I wrote a piece last week stating my opinion that, basically overnight, it became a tenant’s market. Landlords are working hard to retain their tenants by offering simple extensions and favorable renewal terms. They are in the driver’s seat when it comes to offering incentives to those who are looking for a quick fix. But a quick fix will treat the symptom not the cause. It begs the same question that Technology Officers have been asking for years, “Do we know our total cost of (occupancy/ownership)?”
An informed tenant can immediately answer that question. With ease, they can pull their total portfolio and quantify (by location) the tenant improvement costs (Construction + FF&E) and ongoing Operating Expenses (inclusive of base rate, escalations, common area maintenance, taxes and building operating expenses plus utilities) The really keen groups can even add daily ongoing expenses for pantry, janitorial, and office supplies. The expenses add up pretty quickly and are widely accepted in the board room as simply the cost of doing business. Not anymore.
At first glance, a quick extension to a current lease seems like a good option. It allows leadership to focus on stabilizing the business. It gives employees a sense of security (if properly communicated). It also gives everyone a breath to figure out what return-to-work will look like. In fact, if coupled with a workplace strategy plan, it might be a brilliant idea. Those who sift the pennies will be rewarded in dollars.
WORKPLACE STRATEGY (Physical Programming, Portfolio Planning, Virtual)
My hope is that recent events will leave American small business in a far more informed and safer environment. It has us rethinking how we get to work, what we must touch, and how far apart we should be. Our senses are heightened, and we are more aware of our physical environment. THIS is where the physical planning of a workplace THRIVES.
Programming, programming, programming – ESPECIALLY office users. How people work, where they move throughout the office, where high-touch environments are located, and the frequency of use will determine construction materials and alter company standards moving forward. Rethink conference rooms with 18 seats, those are now Zoom meetings. Training rooms (that largely remain vacant) with occupancy for 50 people? Gone. Rent the building amenity room downstairs or get more creative with your venue. Not only will reprogramming the flow of your workers help to illustrate your commitment to their health and wellbeing, it will lead to improved efficiency both in their work product and the overall footprint across the portfolio. The two simple suggestions above might cut rentable square footage by 20% compounded over a 60-month lease term. Do not forget, you avoid the tenant improvement cost on the front end too…
With a simple change of Program comes a seismic shift in footprint. In 2019, Jones Lang LaSalle published a cost benchmarking guide to building out office space across North America. They conclude the average construction cost of progressive office space is $152.23 per square foot. If we assume a 10,000 square foot requirement and cut our meeting and primary conferencing needs to achieve a 20% reduction in size, we’re cost avoiding over $300K in direct construction expense AND reducing footprint. The impact to operating expense matches the construction expense if the rate is $30 per foot and the term is 60 months. $600K stays in your pocket by making simple programming decisions and carrying that forethought throughout the portfolio.
No holistic approach to workplace is complete without the consideration of virtual. None of these reduction practices work if the tech isn’t there. Accessing files, sharing documents, collaborating, video conferencing all of which needs to be programmed just as if the employee were working in the office. A new flow needs to be established. That said, a new host of challenges will emerge. Pushing updates, changes to settings, new software/applications will need to be downloaded and firmware updates will need to be scheduled. IT will need remote-managed solutions both to service people who are working from home and those who choose to work in the office. The need for a consistent platform of hardware – another repeatable kit-of-parts is upon us. IT simply doesn’t have the time to diagnose the hardware first, then determine the problem. A completely configured replacement needs to be available for next day delivery. IT needs secured storage capable of shipping and receiving as well as access to a robust asset management system. The way we work has changed.
BACK TO THE BEGINNING
I mentioned earlier this has become an informed tenant’s market. If models exist that illustrate total cost of occupancy, then informed real estate decisions become easier to make. If the process has been centralized to decision makers who are armed with a comprehensive, strategic understanding of defined factors, expensive mistakes will be avoided. Nimble, cohesive decisions will allow progressive organizations to take advantage of incentives and sublease opportunities. These will be just-in-time decisions subject to market conditions…highly tactical opportunities that are advantageous to the enterprise. Success requires training, and training requires a goal. Does your company have a goal? It starts with a single step.
Chris Moeller is the Owner and Managing Principal of Orion Growth, a division of Gaia Ventures. Orion Growth is restoring the human connection by fundamentally changing the way workspace is delivered. For more information on Orion Growth, please visit www.oriongrowth.com
Photo by Roger Hoyles on Unsplash
