Cutting fat from office space budgets would seem like a no-brainer for CFOs as the economy heads into what could be the jaws of a recession. But realizing real estate savings is likely to be a more complex process than in past downturns, experts say. 

“What organizations now need to do is say ‘ok, during every recession real estate has always been a line item that we look at’ and so they’re looking at it again,” said Julie Whelan, global head of occupier thought leadership and research consulting at the real estate services firm CBRE. “But they need to look at it with that lens of how much they cut during the pandemic and where they think their headcount is going.”

The halting pace of employees’ return to office and the toehold that hybrid work now has in corporate work models leaves experts like Whelan pegging office utilization rates at about 50% of what they were before the pandemic — even as hard-driving executives like Elon Musk and JPMorgan’s Jamie Dimon push hard to get staff back in their cubicles.

The latest round of office space cutbacks are playing out most visibly in Silicon Valley, the source of an almost daily drumbeat of announcements from high profile tech companies like Salesforce and Microsoft, many of whom are detailing layoffs and revising their real estate footprints. “Tech firms were famous for taking space to grow into. Then all of a sudden things came to a screeching halt,” Whelan said in an interview. 

Real estate is a big cost center, with office space often the second or third largest expense for service companies after labor, Whelan said.

Still, companies shouldn’t swing the budget axe until they’ve figured out what their office utilization rate is now as well as what their goals are for the total number of people they ultimately want working in the office, she said. Only then can they zero in on the delta between how many employees are showing up now and how many will show up later, and as a result, how they will manage real estate costs this year, she said.

As they sort through their portfolios of office leases, CFOs should also keep in mind that they are in the middle of another cyclical downturn in the economy, and that it’s not possible to perfectly time their moves because it’s too long a lead item, according to Eric Anton, senior managing director with the commercial real estate brokerage firm Marcus & Millichap. Office leases can extend 10 years or longer.

“You can make a perfect turkey sandwich but if you had to plan how many turkey sandwiches you should order for the company in a year that’s really hard. It’s the same thing with office space,” Anton said in an interview.

Here are four evolving issues or unexpected curveballs that CFOs need to track when deciding how or when they will go about triming office space: 

1. Savings won’t always come from lower rents: 

The U.S. office market is signaling multiple signs of distress and in most but not all markets the tenants have the upper hand, experts say. But you wouldn’t necessarily know that from a quick scan of most average asking rents, the set price buildings say they want for space.

In fact, Class A downtown space rents in the U.S. ticked up to $51.41 per square foot in the fourth quarter from $51.08 a year earlier, while the asking rents for premier suburban spaces were $33.58 last quarter compared with $33.58 a year earlier, according to a Jan. 26 Colliers report.  

Occupiers are gaining concessions such as periods of “free rent” and money that landlords give to tenants to build out space or so-called tenant improvements. Buildings in some big markets are offering 12-month rent abatements or $100 per square foot or more in tenant improvement allowances toward upgrading space, according to Stephen Newbold, Colliers International’s national director of office research, writing in a Jan. 26 blog post. 

Those rents will likely be pressured further this year. The U.S. office vacancy rate rose to 15.7% in the fourth quarter from 14.8% year-over-year, according to Colliers. If that pace continues, by midyear vacancies could touch the 16.3% peak not seen since the height of the Global Financial Crisis, Newbold wrote. The jury is out as to whether there’s a market correction in the works, and there’s considerable debate over the future of the U.S. office market, he wrote.

2. Yes, location, location, location still matters

It’s a new twist on one of the oldest real estate sayings in the book: location, location location. Employees are dictating a flight to quality office space, and companies who want to lure workers back to work in an office need to make it compelling and easy to get there, Anton said.

That is likely to be offices on top of transportation hubs such as Grand Central or Penn Station in New York City that minimize commuting hassles as opposed to the latest “cool” neighborhood, he said. “If I’m coming in three days a week and I live in Greenwich, Connecticut or New Jersey or Westchester, I don’t want to take a train and then a subway or a train and then have a 20 minute walk,” Anton said. “I want to come in and go upstairs and bang, I’m in a class A trophy office building.”

Similarly, there’s a bifurcated market when it comes to where rents are weakest. So far, the demand for newer and more modern buildings with many amenities has held up better, experts say. For example, the average asking rent across all office rent classes was largely unchanged during the third quarter of 2022 at $35.23
per square foot, but effective rents for top-tier properties in some of the largest markets increased by 4.2% last year through the third quarter, according to a CBRE report.

