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How To Strategically Cut Office Real Estate

Trimming the office space budget used to be the easiest and most cost-cutting solution for companies as the economy heads into a recession. However, hybrid work seems to be complicating the matters for leadership. When analyzing your office real estate, consider where your employee headcount is going to make the right predictions for how much office space will be need in the years to come.

Since the pandemic, employers have either drastically decreased the amount of in office workers, moved to a hybrid work schedule or pivoted to all remote.  Nevertheless, the dramatic stop of employees returning to the office now leaves leadership utilizing about 50% of what they were before 2020, even as large corporations like Tesla and J.P. Morgan are pushing for their staff to get back to the office full time.

Office real estate is a tremendous cost on every employers’ balance sheet, but don’t axe it completely until you have figured out two things. First, what your utilization rate is now and second, what your goals are for the total number of people you want to return to work in the office. Once these two situations have been determined, leadership can manage the true real estate cost. Additionally, as CFO’s sort through their portfolio of office leases, keep in mind that we are in the middle of a looming recession and it might not be feasible to perfectly time moves because office space often requires a multi-year agreement. Office leases can now extend up to 15 years.

As we head into another cyclical downturn in the economy, here are four things’ leadership needs to consider when deciding how they go about trimming office space and when.

  1. Cost savings doesn’t necessarily come from smaller spaces

The office market in this country has been signaling signs of distress but not all tenants have the upper hand. According to a report, downtown office spaces in went up to $51.41 per square foot from $51.08 a year prior. Tenants have been given concessions of “free rent” during covid but those rents will more than likely be pressured further this year. Office vacancies across the country rose to 15.7% from 14.8% a year prior. If this pace continues, by midyear vacancies could reach 16.3%.

  1. Yes, your office location still matters

It’s simple, employees want to work in an office that is compelling and easy to get to. For instance, offices on top of transportation hubs such as Grand Central or Penn Station in NYC are considered ideal by employees over having an office in a ‘’upbeat’’ neighborhood. The reason being that offices on top of the hubs drastically minimize transportation, especially for workers who may have moved out of the city. If you are up for office renewal, be strategic in securing your next office location and consider your employees potential commute times.

  1. Leaseback demand on the decline

Do you own an office space? Are you considering selling it and entering into a leaseback agreement with the new owner? Maybe not so fast.
Leasebacks are transactions where companies sell their office and enter a lease agreement, typically 10-15 years long, with the new owner. However, with how uncertain companies are about where their employees are going to physically work, whether at exclusively at home, exclusive in an office, or a hybrid of both, this type of agreement has cooled off in recent years.

  1. Ratio of employees per square foot does not exist

 Right now as companies are determining how, if at all, they are returning to the office, the “proper ratio” of employees per square foot of office space no longer exists. Many companies are aiming to do a mix of hybrid work, in office, and remote, so they can drastically downsize. Companies are now requiring less desks/office spaces for their employees if there is hybrid work. Which, in turn means they can look for smaller spaces for rent. According to CBRE’s U.S. Real Estate Market Outlook, companies will reduce their office space need per person by about 15% over the next few years.

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