As companies return to the office, many execs are faced with the daunting task of determining what if any changes to make to their office attendance strategy:  

  1. What is our permanent remote work policy?
  2. How do we motivate employees to come into the office?
  3. Should we move to unassigned seating?
  4. Will we need to redesign for a more collaborative workplace?
  5. How should these decisions impact existing real estate obligations and projects?

Your initial reaction may not be the best.  Consider that according to PwC, over half of your staff prefer a relaxed remote work policy with office attendance only two days per week AND you will be competing for labor with firms that have a Hybrid Workforce Strategy that will both expand their labor pool and appeal to those that prefer remote.

More than half of the 106 CFO’s of firms over $50MM in the  latest FL Institute of CFO’s survey have either hired remote staff or are considering it:

This is smart because it builds flexibility and resiliency.  

It will also affect the design of the corporate office.  Office space historically has never quite been a commodity that could be occupied with indifference to layout, location or quality.  Think of the difference between a law firm and a call center as two examples of the extreme ends of a design spectrum.  

That being said, you could probably take any AmLaw firm HQ and place any other AmLaw firm in that space and they could make it work without much functional disadvantage.  However, in the middle of that design spectrum is a near equal mix of private offices or meeting rooms and open cubicle areas that could be easily adapted by financial, accounting, insurance, marketing, or other professional service firms.

That’s going to change.  There is no “One Size Fits All”.  

Like compound interest, the answers to each of those questions will build upon each other to create a unique office profile that will fit that particular company’s corporate identity and functional objectives.

It is possible to:

  • Have a remote work policy that maximizes both productivity and staff satisfaction.
  • Create an exciting workplace that staff enjoy and want to utilize.
  • Provide an open seating strategy that allows staff freedom to move around based on functional need.
  • Design areas that anticipate increased collaboration and encourage interaction.
  • Take action to integrate these strategies into existing offices and projects underway.

For those of you eying that 16% “Other” response, only 6% are not hiring remote.  The others generally qualified remote hiring based on compliance or tax issues and a few mentioned that they have retained existing staff that have now moved out of state.

If your firm wants to make the transition and you’d like to see the Hybrid Work Strategy framework that we use to walk companies through the critical considerations, just ping me at wb@avocatgroup.com.

 

There was a time when some people believed that it was physically impossible to run a mile in less than four minutes. Not just difficult, impossible.  After Roger Bannister did it, within a year, three runners broke the four-minute barrier in a single race. Since then, more than a thousand runners have conquered a barrier that had once been considered impossible.

Likewise, many companies thought they could never have their people operate from home, let alone use “hoteling” and not have a fixed and expensive dedicated place such as private offices for staff to work and be productive.  It would be impossible.

If the lightbulb hasn’t quite come on just yet, in just a very short time, most will realize that is just not true.  They will find productivity and management work-arounds. Those who have not initiated a video conference before will learn how quickly.  Some will acquire better monitors or scanners for home use. Nearly every office worker who is able to work remote will enjoy the immediate benefits of “no commute”.  I doubt if anyone will question the ability to operate this way again. And office space requirements are going to change forever.   

Especially if this quarantine lasts for many months, as it very well might, working from home will actually become a habit and the norm rather than the exception.

Long term, some businesses will realize that they can operate without any physical offices.  Most, I think at least until the older generation retires, will simply have a “place” where people can go in to have meetings and collaborate occasionally, and for those with small kids or inefficient work-from-home setups to go.

This may seem an unusual view from someone who works for a company that assists hundreds of corporate users to lease or buy office space.  However, we realized long ago that our business is not to lease as much office space as possible. That belongs to companies that represent building owners who have space to lease.  Our business is “Workplace Strategy” and is generally about helping firms to lease the least amount of space that will most effectively accommodate their business functions.

We also know from having gone through a half dozen or more economic downturns and/or office market collapses that whatever real estate a business had prior to the “event” is probably not the real estate that they will need immediately after it.  Some will need more, most will need less, and almost all of them will find improved efficiency in a redesign of how they currently use space.

It is well known that the average office square footage used per staff member has been shrinking  for almost two decades. It is why almost every urban and suburban office area has experienced parking shortages.  The densification of office space plans further accelerated after the last market crash of 2007 as companies looked to minimize real estate expenses.

It is about to happen again.  The upheaval of the economic system will cause an overall reduced demand for space.  But more significantly, the normalization of productivity via remote work will have an even greater long-term impact.  We won’t all wonder if we can operate remote effectively, we’ll know that we can from experience.  

