Cost reduction triggers office space decisions

Some companies have reduced their real estate space to reflect the need for fewer or smaller offices. More employees working remotely sparked the early wave of this. But that’s not the only reason organizations give up spaces. Macroeconomic forces, including inflation, have prompted reluctant management teams to make decisions about reducing office space.

Switching to remote work cannot be discounted. Two and a half years into the pandemic, remote work appears to be having staying power. EY’s Future Workplace Index survey, released this week, found that more than 70% of employees work from home at least two to three days a week.

In addition, the number of office workers could stagnate: data from Kastle Systems, a provider of swipe cards for building access, shows that office swipes in the 10 largest cities have historically averaged 47% to 48% of pre-2017 levels Pandemic have reached month. That’s just a few percentage points more than last March. (Before the pandemic, office occupancy was probably around 70%, according to Fitch Ratings.)

Unsurprisingly, many companies are retracting their views on long-term space requirements. According to the global real estate company CBRE, in spring 2021 26% of the companies surveyed assumed that their office space requirements would remain the same in the long term. But a year later, that percentage dropped to 9%.

The CBRE Office User Sentiment Survey of 175 corporate real estate managers also showed that just 19% of companies recently believed they would be fully office-centric in the future. Almost three-quarters (73%) are expected to have a hybrid system that combines remote and in-office work.

GE’s Fort Point headquarters

More than half (54%) of respondents to a September CoreNet Global survey of corporate real estate decision-makers plan to consolidate office locations, and 42% are reducing the size of the leases they sign.

The list of companies that have eliminated, consolidated and downsized offices includes:

  • KPMG – Moved to a smaller space in NYC

  • General Electric – to vacate its headquarters at Fort Point in Boston in 2023, among other measures

  • Moody’s – Restructured entire real estate portfolio but expanded “lower cost operations centers” with savings of up to $60 million

  • Tyson Foods – brings members of company team together by closing offices in Chicago, Downers Grove, Illinois and South Dakota

  • Prudential Financial – Office space cut in half, annual ongoing savings estimated at $50 million

  • Lyft – Reduced office space, cut real estate costs in half after hiring 13% of staff

need for cost reduction

However, none of this can be attributed to the fact that employees are working remotely in whole or in part.

Higher costs from inflation, including wage pressures, and the possibility of a recession have prompted some of these organizations to cut operating expenses. They need to preserve margin or slow cash burn, and real estate leases from underutilized space are a priority.

In the CoreNet Global survey, 62% of respondents said current inflation rates influence real estate decisions. About 40% said they are looking for “cheaper buildings and lower rents”.

Office downsizing is increasingly being marketed as part of broader plans to reduce general and administrative expenses. For example, Roomba vacuum cleaner maker iRobot hopes to save $30 million by downsizing its global headquarters amid declining sales and an Amazon acquisition pending regulatory approval.

Layoffs have also paved the way for downsizing of offices. The genetic engineering company Invitae cut 1,000 jobs in the summer. The medical laboratory company subsequently consolidated office space and its laboratory space, including reducing underutilized office space. According to Invitae’s third-quarter earnings call, the moves reduced cash burn by 35% over two quarters.

Other forces impacting office real estate are venture capital, which is driving less money into startups. Commercial real estate firm JLL (formerly Jones Lang LaSalle) noted in its third-quarter office outlook that “a slowdown in the venture capital environment has dampened leasing momentum in innovative industries. including technology and life sciences.” JLL also noted that industries that had fueled post-pandemic growth had “dramatically slowed expansion plans.”

No floor

The commercial office space market has started to slow down, but it will be a long time before the full effects are felt. CFOs trying to anticipate a market bottom will have to wait a long time.

According to real estate adviser Colliers Sept. 30, the US office vacancy rate ended the third quarter at 15.4%, up 10 basis points from the second quarter. However, the vacancy rate is still “comfortably below” the record high of 16.3% at the height of the global financial crisis, according to the company’s third-quarter outlook.

Only when large corporate leases come up for renewal will the market begin to reflect the impacts unleashed by the pandemic. – Drew Suszko, BHDP Architecture

In Manhattan, leasing activity fell 40% in October compared to September, Colliers said Nov. 2, the lowest monthly lease total since May 2021. Renewal rates are “significantly down,” JLL said.

But a major drop in vacancy rates is still 12 to 18 months away, Colliers said. That’s because leasing cycles for corporate real estate are long — terms are often 5 to 10 years, BHDP Architecture’s Drew Suszko pointed out in a CoreNet Global blog. And companies “typically invest in their workspaces in coordination with the expiration or renewal of leases.” Lease exits can be prohibitively expensive if it involves high restructuring or lease cancellation costs.

“Only when large corporate leases come up for renewal will the market begin to reflect the impacts unleashed by the pandemic,” Suszko wrote.

Leasehold organizations can sublease to another company, but according to Colliers, there is a huge supply of such space – there are 218 million square feet of sublease space available in the United States. The previous peak was in the second quarter of 2009 at 143 million square feet.

Fortunately, companies that are yet to get a firm grip on post-COVID real estate needs can lower the cost of office space without committing to a long-term agreement.

“Subletting [office] Space will remain a low-cost, short-term option until there is more clarity on business and economic direction,” noted Colliers.