3. Demand for office sale leasebacks wavering

Sale leasebacks are transactions whereby companies sell their office and enter into what is typically a 10-15 year lease with the new owner. They have long been viewed as a way for companies to monetize assets. In one of the latest large deals, Biogen announced a sale leaseback agreement in September with Boston Properties which gave the company gross proceeds of nearly $603 million. 

But in recent years, investor demand for office property has cooled due to concerns about the outlook for the office market. Also, investors looking for property want to buy single-tenant office buildings, and even companies that own buildings will often have other tenants in them, according to Scott Merkle, managing partner at New York City-based SLB Capital Advisors. 

Still, Merkle said that sale leaseback arrangements merit consideration because the cost of the capital is still cheaper in the current high rate environment. The cost of debt for many middle market businesses rose over 400 bps in 2022, making sale leasebacks more attractive today than 12 months ago, he said. 

4. There’s no magic per person space ratio

Historically, there has often been a discussion in real estate circles around the right ratio of employees per square foot of office space. Right now, that is no longer realistic given the differences from industry to industry layered on top of the different ways companies are aiming to mix in hybrid, in person and remote approaches to working. 

Then too, even as patterns for work are emerging, it’s not altogether clear how to accommodate workers who may not all be in the office at the same time. For example, most tenants are adopting hybrid work with a minimum of three days in the office, according to Colliers. 

Many companies are settling in the increasingly embraced sweet spot of calling all employees back to the office Tuesday, Wednesday and Thursday. From that point some CFOs are seeking to extrapolate how much space they’ll need going forward. 

Shared desks and other systems are changing the calculations companies are making. “The square foot ratio is almost a number that doesn’t make sense anymore,” Whelan said. Over the next few years, as companies adjust to the new work environment, CBRE estimates that companies will likely reduce the amount of space needed per person by about 15%, according to CBRE’s U.S. Real Estate Market Outlook 2023.

CFOs are still exercising caution when it comes to their economic outlooks, with finance leaders pointing to ongoing inflation, waning customer spending and rising interest rates as factors that speak to continuing economic uncertainty.

What is clear in the current environment is that executives’ priorities are shifting, with scalability taking a backseat in favor of sustainability — with CFOs along with the rest of the C-suite looking to keep costs down and ensure greater operational efficiency, said Vikram Bhandari, CEO and founder of technology and consulting firm Yantra.

However, while that goal may be universal, CFOs have different approaches when it comes to achieving it: “old school” and “new generation” finance leaders attack the problem from two separate angles, Bhandari said. Bhandari has served as Yantra’s CEO for 14 years, according to his LinkedIn profile.

New generation CFOs tend to be more automation or tech-driven, Bhandari said. By contrast, old school CFOs tend to be more people-driven — they will look for individuals who can perform necessary tasks for less expense, outsourcing roles to cheaper markets, for example, rather than looking to funnel funds towards new technology.  

The “new generation CFO looks at the technology expense as future efficiency,” he said. “The old school CFO looks at it like, ‘Oh, that’s an expense. I need to chop it off.’”

Identify the blind spots

Inflation still remains a top concern for CFOs, with 77% of finance leaders in a recent survey indicating this was their number one challenge in 2023.

In order to best respond to the current environment, CFOs need to be focusing on three key areas, Bhandari said— prioritizing technology spending, finding top talent, and ensuring they are upgrading the key processes that can improve customer loyalty or otherwise improve commercial efficiency at the business.

As a CEO, Bhandari’s role is to steer the company in the right direction. The CFOs’ role, he said, is to “identify my blind spots.”

CFOs are the backbone of the organization, he said — “If the CEO is the pilot, the CFO is the air traffic control guy who's telling you, ‘run at this altitude,’ or ‘there's a plane coming in next to you, you'll get into a crash,’” Bhandari said.

To identify these blind spots and to ensure the company is properly responding to them, an “old school” CFO will draw on their past experiences — these CFOs will look at the problem saying they have “’fixed it four times in my life, I know what to do, I know what works,’” Bhandari said. Meanwhile, new generation CFOs — lacking such experience — will turn to data to inform them and to move forward with the best decision, he said.