In the same way that you don’t expect your local Starbucks to have a table reserved 24/7/365 for your exclusive use, even if you happen to frequent it every day, many workers will opt to work from home more often so will not require or expect a particular office or even a desk to be available 24/7/365 for their occasional use.

Will the commercial office market collapse?  Let’s put that in perspective: Any collapse in demand and rates will be temporary and part of a recurring cycle.  Economic downturns reduce demand for space, and this time the market will feel a double-whammy as work-from-home becomes a standard operating procedure for nearly everyone.  It is a little early to make predictions with certainty but, if history can be relied upon, commercial office market rate trends will generally follow the stock market with a 12-18 month lag.

Certainly there will be an old school mentality among some workers who will not be persuaded.  However many more will likely not only adopt but welcome a new work methodology. Companies will still want, at least for now, a private place for their staff to work and collaborate and even occasionally meet with clients.

But how companies use office space  is never going to be quite the same again.

 

Your company signed a lease for office or perhaps warehouse space a few years ago and you’re now somewhere in the middle of the term.  You can relax for a few more years, right? Wrong. Not if you want to make sure that you are staying ahead of the game. Here are three things that you should do right now:

 

  • Know the Market – Where are market terms relative to your current rate and terms?  Find out availability and current rates for both your existing building and competitive alternate spaces.
  • Why this Matters:  You want to be proactive and informed should you need to either expand or contract.  You might discover the opportunity to renegotiate now for either more or less space, or otherwise improve your terms as an early incentive from the Landlord for you to renew.  And you won’t be surprised when lease renewal or relocation time comes along.

 

  • Audit your Current Lease – Are your negotiated Operating Expense exclusions or caps on increases being correctly calculated?  Are you paying the correct proportionate share of expenses? Your lease is likely a complex 40 pages or more and there is not a word there by mistake – it is all there to protect the Landlord.  
  • Why this Matters:  Don’t rely on the Landlord’s bookkeeper to apply your negotiated terms or assure that you are not being overcharged.  Now is also the time to consider how your terms compare to current market terms. 

 

  • Reassess your Requirements – Is your space as efficient as it could be? Know how your neighbors and industry peers compare and are building out their space.  See how strategies like hoteling or coworking layouts might work for you.
  • Why this Matters:  You need to understand how much you might save or better serve your objectives with an ideal layout. Most companies use space differently now that they did 5 years ago.  Attracting workers and leveraging their talents often requires more collaboration, requires less admin, filing, and library area, and replaces drywall with glass partitions to allow more light.  Now is the time to start considering how your space could be better used in the future and start discussing with your staff.

Avoid negative surprises at the end of your lease, or discover that you’ve been incorrectly charged for years when it might be more difficult to correct or collect.

You don’t wait until you are ill to go to the doctor for a checkup (hopefully).  Don’t wait until your lease expiration is upon you to do a Lease Checkup. Stay informed and on top of market terms.

 

If you expect to get a fair and competitive rental rate and terms on your renewal, you need to start early and have a process.

Your Landlord is a professional. They probably have also hired an expensive real estate leasing company and have a $500/hour commercial real estate attorney. This is serious business.

Even if you have what is considered a small lease for a short 3 year term, you are with near certainty making a 6 figure business obligation. If you have 50+ employees, you’re more likely to make a 7 figure obligation and perhaps larger. You’d better take it as seriously as if your company was involved in a lawsuit of that size.

The Landlord’s asset manager gets his/her bonus based on how much they increase the revenue on your property. The highly paid professionals on their side have to justify their fees. They all work on several hundred leases each year. They are smart professionals.

Don’t expect to do this once every 3 or 5 years and outwit them. Your only chance for success is to create market competition. Accept that you are not a better negotiator than them, but the market is a better negotiator. If you can get other landlords to bid for the future income stream offered by your firm, that market force will apply downward pressure on your rent and improve the other terms.

Let’s suppose that you’ve decided that you don’t need professional representation, or at least have not made a final decision yet, your first and most likely choice is a simple lease renewal, and there is nothing too complex happening such as expansion, downsizing or major reconfiguration.

Before you get started, pause a moment to take in the big picture and assess where you stand. If you are planning to renew, here’s the likely situation: Your existing space is not perfect, but it works for you just fine. You, or your boss, decided “It would cost us a fortune to move” and lacking any other compelling reason, you’ve already decided to renew. You’ve not received a proposal from your landlord, but assuming they are “reasonable”, renewal is a forgone conclusion.

