“We’ve proven we can operate with no footprint. That tells you an enormous amount about where people need to be physically.” – James Gorman, CEO, Morgan Stanley
So your firm has realized that it can work differently than in the past. What’s the right process to reduce your footprint? Here’s a plan to follow.
Less than 10% of the firms that we’ve polled believe they can operate with absolutely no office space, so likely you’ll still have an office presence, albeit a reduced one.
Since nobody is a post-Covid19 office space design expert, we’re going to go past the philosophical discussion of the future of office space, and jump into a pragmatic approach for executives who suspect they can now get by with less space. We’ll help you answer these questions:
- How much less?
- What kind of savings might we realize?
- When can or should we do it?
- How do we maintain culture, brand, and staff satisfaction?
- What steps do we need to take to make it happen?
Remember this is post-Covid19. Don’t confuse social distancing and immediate precautions with eventual we-all-have-the-vaccine future requirements. Many of the large landlords and the brokerage firms that represent them are trying to contend that the reduced demand for space will be offset by distancing. Wrong. One requirement is a short term precaution, the other is long term and permanent.
To understand the process we use a framework known as E.S.C.A.P.E.
E = Evaluate
Since most businesses lease their space, we’ll presume an office lease, although the method is very similar for owned properties. Culture and political issues aside, there are three categories that you must consider to understand what is financially feasible. Start by reviewing:
- Lease Contract Obligations
- Space and Floor Plan
- Anticipated New Requirements
Let’s break it down:
Lease Contract Obligations
- Term – Short or long term remaining?
- Rate – Are you at or below market rate?
- Language – Do you have sublease rights that are not overly restrictive? Any rights to terminate?
If less than 2 years, you’re probably best to ride it out until expiration. If longer, you need an exit strategy. The two year timing is an average and will vary based on size and complexity of infrastructure.
To vacate long term space, the most obvious solution is to sublet all or part of the space. Subleases generally provide less flexibility than direct space with a landlord, so rates need to be discounted accordingly. Hopefully, you have rights to sublease that allow you to price it attractively, market it, and lease to obvious users such as neighboring tenants.
Space and Floor Plan
- Condition – Is the space “move in ready” for another user?
- Separability – Could you divide it easily into two or more spaces?
- Demising Costs – Is dividing as simple as constructing a wall or do you have restroom, electrical, HVAC and fire code issues that need considered?
- Alternate Users – Do you have any growing neighbors or related-company occupants who can take part or all of the space?
You’re trying to understand construction cost feasibility. A neighbor might simply open up a wall and capture part of your space, and related companies may not require formal demising to share space and could possibly assume the remaining lease.
New Business Requirements
- Existing Space – Do you anticipate that you could operate out of part of the existing space comfortably?
- Existing Building – Would relocating within the existing building be a reasonable option?
You likely don’t know yet exactly how much space you’ll ultimately need, and that’s OK. You just need a conceptual understanding to decide if keeping part of the space would be a good solution. If you physically can, it often is, due to minimized disruption. A relocation within the building allows you to renegotiate with your existing landlord, who has the ability to substitute a more suitable space immediately.
There are more than a dozen potential solutions, although six that are most common:
- Divide and Sublease Excess
- Sublease/Substitute and Relocate
- Downsize Blend and Extend
- Early Termination
- Early Buyout and Relocate
- Wait It Out and Relocate
Before you draw any conclusions, you need to make sure that you fully understand the impact that Work From Home will have on your business operations, consider the impact on company culture, and get both input and buy-in from your staff. Read about the next stage on how to Survey Your Staff in our upcoming post. #PostPandemicOffice