Trading spaces Featured

7:00pm EDT February 23, 2009

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 jodonoghue@gsa-cw.com 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.