Ultimately, Bhandari said, there is “something in the middle which is going to work” and as CEO, finding a CFO which has melded these two approaches together would be the ideal.

“As these new generation CFOs become more experienced and more data driven, I think that will be a killer CFO,” Bhandari said. “And that is what I would want my CFO to be.”

CFOs, CIOs and tech spend

Whether old school or new generation, CFOs looking to navigate the current environment “need to transform their thinking and approach,” Bhandari said. Keeping with the “status quo is not going to help anybody.”

This is especially true when it comes to technology — while some CFOs have cut back on technology spend in the face of a rocky economic outlook, others are willing to take risks on emerging technologies like artificial intelligence to potentially improve efficiency in the long-term.

There has been a spike in technology spending, with CFOs increasingly looking to data analytics and other technologies to help them make decisions surrounding their workforce, or what effect certain moves may have on profitability, Bhandari said. 

As implementing emerging technologies becomes a greater priority for businesses, CEOs with “old school” CFOs may be looking to other executives, such as the chief information officer, to take point on such initiatives, Bhandari said.

“We are seeing that change where the CIO is taking the driver's seat,” Bhandari said. “The CEO is listening to the CIO and saying, ‘Okay, if you think technology is going to help me, I am ready to bet on it.’”

Combining forces here could help to drive key benefits when it comes to optimizing tech spend: A strong relationship between CFOs and their CIOs is crucial  when it comes time to decide where and towards what technologies they should invest, Russ Porter, CFO of the Institute of Management Accountants told CFO Dive in a recent interview.

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By BlueGrace Logistics

The logistics industry has long been colored by both changeability and unpredictability. Markets are precarious and can be impacted by everything from changing consumer trends to regulatory updates and unexpected pandemics. These shifts are catalysts for rate increases, service degradation, breakdowns in planning cycles and overall supply chain disruption. While some market shifts – like seasonality – are more predictable than others, it is often impossible to predict exactly what will happen next, and what you’ll risk in supply chain and business success.

Taking complexity into consideration

As supply chain operations become increasingly complex, the nature of risk continues to evolve with it. Today, anything ranging from political changes to weather conditions affects the way the supply chain pipeline functions. A shortfall in any area, be it manufacturing or shortage of supplies, can wreck entire business functions.

Understanding supply chain risk factors

There are two significant conditions that drive disruptions in the supply chain. The first is natural occurrences such as pandemics, earthquakes, floods, hurricanes and wildfires. The second is social disputes such as trade wars, labor disputes and politics.

Recent events have disrupted many businesses by making them privy to unexpected challenges such as restrictions, container shortages, truck driver shortages and port congestions even as global demand increased.

There are three key areas that you can explore and break down to realize the full potential of your company that can help you to remove risk in your supply chain, today.

Supply chain risk management methods explained

1. Measuring the supply chain structure

To measure your supply chain is to create an overview of your operations and within that, to develop an understanding of your key processes and where your company’s strengths and weaknesses lie.

Adding quantifiable metrics not only helps to benchmark your operations, but also can help to:

• Analyze the need for process improvements.
• Understand where cargo can be consolidated to increase cost savings.
• Measure carrier cost structures to maximize efficiencies and lower costs.
• Better financial efficiency of your end-to-end supply chain network.
• Enhanced control over shipment scheduling.

2. Managing key stakeholders

Stakeholder management is all about the internal conversation within your organization. It’s about understanding why key stakeholders which should include, vendors, purchasing, customer service, sales, are making the decisions that they do and how those decisions affect your supply chain. This step is also about understanding the flow of goods, money and information throughout your organization.

The data and analytics gathered during the measure phase is instrumental to a proper understanding of your operations and can create the insight necessary to understand why these decisions are being made and how you can improve upon them.

There are four key advantages to the management phase:

1. Visibility across the entire supply chain from sourcing raw materials to the delivery of finished goods
2. Modeling future supply chain scenarios as your company grows/changes to ensure speed to market while maximizing cost structures.
3. Complete insight into the production, partner and supplier performance to ensure responsiveness to customer needs.
4. A global perspective to keep updated on the latest developments and optimize processes across North America.

3. Maximize decision making power

The last method is all about making the most possible good from every factor and decision within your organization. For example, choosing the right technology partner can help maximize efficiency and, in turn, increase profitability.