Regarding that thought above, “It would cost us a fortune to move”? A few points:

  • It probably costs a lot less than you think. The physical move is approximately $.50/SQFT + $400 seat for cabling + furniture assembly if you have cubicles + minor IT and phone reprogramming. And a new landlord will, in almost every market in North America, provide a move allowance or free rent that will more than cover that cost.
  • However much it will cost you, it will almost certainly cost your landlord a lot more. Vacancy, marketing, completely rebuilding the space for a new tenant, lost rents while the space is under construction, and free rent as a concession to the new tenant to entice their move equals a very big number.
  • You’re doing your landlord a very big favor by staying. In fact, between 75% and 80% of all tenants renew their leases. So before they even have a conversation with you, they know that the odds are that you’ll renew. Imagine going to Vegas and knowing that you’ll win 4 of every 5 hands of blackjack.

Now imagine that the odds are reversed. The landlord is making a proposal to a company considering 5 possible locations. Their odds are now 20% rather than 80%.

Not so great for them and here is why: A commercial building is not worth it’s replacement cost without a tenant. When they sell, the building is valued on the income stream. And here is a small but very important consideration, so please excuse the all caps.

YOU CONTROL THE INCOME STREAM. YOUR BUSINESS IS THE INCOME STREAM.

You’ve got a lot more power than you probably realize. I know that it seems like the landlord is big and powerful, and that certainly is a nice big building that they own, but you can bet that the bank will come and take it away from them if they don’t keep it full of tenants just like you who pay the mortgage with those income streams. A building is, generally, a commodity. You don’t have to advertise to find people who will accept your rent money, but they have to advertise their space for rent. Think about that.

captive tenant syndrome

In a recent post, Newtons First Law, we discussed how the “house odds” favor landlords since the overwhelming majority of tenants renew their leases.  Why?

Because:

  • It is a hassle to move
  • Evaluating options would require time and effort
  • A move would cause disruption to already stretched staff resources
  • It is expensive to move

Read more

 

 

One of the easiest and most effective ways for a corporation to keep real estate costs low is to regularly perform Market Rate Audits on their leased locations.  Often many companies get caught up in reactionary tasks such as simply handling leases as they come up for expiration, so they never get ahead of the curve with a proactive approach. Read more

I’m not crazy about condominiums.  Here’s why:

Other people (the condo association – which is often controlled by a very small group of individuals) get to vote on how to spend your money.  Some of those choices may not add value for you or to your property.

Operating expenses on leased commercial property work the same way. The management company, which is the property ownership or someone under their direct control, gets to decide what expenses get passed through to the property tenants. Read more

One of the most common objections to the concept of Hybrid Work is that it may cause an unwinding of company culture.  Here’s the results of a recent poll of Florida Institute of CFO members (CFO of firms $50MM+).

Nearly 20% believe that at least 4 days per week in the office is required.  The others don’t agree.  Who’s right?

If you establish trust, values, and team building the way that it was done historically, you can bet that culture will take a hit because it was often done with a passive “chat at the water cooler” mentality.  

Hybrid Work is a way to empower employees to choose when and where is best for them to work.  It is trusting them to perform without need for in-person supervision.  In essence, it is valuing the human experience over the historical process.

Remember that hybrid does not mean “100% remote”, so the presumption is that a majority of staff will meet occasionally in a joint office location.  Obviously, the frequency and how to connect those fully remote will determine your culture program.  To maintain and strengthen culture, Hybrid Work will require a more conscious effort.  That doesn’t necessarily mean significantly more effort, but it will require establishing routines and procedures that enhance and communicate company values and objectives.

We all have friends that we love and trust that we only see occasionally.  When we do meet again, even after months or years, it feels like we just spoke yesterday.  How much more we will stay bonded to coworkers that we see more frequently – some several days per week, and others less, perhaps every few weeks.  It will require that we make the effort to establish that bond up front, earn the trust, see the efforts of the company demonstrating values, and participate in team building activities.  

A Hybrid Work strategy or even a fully remote one, makes a statement about your company culture and becomes a part of who you are as a company.

Take steps to move from passive culture building to a more proactive process.  Generally this means just reinforcing what you did prior to Hybrid Work, but making sure that it happens on the calendar.  

