We’re in the midst of an economic crisis. As businesses across America struggle to cope with record inflation and skyrocketing overhead, we have reached a breaking point.
At the same time, this is a unique situation with the emergence of remote working. Companies that have taken advantage of remote working have seen dramatic reductions in the utilization of their commercial spaces.
So, we are looking at a recession while simultaneously the method in which we work has been flipped on its head. What does this translate into? It is an opportunity for corporate tenants to slash their overhead by improving the efficiency of their CRE portfolio.
As tenant reps, we have seen how the commercial real estate industry has changed in the last few years. The WFH movement and an impending recession initiated a drop in real estate demand.
We have helped savvy tenants see these circumstances as a positive. Rather than languish over the current crisis, it is a moment to step back and adapt. Your corporate real estate is the best place to make adjustments right now, as typically one of an organization’s top costs is CRE. Improving your portfolio will save you millions and dramatically improve your bottom line as we head into a recession. Read on to learn how. We will walk you through:
What is Space Optimization?
Space optimization is essentially identifying where your organization’s physical space doesn’t align with its needs. It is a profile audit that points out your highest costs compared to the current market value. Closing in on these areas will save money while increasing employee morale, productivity, and the overall quality of the working environment.
Right-Size Your Corporate Spaces
A critical step towards optimization is measuring your current spatial utilization. If you weren’t actively tracking your utilization before the pandemic, there’s no more time to waste as we enter a recession.
- Have employees been working from home successfully?
- Do you plan to implement a permanent remote/ hybrid workplace?
- Have you recently made talent cuts?
If these circumstances sound familiar, you are likely wasting money on your commercial spaces. Accordingly, you can save big by reducing the bulk in your CRE portfolio through right-sizing.
When right-sizing, you traditionally take your employee headcount (projected out for the next few years) and multiply it by the square footage needed per employee. However, since we are getting efficient here, take the number of seats you need rather than employee count. As, with hybrid and WFH schedules, it is unlikely that everyone will be in the office at the same time. So working with the seat count will allow you to use your space better and trim the fat.
Keep in mind that the square footage devoted to each seat should be a comfortable and productive metric.
To recruit and maintain great talent (especially in this job market), companies need to provide people-friendly working spaces.
Don’t look to cramp your employees into 100-150 sq. ft. per person. We recommend devoting each seat 200-250 sq. ft. per person.
So, take the number of the seats multiplied by the necessary square footage (200-250 sq. ft.), and you have your optimal space utilization. Then, compare it to your current utilization. The chances are that there is room for improvement.
Space Optimization Beyond Right-Sizing
Optimizing your space utilization goes beyond tracking your utilization. It means making tough decisions about the efficiency of your commercial portfolio and how it can be improved. For instance, look at Yelp. After finding that their offices saw a “weekly utilization of 2%,” they closed 450 thousand square feet of office space in traditional business hubs, NYC, Chicago, and DC.
For Yelp, not only was cutting space a wise decision based on utilization metrics, but they took it further to cut ties with business-unfriendly cities entirely.
This brings us to a key point here that optimizing your commercial real estate also means paying close attention to its geography. If you want to retain your space, is it fiscally responsible to remain in the same location? By relocating to a business-friendly area, you will likely be able to improve your bottom.
For Yelp, the skyrocketing overhead of places like NYC was no longer worth it. Rather than hold on to its properties in a dying physical business environment, it cut them loose.
If you’re in a similar position, underutilizing your CRE properties, you can make similar moves. Now you don’t need to close offices entirely, but you can capitalize on this opportunity to streamline your CRE portfolio.
You have other options. Moving a headquarters, combining multiple satellite offices within a region, or downsizing certain properties are all techniques to optimize your portfolio. The important thing is that you’re taking that first step to acknowledge your CRE can be improved and assessing the most cost-efficient way to do so.
Who Can Benefit from Space Optimization
Any company can benefit from making their CRE a more efficient expense, especially now. With skyrocketing inflation, wasted money adds up…. Fast.
However, the companies that can benefit significantly from analyzing and capitalizing on their space utilization have large footprints. With these large footprints comes a substantial potential for wasted space.
Big picture: The larger the organization, the greater the savings
This creates a more considerable net change when right-sizing. The larger the portfolio, the easier it is to lose track of optimal utilization.
Combat this by doing an internal check. With large footprints, you also have more leverage. With this comes more opportunities to renegotiate your leases' terms and rental rates to get back to or under the current market value. As these utilization adjustments add up, you will find that the savings will be much larger.
Yelp's Large Footprint
Let’s look at our poster child for new and improved space utilization, Yelp, again. Part of Yelp’s initiative to reduce waste in its portfolio was cutting 270 thousand sq. ft. of space in NYC. So how much was this costing them? Well, when the average price for one square foot of office space in NYC is $80- vacating this space would save them $21.6 million (in only one year!)
With the understanding that the demand for CRE has dropped, their existing lease was likely even more expensive (than the $80/sq. ft.) since they inhabited the space while real estate was still at a premium.
But, it wasn’t just one office meeting a 2% utilization for Yelp…it was three. So take that 21 million in savings (for one year alone) and multiply it three times over.
When you see the big picture, you can understand how larger organizations have more room to create savings through optimization.
Optimize Your CRE With a Tenant Rep
With massive companies like Yelp significantly cutting space, measuring utilization has been on the top of mind for CFOs lately. Remember that if you are considering a similar undertaking, it is important to keep your employees and stakeholders in mind.
Before closing its offices, Yelp went to its people to determine the best course of action. 86% of its employees preferred working from home. So Yelp made decisions in line with their preferences and the overall improvement of their bottom line.
If you feel overwhelmed tracking your space utilization and integrating your company's needs into the best plan for your CRE, you can work with a tenant rep. As real estate experts, they can point out where you may be underutilizing space and the solutions you have. For example, to reference our poster child of space optimization, Yelp, again, you can sublease. Before cutting their office space, they were subleasing a large portion of their footprint.
The important thing to remember is that you have options, and tenant reps can help you weigh the alternatives to land you your most efficient portfolio.
Learn the three things you should be doing with your CRE in the recession.
Ready to optimize your portfolio? Talk to a Tenant Rep to learn how.