A well-managed supply chain provides companies with the ability to execute best practices in the following areas:

• Demand Planning
• Procurement
• Logistics
• Inventory Management
• Information Systems
• Compliance
• Distribution
• Risk Management and Contingency Plans

Putting it into action

Logistics challenges are an inevitable part of the supply chain industry. During the uncertainty, dedicating resources (time, energy, money) to anything that doesn’t have an immediately apparent return can be terrifying. However, taking that first step is most important as it lays the path towards improvement and growth in the future.

Today, the industry is so interconnected that the impact of a slowdown in one area is felt across all operational divisions. Everybody involved experiences similar challenges. With some foresight and awareness, supply chain leaders can manage risks better and cushion the effects of a blow.

As CFOs grapple with challenges brought on by increasingly high interest rates and a still extremely tight labor market, welcoming automation into their arsenal of tools remains top of mind.

Although investing in technology that can automate certain activities is a priority for many finance chiefs, it remains expensive. 

“Right now, I could probably list out 10 things and I think every CFO could list out at least 10 things that they want to see automated in their organization from the data perspective, but those those things upfront definitely cost money from an implementation perspective,” Coupa Software CFO Tony Tiscornia said in an interview. 

Tiscornia has been at the financial helm of Coupa — a cloud business spend management platform — for over a decade. He previously served as controller, vice president of finance, and chief accounting officer before taking on the CFO post in 2021. 

Before Coupa, Tiscornia also held executive financial positions at Soraa and Blade Network Technologies, the latter of which was acquired by IBM in 2010, according to his LinkedIn profile. 

When it comes to when and how CFOs should make tech investments right now, timing is everything, according to Tiscornia. 

“I think for most CFOs, myself included, you have to pace yourself,” he said. 

Bang for your buck

“I mean, we're always looking at things that can deliver the biggest bang for our buck with a really quick time to see a return on investment, meaning within three months to six months and only in some cases, nine months,” said Tiscornia.

Although some CFOs are postponing tech spending and hiring until the possibility of a recessionary storm retreats, they may be able to avoid lagging behind by only postponing tech spending that will have an ROI further down the line.

“I think it's tough for CFOs to support projects that are going to take two years, like major overhaul projects, before they start to see some return on that investment,” said Tiscornia. 

Between higher interest rates and market volatility, there are cross-currents like demand from investors forcing CFOs to take a step away from a growth-at-all costs mindset. 

Although finance chiefs may be more lean when it comes to deciding where to invest in when it comes to technology, the impact of AI is not going anywhere. 

“My hunch is that this AI technology, this level of recent advancement, and what we're going to see in the next three to five years is going to really catapult a lot of areas of automation in a more accelerated way,” said Tiscornia. 

One of the ways that CFOs can see a swifter ROI in both a cost-cutting and morale perspective, is the automation of back office jobs. 

Digitizing the back office

Back office jobs — like billing customers, collecting payments, treasury, and banking — are in most cases not intellectually stimulating and a waste of time and resources, according to Tiscornia. 

“These jobs are really anything that supports the business and its front-facing activities, but it's not in and of itself front facing, it's the kind of the backbone of the company,” he said. 

Automating these activities are where CFOs can really start to see scalability — 40% of finance jobs will be new or reshaped by 2025 as autonomous finance efforts continue — and organizations can actually see a boost in morale as well. 

“There's a lot of high volume, low value work at organizations… and you know these jobs are really not something people should be spending their time on. So that's one area from a cost perspective, and also from a morale perspective, where automation should be a key focal point,” said Tiscornia.

Fresh from closing a $20 million series A financing in December, biotech firm Ratio Therapeutics’ new CFO is focused on helping his young company build a sophisticated finance department. 

Before Reed Malleck, the company’s finance chief, arrived in October there was a part-time contract CFO, a part-time contract controller and four or five people in the company who did some of the finance and accounting work, including the CEO, Jack Hoppin. 

“There was really no structure, no cadence,” Malleck said in an interview this week. “When I came in the door I said, ‘there’s no such thing as a soft close, we either close the books or we don’t.’” 

A U.S. army veteran who spent the first 22 years of his career in various finance roles at Hewlett Packard before taking multiple CFO positions in a range of companies, Malleck has quickly taken steps to build a strong financial structure for Ratio, which was founded in 2021. 

