Why Now is the Time to Right-Size, Relocate or Renegotiate Your CRE Portfolio

As the economy emerges from the ills of 2020, many businesses are taking an opportunity to step back and assess their commercial real estate portfolio. The way we work now is different from the way we worked then. The places we work now are different from the places we worked then. And the economics of how we provide workplaces are completely changed as well.

The problems facing real estate portfolio managers are myriad, but so are the solutions. Our research has identified three broad pain points for businesses like yours, which we will cover here.

Configuration Challenges

Workers come to the office differently and do different types of work now than they did in the past. This means that traditional office designs are frequently outdated and not suitable for new working trends.

For many companies, the problem is simple. Their old offices are too big. While moving to a 100% virtual workspace might not be an option for your company, a hybrid model is probably where you will settle. In fact, according to an April 2021 survey, 95% of your workers want it, 64% would pay out of their own pocket to support it, and 79% of your C-Suite plans to do it, if you're the average company.

When you cut through the euphemisms, the impact of a move to a hybrid work schedule is that you will have fewer people in your office on any given day. If you go from, for instance, having 50 people at work to 25 of them, you don't need as much space.

In addition to the challenge of too-large offices, many offices are also the wrong configuration for a hybrid working environment. Effective hybrid environments are configured to allow for people to get the space they need when they are in the office -- whether it's a small private office for focus work, a zoom room for video conferences or a collaboration space to work with other people. Spaces need to be granted on an as-needed and per-day basis as opposed to being permanently assigned to a certain person. All of this means that your office probably needs to be radically different from what you have today.

Location Challenges

Your office might not need to be in the same place, either. The flexibility that your workers crave also applies to where you locate your office, both based on their needs and on the best interest of your company.

Many organizations are rethinking having a traditional major location in the central business district. Given the need to draw people into the office -- and given that many of your workers have spent a year without the financial and temporal costs of commuting -- a location that is closer to their homes may be more desirable, especially as suburban living is becoming more popular in many parts of the country. Alternately, you may choose to go to a hub-and-spoke model where you maintain a smaller, centralized, main office but offer additional spaces located throughout the metro area to shorten commute times but still offer a more traditional work environment for those who seek it.

In addition to these office-specific challenges, your company may be having second thoughts about the community in which it is located. If your employees can work from anywhere, your company can, too. This means that if you are facing an unfavorable cost structure, tax structure or regulatory environment, moving your office to a better part of the country is easier now than in the past.

Economic Challenges

Finally, on top of all of these problems, the economics of your current space simply might not work. Locational and configuration issues don't just impact your workforce -- they also sap your bottom line with unnecessary cost. In addition to the actual cost of paying for an unsuitable space, you also face the opportunity cost of not being able to redeploy that capital towards a space that actually meets your company's needs.

While you probably can't terminate leases or abandon spaces willy nilly, you have still have options. With the balance of power between landlords and tenants shifting in your favor in many markets, now can be a uniquely opportune time to open these discussions with your building's management. Renegotiating and modifying leases can help to align your space and its cost with your business's needs.

Solutions

While the challenges outlined here may seem daunting, they are not insurmountable. Your company can find space in the right place, with the right shape, and at the right cost. The key to doing is to harness the power of The 3 Rs:

Right-Size your space to make it suit the way you work tomorrow instead of the way you worked yesterday.
Relocate your space for where you and your workers want to be instead of where you were.
Renegotiate your leases for improved economics and flexibility.

Tenants that apply the 3 Rs can come up with an optimized portfolio that not only works better today but also provides future-proofing.