Spending cuts trigger office space decisions
Some companies have reduced their real estate footprint to reflect a need for fewer or smaller offices. More employees working remotely sparked the first wave of this. But now, that’s not the only reason organizations are abandoning spaces. Macroeconomic forces, including inflation, have pushed reluctant management teams to make decisions about reducing office space.
The shift to remote working cannot be ignored. Two and a half years after the start of the pandemic, remote work seems to be continuing. EY’s Future Workplace Index survey released this week found that more than 70% of employees are working from home at least two to three days a week.
In addition, the number of office workers could plateau: data from Kastle Systems, a provider of building access swipe cards, shows that swipes at offices in the 10 largest cities averaged 47% at 48 % of pre-pandemic levels in the past. month. This is only a few percentage points above the occupancy level last March. (Before the pandemic, according to Fitch Ratings, office utilization was probably around 70%.)
Not surprisingly, many organizations are backtracking on their view of long-term space needs. In the spring of 2021, according to global real estate firm CBRE, 26% of companies surveyed expected their office space needs to remain the same over the long term. But a year later, that share fell to 9%.
CBRE’s Office Tenant Sentiment Survey of 175 corporate real estate executives also showed that only 19% of companies expect to be entirely office-based in the future. Nearly three-quarters (73%) are expected to have a hybrid system that combines remote and office work.
More than half (54%) of respondents to a global CoreNet Global survey of corporate real estate decision makers released in September plan to consolidate offices and 42% are reducing the size of the leases they sign.
The list of companies that have removed, consolidated and reduced offices include:
KPMG – moving to a smaller space in New York
General Electric – leaving its Fort Point, Boston headquarters in 2023, among other actions
Moody’s – restructuring of overall real estate footprint but expansion of “lower cost operating centers”, with up to $60 million in savings
Tyson Foods – reuniting company team members by closing offices in Chicago, Downers Grove, Illinois and South Dakota
Prudential Financial – halving office footprint, projected annual savings to $50 million
Lyft – shrinking office footprint, halving real estate costs after laying off 13% of staff
Cost reduction needs
However, not all of this can be attributed to letting employees work fully or partially remotely.
Higher costs due to inflation, including wage pressures, and the possibility of a recession have caused some of these organizations to cut operating expenses. They must preserve their margins or slow down the use of cash, and real estate leases of underutilized space are a prime target.
In the CoreNet Global survey, 62% of respondents said the current rate of inflation has an impact on real estate decisions. About 40% said they were looking for “more profitable buildings and lower rents”.
Office downsizing is increasingly market-driven as part of broader general and administrative expense reduction plans. For example, Roomba vacuum maker iRobot hopes to save $30 million by downsizing its global headquarters amid falling sales and a takeover by Amazon, pending regulatory approval.
The layoffs also paved the way for office downsizing. Gene technology company Invitae laid off 1,000 employees over the summer. The medical laboratory company subsequently consolidated its office space and footprint, including reducing underutilized office space. These measures reduced cash burn by 35% over two quarters, according to Invitee’s third-quarter earnings call.
Other forces affecting office real estate include venture capital pouring less money into startups. Commercial real estate firm JLL (formerly Jones Lang LaSalle) noted in its third-quarter office outlook that “a slowing venture capital environment has dampened leasing momentum in innovative industries. including technology and life sciences. JLL also noted that industries that had driven post-pandemic growth had “significantly slowed expansion plans.”
Not a bottom
The market for commercial office space has started to slow down, but it will be a long time before the full effect is felt. CFOs trying to time a market bottom have a long wait.
The office vacancy rate in the United States stood at 15.4% at the end of the third quarter, an increase of 10 basis points compared to the second quarter, according to real estate adviser Colliers on September 30. However, the vacancy is still “comfortably below” the record high. 16.3% at the height of the global financial crisis, according to the company’s third-quarter outlook.
It is only when large corporate leases are renewed that the market will begin to reflect the influences initiated by the pandemic. — Drew Suszko, BHDP Architecture
In Manhattan, rental activity in October fell 40% from September, Colliers said Nov. 2, the lowest monthly rental total since May 2021. Renewal rates are “decreasing significantly,” a declared JLL.
But any bigger drop in vacancy rates is still 12 to 18 months away, Colliers said. Indeed, corporate real estate lease cycles are long – terms are often 5 to 10 years, BHDP Architecture’s Drew Suszko pointed out in a CoreNet Global blog. And companies “typically make investments in their workspaces in coordination with expiring or renewing leases.” Terminating leases can be prohibitively expensive if it results in significant restructuring or lease abandonment costs.
“It is not until large corporate leases are renewed that the market will begin to reflect the influences initiated by the pandemic,” Suszko wrote.
Organizations under lease can sublet to another company, but according to Colliers, there is a huge supply of such space – 218 million square feet of sublease space is available in the United States. The previous peak was 143 million square feet in the second quarter of 2009.
Luckily, businesses still unfamiliar with post-COVID real estate needs can cut office space costs without being locked into a long-term deal.
“Subletting [office] space will remain a competitively priced near-term option until the business and economic direction is clearer,” Colliers noted.