One of his main goals: to set up the people and systems needed to be due-diligence ready every day, meaning that the Boston-based firm is capable of answering any questions potential investors may have at all times.

To achieve that, Malleck is establishing departments in the company, with each department having what he termed an owner or individual who is responsible for employment and the management of the department’s resources. He’s also applying a system which he invented about 20 years, which he calls a “framework for everything.”

Most companies have some elements of it, he said. It is roughly composed of vision and mission statements and strategic objectives for the company. Objectives, he said, can last for about a year. 

“We’re setting up the cadence for the monthly close and monthly published financial statements,” Malleck said. “That’s where we’re going and that all supports many other things, it supports command and control of the business and it also supports the communication with potential and existing investors.” 

Hoppin, the firm’s CEO, said in an interview that he tapped Malleck knowing his vision was exactly what his growing company needed. Reed has set up a plan that syncs what he called the budget burn down with the company’s plans for growth this year. Hoppin said he’s also adopted Reed’s framework for everything. 

In another measure of the company’s growth, the firm moved out of WeWork space and into new 19,000-square foot space this week in Boston’s Seaport District. The space contains offices and a research facility. 

Founded in 2021, the firm now has about 30 employees and expects to continue to expand its hiring this year. The work that Malleck is doing will support that growth.  

“This all speaks to maturing Ratio in the financial management dimension,” Malleck said.

Financial leadership is falling under a spotlight as economic headwinds continue to batter companies, with hard-hitting industries like the technology space likely to hunt for “operating” CFOs that can pare down expenses.

The shifting economic environment may also lead to more companies seeking out finance chiefs that, rather than managing things behind the scenes, are increasingly “leading in the front line,” Zhi Li, CFO for online marketing platform Customer.io, said in a recent interview.

“What that means is, you want to be out there interacting with customers, talking to people in the capital markets, in the investment community,” Li said. “You want to be out there talking to critical hires.”

Li has served as Customer.io’s finance chief since October 2021, having previously served as CFO for online medical education platform MedBridge, according to his LinkedIn profile. He has held other financial leadership positions for cloud service Skytap and bank Credit Suisse. Li served as VP, investment banking, technology, media and telecom for the bank for about six years.

Moving to the front lines

While companies may be asking more from their CFOs, there are still responsibilities that remain table stakes for finance leaders, Li said. Maintaining good accounting compliance, managing cash, and making sure the company’s numbers are correct and timely are still the skills needed for a high-functioning CFO, Li said.  

“The train’s always got to be on time,” Li said.

However, being able to wear multiple hats and to work closely with other members of the executive team, including the chief human resources officer, when it comes to hiring becomes more of a value add for a CFO, Li said.

Taking that front line view can help to boost value by making the CFO “more of a strategic partner to the executive team and the CEO,” Li said.

Companies are still facing a tight labor market, with “quiet quitting” trends still a major concern for financial leaders. In a recent survey by CFO.com, 78% of CFOs and 59% of non-finance executives said quiet quitting is an issue for their organizations, for example, and talent shortages in key areas mean companies are jostling to entice skilled employees.

By talking to critical hires, the CFO can help to communicate the story of the company, the potential employees’ growth or financial prospects — such as stock options, for example — and the way the organization thinks about value to new potential candidates, for example, Li said.

“I found that the candidates find that really kind of valuable, to be able to talk to a CFO and kind of get insight directly about how we think about the future,” he said.

Growing comfortable with uncertainty

It is important for CFOs to act as strategic partners, Li said, communicating with others in the executive suite regarding trends such as pricing or other top-of-mind indicators, he said.

“You have the opportunity as CFO to have the front row seat on the growth of the company, so you should take advantage of that,” Li said.

This means involving oneself in areas that have the potential to provide a leading impact to the company, he said, rather than seeing such indicators after the fact. “A lot of the time when the numbers come through, it’s too late,” Li said.

“I want to be ahead of that process and working with the exact team to make that happen,” Li said.

Especially in the startup world, it’s also important for CFOs to become comfortable with “a certain level of uncertainty,” he said — this may seem counterintuitive for finance chiefs, but doing so can help CFOs get more in line with the rest of the C-suite, he said.

“I think a lot of opportunities open up when you have the mentality of ‘if,’ or ‘yes, and’,” Li said. “So always come with two or three alternatives rather than, ‘Hey, we’ve got to keep cash at this level.’”