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Summary
The Apgar Real Estate Score (ARES) is a simple tool that enables boards of directors and executives of large companies, government agencies, and other holders to quickly assess the quantity, cost and quality of their organizations' real estate portfolios and individual facilities. Mahlon Apgar, IV originated this Score in 1991 and patented it in 1997.

Known technically as "A System and Method for Evaluating Real Estate," the ARES evaluates an organization's real estate and facilities portfolio along five critical factors. Each factor is measured on a scale from 0 to 2. The resulting composite Apgar Real Estate Score ranges from 0 to 10. Empirical evidence shows that scores of 6 or lower indicate immediate opportunities for improving real estate costs and/or utilization.

Acronym
Each letter of the Apgar name denotes a critical factor in evaluating the cost-effectiveness of an organization's real estate portfolio:


 * Amount: The volume of owned and/or occupied space in the portfolio.  Amount is typically measured in square feet/meters for most categories of office, sales and servicing facilities, and in cubic feet/meters for storage and production facilities.


 * Price: The cost of leased and/or owned space in the portfolio.  For leased space, Price includes the rent and associated costs, measured in cash as recorded on an organization's expense statement.  For owned space, Price is defined as the depreciation and/or replacement cost, as recorded on an organization's balance sheet.


 * Grade: The level of building quality, defined by industry-wide and local market standards, for individual buildings and building types.  Grade is usually expressed as a letter (A, B, C, etc.).


 * Area: The geographic area(s) in which individual sites and portfolio segments are located, usually defined by the official government census and/or common local market usage.


 * Risk: Exposure to financial, market and environmental risks in the portfolio; each type of risk has one or more ways of being defined and evaluated.

Evaluation
The Apgar Real Estate Score is determined by applying measures that analyze the quantity, cost, and quality of corporate real estate portfolios and facilities. These measures, culled from a master list of over 150 originally developed in the Apgar consulting practice, are grouped according to the five real estate factors: Amount, Price, Grade, Area, and Risk. Data to populate the measures come from the organization's real estate "users" or "tenants" (those who occupy the facilities) and from external data providers.

Using these measures, each factor is assigned a rating from 0 (poor) to 2 (excellent). The ratings for each of the five factors are added to develop a composite real estate score, on a scale of 0 to 10. A composite score of 6 or lower typically indicates that management should focus quickly and decisively on specific real estate issues for improvement.

Table 1 summarizes the definitions, indicators, and selected measures used to rate each factor.

The evaluation is typically performed by a team with the following members:


 * one or more executives with knowledge of the organization's strategy, competitive situation and cost structure;


 * internal managers and experts with knowledge of the organization's real estate portfolio, key indicators and data sources;


 * external consultants with specific expertise in analyzing large real estate and facilities portfolios and applying the Apgar methodology.

In complex portfolios, this team may decide to weight each factor by portfolio segment and characteristic -- e.g., by facility types, users, or geographies. Based on the organization's economics, strategy, and other factors, one or more selected factors and / or portfolio segments may be weighted over the simple average. For example, in a global services organization, branch sales facilities and customer call centers will likely be assigned greater Area weights than headquarters offices, which are less dependent on customer and employee locations. In a retail enterprise with low operating margins, Price will likely be assigned greater weight because of its high impact on profitability.

Situation
A 200,000-square-foot administrative center had 800 employees. The evaluation team determined the most important factors to be Amount and Price. Each was given a weight of 4. Grade was given a weight of 0 because the facility accommodated "back-office" support operations, not retail. Area and Risk were given weights of 1.

Analysis
External comparisons showed that the facility had more square feet per employee than the company or industry average. Its cost per square foot was also higher than the company or industry average, and higher than the submarket for similar space. Its location was lower cost than other comparable locations, while it was still accessible to employees. Because the facility was built after 1979, its main environmental risk -- asbestos condition -- was acceptable. Its financial risk was low because the facility’s debt-to-equity ratio was below the company or industry average.

Apgar Real Estate Score
Table 2 shows the resulting score for the case example facility.

With a score of 6 out of a possible 10, the organization's senior executives and real estate managers discovered that the facility had considerable room for improvement, and received a clear picture of where to focus their efforts: on improving space utilization and reducing rent. Just as important, they learned they need not concentrate on the other three factors.

Literature
Apgar, Mahlon, IV, "Managing Real Estate to Build Value," Harvard Business Review, November-December 1995, Vol. 73, No. 6, pp. 162-179.

Apgar, Mahlon, IV, "Uncovering Your Hidden Occupancy Costs," Harvard Business Review, May-June 1993, Vol. 71, No. 3, pp. 124-136.

Credentials
Mahlon Apgar, IV, is a director of The Boston Consulting Group and leads BCG’s infrastructure, real estate and facilities practice. He founded Apgar & Company, Inc., a real estate strategy consulting firm, and was a partner of McKinsey & Company, Inc. where he developed a real estate practice. For nearly four decades, he has consulted on real estate and facilities issues with the senior executives and policymakers of more than 100 corporations, institutions and governments in the United States and 15 other countries; and advised on strategy, organization, operations and processes for some 450 real estate portfolios and infrastructure/development projects with an aggregate value of over $250 billion. From 1998-2001, he served as Assistant Secretary of the Army for Installations and Environment with responsibility for the world's largest infrastructure, real estate and facilities portfolio and for environmental matters on military installations.

Background
The Apgar Real Estate Score was inspired by the CEO of a leading global financial services firm and a client of Mahlon Apgar. After a challenging board meeting in which participants expressed strong opinions about major real estate decisions but did not have complete data and robust analysis to support them, the CEO suggested that Mahlon Apgar develop a real estate equivalent to the Apgar Score in medicine. From 1992 to 1997, the Apgar consulting team compiled data from US and UK-based companies with large real estate portfolios, applied various analytical methodologies developed by the team, and distilled the findings into the Apgar Real Estate Score algorithm (US Patent # 5680305). The method and measures have been refined through many applications since the patent.

The Apgar Score in medicine was devised by the late Dr. Virginia Apgar in 1952 for evaluating the health of newborns. Dr. Apgar, an eminent pediatric anesthesiologist, was a cousin to Mahlon Apgar's father. Mahlon Apgar discussed Dr. Apgar's research and scoring methodology with her during the 1960s, about 30 years before originating the Apgar Real Estate Score.