Office space is most likely one of
your highest costs of doing business. In today’s uncertain economy, you may be finding it difficult to pay
your rent or, perhaps, you’re faced with
having to reduce your work force, thus
leaving you with excess space. If this
sounds familiar, you are not alone.
“Now is the time to scrutinize occupancy expenses and operational
options,” says Jack O’Donoghue, executive vice president of Grant Street
Associates, Inc. “Being in a tenant or
ownership position, it is wise to give
serious consideration to consulting with
a commercial real estate expert to put all
of the options on the table.”
Smart Business learned more from
O’Donoghue about different internal and
external strategies to reduce your occupancy costs.
How can you reduce occupancy costs?
First, try to configure your office space
more efficiently. Determine if it makes
sense to market a portion for sublease.
When you are reducing your space and
work force by 10 to 20 percent, hoteling
can be a good option.
Hoteling involves sharing a workspace
or office area. If your corporate climate
involves field associates who spend less
than 50 percent of their time in the
office, hoteling is a practical solution.
Another solution is to adopt a remote-work program where groups of associates alternate between working from
home and hoteling in the office.
For companies with multiple locations,
consider centralizing and consolidating
internal functions. Consolidations, sub-leasing or even lease buy-outs are viable
options. By involving a real estate professional, you can better determine the
opportunities of, and costs associated
with, subleases or lease buy-outs. If you
have excess space and are in a building
with premium rent, now may be the best
time to do a partial or total relocation. A
move to smaller or less expensive space,
even for a short term, can prove beneficial in these tough economic times.
How can a real estate professional help in
reducing costs?
Hiring a seasoned real estate broker to
represent your interest to renegotiate
existing lease terms is an effective strategy because the broker proceeds with an
understanding of both sides, tenant’s and
landlord’s. If you are a good credit tenant
with a significant presence, a broker can
typically persuade the landlord to
restructure your lease. For example, if a
lease has only a short term remaining,
consider adding term, restructuring existing rental by reducing the amount upfront
and back-loading the latter years. This
will certainly alleviate a portion of the
rent expense and may be attractive to the
landlord to secure additional term with
rates being higher in the remaining years.
What are some external strategies tenants
can look at to reduce costs?
Consider alternatives outside your current location. Evaluate the amenities and
determine if relocation options afford similar opportunities for employees.
Survey existing employees. Many times,
companies work behind closed doors as
they make real estate decisions and lose
touch with their people. Involve your
employees to creatively come up with
cost-saving strategies for the company.
Target future employees. Determine
what the best environment is for recruiting purposes. You have to be sensitive
and cognizant of what it’s going to take to
recruit them to the new location.
Plan a few exit strategies within your
lease. A less-popular but effective one is a
diminution option. You might be able to
give back as much as 20 percent of your
leased space at certain periods during
your lease term. There are also termination options, though not popular among
landlords, that can certainly provide protective opportunities for tenants.
What are the keys to successfully reducing
occupancy costs or creating capital?
Obviously, anyone can go to their landlord, hat in hand, point to the economy
and play the victim. Be mindful that the
landlords are suffering the same reality,
and are dependent on your cash flow
(rent) to maintain a healthy investment
property. That being said, your survival
and ability to pay rent are the primary
issues that will bring them to the table
and honor your request to renegotiate.
Careful planning and proper evaluation
internally and externally ensure that
you’ll bring options to the table. They give
you leverage with the landlord.
For owner-users, an effective means of
generating immediate capital is the
sale/leaseback of existing property. Once
you’ve converted your asset to cash, you
can reinvest your earning into your business, deleverage your balance sheet or
refocus efforts on your core business. In
most cases, investors are eager to purchase properties with good credit tenants
holding stable long-term leases.
JACK O’DONOGHUE is the executive vice president at Grant Street Associates, Inc. Reach him at [email protected] or (412)
391-2621. Grant Street Associates, Inc. is a full-service commercial real estate firm and a member of the Cushman & Wakefield Alliance.
The firm has provided tenant and agency representation, investment sales services and business consulting to its clients since 1993.
