Richard Bertasi, chief executive officer of Newmark’s Global Corporate Services, built his career helping commercial real estate clients expand and reposition portfolios worldwide. These days, however, he’s increasingly being asked by CFOs and other executives to do the opposite: trim space or at least the expense line.
“One hundred percent of my [large occupier] clients are dealing with these decisions,” said Bertasi, who is based in Manhattan at Newmark’s global headquarters. Corporate leadership recognizes that a long-term expansion strategy isn’t always about high-speed growth, he said. Sometimes, companies want to reduce space and cut costs to minimize expenses and position themselves for future growth when the timing is right.
Many finance chiefs are in cost-cutting mode when it comes to real estate as inflation is pushing up the price of everything — including rents. Subleasing and landlord buyouts are just some of the solutions CFOs can consider, experts say.
The shift toward retrenchment poses some complex challenges because it comes as the world emerges from the global pandemic which has dramatically altered how and where many people work. While more people are going to work in offices, it’s apparent for many CFOs that the days of workers filling cubicles forty hours a week are over. Now, the question is not ‘if’ hybrid, Bertasi said, but rather, how flexible one’s hybrid work model will be.
Democratic or autocratic?
So far, industrial space has largely been buffered from the hybrid shift, though retailers are feeling some pain. The biggest effects are rippling across the office sector as companies reconsider alternative options to traditional supersized spaces. Indeed, during such volatility, “cost-cutting programs become essential,” said Jon Sanborn, a
Philadelphia-based real estate investor.
Once a company realizes it is time to make changes to its real estate, “the first decision is to either be democratic or autocratic regarding your real estate strategy going forward,” said Baron Christopher Hanson, principal of RedBaronUSA, a national turnaround consultancy. “Do you discuss options of potentially selling, subleasing or
moving to a more right-sized location with your key employees and executives, or do you do your fiscal homework privately in the C-suite and surprise your staff with a real estate cost-cutting announcement?”
For CFOs looking to cut costs, there are numerous options:
● Reduce the footprint. “The fastest way to save occupancy costs is to have less space,” Bertasi said. Sanborn suggested considering making employees who don’t need the office permanently remote, reorganizing floor plans and implementing desk sharing. Keep in mind that such strategies “require adjustment for the entire company,” he said. “Organizational shifts are generally turbulent, however, they work themselves into the system.”
● Sublease. If you find yourself with extra square footage, consider finding someone else to take over the excess area until the lease ends. “Subleasing is going to ultimately monetize the underutilized asset,” Bertasi said.
However, with so much restructuring occurring, there’s a space glut in some regions, particularly in select large cities including San Francisco and New York. Currently, there is 166 million square feet of sublease space available nationwide, up from 97 million just 15 months ago, marking the largest since the financial crisis, according to Newmark research.
Of course, someone has to want the space, and big users are harder to find right now. Before COVID-19, the target market for anyone looking to sublease was about 50,000 square feet, compared with the average sublessee who is looking for between 15,000 and 25,000 square feet currently, according to Newmark. “Clients look to us to do the analysis to understand the financial implications of a potential sublease, and how that compares against the other alternatives to reduce costs,” said Bertasi.You also run the risk of the subtenant not paying the rent, leaving you on the hook. Meanwhile, there will likely be accounting issues to consider.
● Buy out. Another option is to ask the landlord to buy out the lease or part of it, which can be expensive up front, but creates a lasting solution. Part of the issue is that “there’s pretty much no place in the country where office landlords want the space back,” Bertasi said. Beyond this, the permanence of a buyout approach can be seen as too extreme for many occupiers who want to effectively reduce space with a hybrid model rather than eliminate it altogether. As a result, “there’s not a lot of that happening today,” he said.
● Sell. For companies that own their space, selling is an option, particularly if they’ve owned it for a long time and can earn a profit. You could negotiate what’s known as a sale-leaseback, which lets you stay in the space and pay rent, or find a new location to buy or lease, particularly if it is a smaller space that generates operational savings, Bertasi said.
● Relocate. Regardless of whether a business owns or leases, moving to a more affordable space is an option. However, this comes with costs of its own and there is the potential for business interruption. You also have to consider employees. Companies need to ask: “If we move to this location or building or trendy area, will employee productivity and company morale skyrocket or plummet?” Hanson advised. “You’d have to poll or interview
each staff member or executive to find out and project a consensus first.”
Before making a final decision “do a side-by-side analysis of either selling, subleasing, or moving scenarios, each based on fully exhaustive inquiries, numbers crunching and negotiations up front,” Hanson of RedBaronUSA said. “You and your executives may need to shop various real estate options voraciously in person for a few weeks or
months, to canvass what your local market has to offer, to not rush or make an unvetted decision.”