe higher maintenance?) related costs (maybe greater taxes) and costs we’ll encounter down the road (maybe faster obsolescence.) When we make our decisions we should be looking at the total cost of ownership.