By Gabe Burke
Corporate real estate is headed for a showdown. A fear once deemed insignificant is now impossible to ignore. Many leaders worry that their portfolios will remain vastly underutilized. They wonder if office space has lost its efficacy.
While some are intoxicated by the possibilities attributed to remote work, others believe that years of lease contracts must be restructured. If they are correct, companies will aim to remove what is not needed—excess office space. That removal will be a longer-than-expected journey, fraught with strategy discords, financial tradeoffs, and cultural sacrifices.
For those who would lead this endeavor, challenge and opportunity lie ahead. To restructure a portfolio requires expertise, creativity, and grit. To reduce or shutter offices is often somber and sometimes contentious. Focus on supply and demand to find the dispensable. Prepare to navigate competing priorities, to mediate conflict, and to implement bold strategy. Use this moment to draw on the wisdom you have earned and lead.
If you find yourself in this position and would like support, I say let Clint Eastwood be your guide.
“When you hang a man you better look at him.” In Hang ‘Em High, a mob lynches Eastwood character Jed Cooper, but the resilient cowboy survives. Sometimes you need to look again to ensure a job was done right. In each market you occupy, reassess the critical components of location strategy.
Labor Pool. Know the availability of talent. Determine the volume, concentration, and growth trajectory of relevant job skills. It will inform you if the talent pipeline can sustain your growth. Analyze the proximity of universities, technical schools, and transportation, especially major airports. Consider education levels, average age, and if the population will support your diversity goals. If you might relocate people, then study the costs and availability of housing, education, health care, and cultural amenities.
Costs and Incentives. Compensation is the biggest cost driver. Do thorough comparisons. Measure all other operational costs, include real estate and the need for technology infrastructure. Examine tax rates, regulations, grants, credits, and incentives.
Key Customers, Competitors, and Employees. Research the locations of, and perhaps consult with, important customers. Investigate your competitors’ locations and, if possible, their growth plans. Identify and consider your critical employees.
Brand. When you assess whether to retain or to relinquish a location, weigh the impact on your company’s image, reputation, and visibility.
“Learn about people to hunt them.” In Coogan’s Bluff, Eastwood’s Walt Coogan studies the habits of fugitives to track and capture them. Often, to achieve a goal, we must understand the people involved. Your company’s demand for space is based on the needs of your workforce. Study them to create a forecast.
Your employee categories will turn on what your technology will allow, what your infrastructure can support, and what your culture will embrace.
Categorize Office Users. Employees’ office use can be classified as full time, remote, or tethered. Your choices will turn on what your technology will allow, what your infrastructure can support, and what your culture will embrace. Be aware that your likely increase in remote and tethered workers will lead to more unassigned workstations or “hotdesking.”
Leader Feedback. Business unit leaders are expected to drive growth. They are often bullish on space demands and fear that space constraints will inhibit their goals. In this new paradigm, ask them to explain why their office should not be reduced or closed. Work with them to uncover their true need.
Occupancy Ratios. Historical data such as square feet per person, revenue per person and many other like comparisons remain useful predictors of future space requirements. Still, these ratios may change after you have recategorized employees and studied utilization.
Use Analysis. To enhance efficiency, health, and safety, track how and when employees use space. New technologies to do this are unprecedented. Sensors, cameras, badge data, room booking, and beacon tracking are available at low cost. Take advantage.
Mergers and Acquisitions. Include likely acquisitions in your analysis for both head count and real estate supply.
“You better have rights to this mine.” In Pale Rider, Eastwood’s vigilante gunfighter known as the Preacher helps a group of miners fend off a land baron who is after their gold. To use real estate effectively, we must know the legal authority we hold. Study your supply in detail. Continually weigh it against your demand.
Size and Type. Know the square footage and building category for all locations. Assess what uses can take place in each.
Lease Expiration Dates. Peg each date against your occupancy plan.
Additional Rights. In each lease, research your renewal and expansion rights, rights of first refusal, rights of first offer, and holdover penalties.
Head Count Capacity. Analyze how many people each location can accommodate. Include full-time employees and contractors. Consider how often each of your categorized people will use the office.
“We’ll have to earn this money.” In the final scene of The Good, the Bad, and the Ugly, three fortune seekers face off over a long-sought treasure—two hundred thousand dollars in gold coins buried in the grave marked “Unknown.” To earn the money, Eastwood’s character explains, they must seek a final outcome to their rivalry.
When it is time to act, some level of conflict is inevitable. You may be forced to downsize locations, close offices, or relocate major business units. In most cases, the tension will resolve without incident. But occasionally, a clash of wills may ensue—the CFO’s drive to cut costs, the business-unit leaders’ push for growth, and employees’ demand for quality of life. An activist investor or an aggressive board member could bring pressure to bear. You may be in direct dispute with someone or simply caught in the middle. Regardless, you must alleviate the strife.
People can endure defeat if they feel their concerns were considered.
Present options. People are more likely to yield when given choices. Convince all parties that you understand their interests. People can endure defeat if they feel their concerns were considered. The trust you have built is critical. Take responsibility for anything you have said or done wrong. Deliver a negative message empathetically. Compassion will tame vitriol.
“Everybody wants results, but few will do what it takes to get them.” In Sudden Impact, Eastwood’s Harry Callahan commandeers a civilian’s car to apprehend a bank robber. Sometimes getting the job done requires creativity and resolve. To streamline a portfolio, you will need both. Investigate every possible method.
Slow Growth. Where possible, freeze renewals, expansions, and new leases that are in process.
Consolidate by Geography. You may have multiple locations within the same metro. It is a near certainty that you will gain efficiency if you combine them.
Consolidate by Function. Identify demand clusters. Group similar requirements across different lines of business. For example, “back office” operations may be distributed in different cities, even different countries. Combine some or all into one location.
Reuse Existing Space. Move a team from a location that has a lease near expiration to one with more term and surplus space.
Reposition Existing Space. A long lease on a space that is no longer necessary for its original purpose may present an opportunity. Convert it to a new use, and assign it to a different business line.
“I see they’re still here. Get three coffins ready.” Act decisively when the course of action is clear. In Fistful of Dollars, Eastwood’s nameless character is threatened by three outlaws. He swiftly confronts them. When you have determined what space is unneeded, immediately begin to dispose of it.
Lease Review. Explore break options, recapture rights, and all legal methods to terminate a lease.
Sublease vs. Buyout. Analyze the likely revenue, cost, and time to complete a sublease. Propose a lease buyout to your landlord. Choose between the risk you will not find a subtenant and the cost of a termination fee.
If you find a subtenant, your landlord will have improved motivation to terminate your lease.
Buyout via Sublease. If your landlord refuses a buyout, search for a subtenant. When you find one, structure a deal in which the new tenant leases directly from the landlord. Your landlord will have improved motivation to terminate your lease.
Pressured Buyout. If the entity that signed the lease is financially weak, use the threat of bankruptcy to negotiate a buyout.
Sell Owned Assets. Owned properties are often easier to dispose of than leased properties. Even a distressed property has a buyer; it is simply a matter of price. Properties available for sublease can languish, regardless of cost.
Corporate real estate faces a reckoning. For those who would drive this movement, elevate your skillset and raise your acumen. Remember the lessons from Eastwood’s characters. Don’t assume the job was done right the first time. Study your workforce. Know your property rights. Think creatively to solve problems. Act decisively when the course is clear. Prepare to take the reins and guide your company with knowledge, insight, and poise.
This article was republished with explicit permission from Gabe Burke. The original post can be found here.