When Nationwide Property & Casualty announced earlier this month it was permanently downsizing its office space and allowing employees to keep working remotely, even after stay-at-home mandates lift, it was one of the first major companies to articulate a strategy that many are expected to follow: Keep employees home or working in smaller hub offices to reduce occupancy costs.
"What CFO isn't thinking right now, if we haven't lost productivity and engagement, why are we rushing back?" Ross Forman, managing director of strategy and operations at BDO USA, told CFO Dive. "Because that's the driver. Where this is going to shake out is a complete rethinking of companies' occupancy and real estate optimization and portfolio strategy."
Nationwide, based in Columbus, Ohio, said it was keeping five of its brick-and-mortar offices and eliminating five others.
"Our associates, and our technology team, have proven we can serve our members and partners with extraordinary care, with a large portion of our team working from home," company CEO Kirk Walker said.
Keep it win-win
Although the ability to downsize puts companies in a good negotiating position, especially if their office space is in a major city center, like midtown Manhattan, where downsizing is expected to hit the hardest, it's important for CFOs to take a cooperative approach with landlords.
"Landlords have investments they're going to have to make to get your employees back to the office to even allow those doors to reopen, so you want them to be able to do that," Forman said. "Landlords and tenants have to cooperate; you really are in this together."
Even downsizing companies will need to keep some kind of office footprint to manage corporate operations, host meetings and events, and otherwise maintain a physical presence, and getting that ready for occupancy once shutdowns end won't be easy.
"Your employees are going to face temperature checks, mandatory masks, and restricted numbers of people allowed in an elevator, break rooms, and conference rooms," he said. "You're going to have to build a toolkit [of new protocols and procedures], effectively."
Depending on how many employees return, the office might actually need to physically expand. But in many cases, space needs won't change, or will go down, and if so, begin conversations with your landlord now.
"Our point of view is, if you're just starting to think about your real estate strategy, you're already late to the game," Forman said.
Blend and extend your lease
Forman advocates for what he calls a blend-and-extend strategy in which you offer to extend your lease for the long-term, well before it ends, to give your landlord what it needs most: a cash flow commitment for years to come. In exchange, you get a material reduction in your monthly rent, something on the order of 20% or more.
"The landlord's objective is to protect or improve the value of their asset, and they can only do that with consistent cash flow, which has been completely disrupted" by the shutdowns, he said. "So, the idea of a longer-term lease, even though it might be lesser rent, is going to be attractive."
You won't want to ask for a rent reduction for the remainder of your lease, because that leaves the landlord with nothing. "If you say, I have three years on my lease and you ask for a reduction in rent for three years, that's not a win-win for the landlord," he said.
Landlords operating in downtown Manhattan, Chicago, Los Angeles, and Boston are facing the biggest tenant and rental income losses, because their rents are the highest and they're dependent on public transportation. Social distancing, post-pandemic, will make commuting not only difficult but more time-consuming.
"How am I even going to get people in big cities to the office?" Forman said.
Suburban office areas are expected to fare better, because companies will likely find them attractive for operating smaller hub offices.
"Your more suburban areas will probably have a little more resilience because it may be where there’s a retreat to," he said. "We'll have a smaller hub location, or a co-working space, and we're providing a work from home option."
For landlords, the next few months will be a crucial, difficult time. For companies that survive the downturn and rent their space, though, the future will look very different. These companies will be in the driver's seat, driving toward "choice and agility," Forman says.
Disclaimer: BDO US has performed tax advisory services for Industry Dive, publisher of CFO Dive. BDO has no influence over CFO Dive's coverage.