How To Combat Inflation by Right-sizing Your Commercial Real Estate

Inflation is rampant (but you already knew this). Good luck turning on the TV, picking up a newspaper, or buying groceries or gas without being reminded. The country hasn’t seen inflation  this bad in 40 years. 

 Price gauges are top of mind of American consumers and businesses who are forced to cope. Methods to cut waste and increase corporate efficiency have never been more critical. The value of the dollar is reaching record lows- oh, and – we’re entering a recession. 

So, if you’re responsible for your company’s finances and/or corporate real estate, the spotlight might just be on you to improve your company's EBITDA despite runaway inflation. Learn how.  

Inflation is Increasing Cutbacks

CRE Reductions are on the Rise

How to Know if You Have Extra Space

Inflation is Increasing Cutbacks 

Spending cutbacks are an obvious first line of defense to protect budgets from the wrath of the current economic crisis. With inflation triggering increases in everything from gas to consumer goods, CFOs are slashing their Operating Expenses (Op Ex).

These cutbacks are only sure to increase as there is no end in sight, and “60% of execs think the economy will worsen in the next six months (up from 23%),” according to the Conference Board’s 2022 C-Suite Outlook. 

Where do you start tightening the belt? How about the top two costs of corporations: Payroll and Corporate Real Estate (CRE)? 

Increases in overhead have forced many major organizations to initiate layoffs and hiring freezes. This is especially true in the tech industry. Amazon, Meta, Twitter, Spotify, and Netflix (to name a few) have already begun cutting into their employee numbers or slowing down further hiring.  

According to Brian Peccarelli of CFO Magazine,  

However, what if we told you that the directional shift you should focus on is not in payroll- but in your CRE? Making necessary adjustments to your commercial real estate at this time can avoid layoffs and preserve your company’s culture and morale.  

CRE Reductions on the Rise 

Let’s cut to the chase: Remote work is a blessing in disguise for businesses looking to cut costs. Since workers have the freedom to function remotely (and many want to), this presents a once-in-a-lifetime opportunity for companies to cut costs by adjusting real estate to this evolving work demand. 

Many of the companies making talent cuts already had wasted space. They shifted to hybrid or remote work to keep up with the contemporary demand for flexible workspaces. While this works for recruiting talent, it leaves organizations hundreds of thousands of underused square footage. 

Plotting cutbacks in talent numbers will only worsen the situation, giving companies even more wasted space. That way, talent cuts are only a band-aid over the gaping wound of misdirected spending. 

While, at first glance, it may seem logical to target the highest cost, in this case, it will only increase the divide of waste among other top expenses. This causes a disproportionate effect on the overall spending.  

Many companies have already locked their focus on streamlining their portfolio and shedding the bulk. According to a Reuters analysis of recent quarterly earnings reports “more than 25 large companies plan to reduce their office space in the year ahead, a move designed to reduce the second-largest expense after payrolls at corporations.” 

Companies like Amazon and Meta have already begun to reassess their space utilization. They, like many corporations, are reorienting themselves to a remote world and assessing the role of real estate in future production. In the meantime, cutting away at extra fat saves them millions. This is especially true since true because they are looking to downsize their footprint in Manhattan, the country’s most expensive city. 

Let’s see how much you could stand to save by just reducing your footprint in NYC. And remember, we are just highlighting how much you can cut costs solely from downsizing. This example doesn't consider possible additional savings from renegotiating base rent, escalations, lease terms, etc. 

CRE adjustments as the basis of reactionary inflation cuts can save millions (and make your work environment more efficient and sustainable for remote-flexible schedules. 

Do You Have Extra Space? 

As we leave one era of disruption and enter another, there’s no doubt your company’s needs have changed. The difference between these rapidly evolving expectations is most evident in your CRE. 

According to Kastle Systems’ workplace occupancy barometer, office occupancy has been averaging around 44% for the past four months, so it’s more certain than not that you are wasting space (and losing millions!) 

 To look deeper into your space disposition, right-size your commercial real estate. By working with the following considerations, you’ll better understand where you can afford to downsize. 

How many employees did you have coming into the office when you signed your lease? How has that changed in recent years? This is easy to determine by checking how many employees badged into the office over a given period of time. 

Also, how much square feet did you originally devote to your employees? How has this number changed since the emergence of social distancing? As a rule of thumb, each employee should have around 200 square feet to promote the safety of your workspaces.  

To right-size, multiply the number of employees regularly attending the office by the amount of square feet they need. This will bring you to your optimal space utilization. With 45% of businesses planning real estate reductions, according to the Wall Street Journal, it wouldn’t be shocking if you discovered that you have extra space as well. 

Some corporations are now rethinking their space and making their CRE spending go further. With not everyone in the office all the time, they can reduce their overall square footage — while increasing the square footage per team member (who is in the office).   

This may be essential in recruitment and retaining team members as time goes on.  Covid (and perhaps other epidemics/pandemics) are not going away.  We have to learn to live with it.  So ask yourself, where would you want to work – in an office where the corporation went cheap on the square footage per team member, or where you felt you had breathing room (pun intended). 

Improve Your Space Utilization with a Tenant Rep 

The key here is for CRE professionals to watch trends carefully and maintain as much flexibility as possible to respond. For example, if you have too much space and your landlord won’t cut your footprint, you can sublease the extra room. Or you could get creative with property holdings and launch sale-leasebacks. 

The commercial real estate world is changing. It also provides savvy CFOs and directors of real estate a unique opportunity to slash overhead without cutting into your most important asset, your people. 

The circumstances of past years have created the perfect storm for CRE OpEx. And as Tenant Reps at iOptimize Realty^®, we have had a close eye on these trends. As right-sizing experts, we have seen how much our corporate clients can save by improving their space utilization. What’s better? These savings could be yours if you analyze if there is waste in your portfolio and take action. Luckily, you don’t have to do this alone. A Tenant Rep can assess your portfolio, compare it to your optimal space utilization, and provide CRE optimization strategies.  

If you’re ready to take a close look at your CRE (like so many Fortune 500 companies are doing now), don’t wait any longer. Talk to a Tenant Rep at iOptimize^® today. 

Learn more about The Tenant Rep Services that will Save Your CRE from the Recession.