Here are our top tips for maintaining culture and connection in a Hybrid work environment:

  • Schedule weekly staff meetings and one on ones with managers.  Encourage managers to pay careful attention to staff concerns about growth and development and take action to address and meet these needs.
  • Provide weekly learning opportunities with workshops that are both in person and virtual.  Record them and keep in an online library.
  • If feasible, schedule in-person team retreats in fun locations and an annual company-wide event that brings everyone together.
  • Leverage team work tools such as Microsoft Teams, Slack, or Asana to allow asynchronous project tracking, delegation of tasks, and communication.  The goal is to provide staff with direction and support without micromanaging or constant monitoring. 
  • Communicate clear goals, objectives, and expectations for each employee, and hold them accountable.  Everyone clearly understanding their responsibilities helps build trust among teams.
  • Leaders need to over-communicate company progress and objectives in a way that is fully transparent.  It is natural for staff to have concerns about the business and their positions in times of uncertainty or change, so a frank assessment of business impacts and a clear agenda for moving forward is important to reinforce retention concerns.

Every company is unique, so there is not a “one size fits all” approach to maintaining culture.  Plenty of firms have maintained large remote work populations successfully long before Covid forced us all to learn new culture-building skills.  The ability to work from anywhere is a capability that, by itself, can make a very positive statement about your company culture.  Now is the opportunity to embrace it.

James Gorman, the Morgan Stanley CEO, “We’ve proven we can operate with no footprint. That tells you an enormous amount about where people need to be physically.”

Our business relationship with office space radically changed over the last year.  Here are questions being debated internally by almost every office-based firm:

  • What changes are permanent and what have we learned?  
  • Is this a temporary condition with companies and staff eager to return to a historical “normal”?, or
  • Did the pandemic simply accelerate the move to a mobile workforce that might have otherwise taken a decade or more although was inevitable?

What we are learning is:  There is no single answer.  It depends on the vision of company leadership and culture, and the nature of their work.

What is emerging is a variety of different real estate use strategies, including:

  • Retro – Return to pre-2020 design and use, no significant change to space requirements.
  • Hybrid – Permanent offices for full time occupants, hot desking for partial week attendees.  Minimal redesign and reduction, most companies will view excess space as “room to grow”.
  • Flex – Little or no assigned offices in favor of hot desking and some portion of staff fully remote.  Significant reduction in office space, typically 40-60%.
  • Mobile – Staff prepared to work remote for extended periods.  Office space used focused on meeting and collaborative space, perhaps with coworking or small urban offices for staff convenience.

There are many variations on the categories above.  And there are as many questions as there are answers:

  • Is there a correlation between the status during the pandemic and future planning?  
  • What are the trends by industry?
  • Does company size influence flexibility?

Want to know where your company ranks?  Take this five question two minute survey:

Note:  The survey is open to firms with 50 or more office staff only!  Please respond only if you fit that criteria.

Office Transformation Survey

Your individual response will be confidential and presentation of all results will be anonymous.  Respondents will get detailed results and we’ll have future posts here discussing general trends.  We appreciate your participation.

Many firms are struggling with the culture shift that has occurred within their firm regarding remote work.  

There are numerous very well conducted surveys, including this one by PwC, that conclusively state that employees overwhelmingly prefer some remote work as part of their routine.  Even pre-pandemic, CNBC, Hillarys, and others published surveys indicating that a large portion of staff would accept less pay in exchange for flexible or remote work.  The numbers are growing.  This year, TechRepublic reported a Citrix survey that found 75% of polled employees would take a pay cut if they had the freedom to work remotely.

The imperative now is that there is a growing wave of companies that are developing remote work policies that will provide this flexibility, and your firm will be competing with them for job candidates.  Without it, you risk that your staff will will seek other employment if forced back to a full time office routine.  This is causing businesses to rethink both remote work and real estate strategy.

 Check out these results from over 100 CFO’s of firms over $50MM in the  latest FL Institute of CFO’s survey:

Note that the sentiment is split above and below the 70 percent occupancy level with approximately 39% of firms expecting staff to work mostly in office and 45% planning for 60% in-office attendance or less.

There have been many media, and social media, debates on whether staff truly want to get back into the office or work from home.  The truth is: They want both.

The commercial office investment industry wants to convince you that we need to return to a 2019 office mindset which coincidentally happens to be a very profitable and well controlled business for them.  The long term nature of leases and the inflexibility inherent in that old system provided tremendous opportunity for professional landlords to maximize return on investment because:

  1. Businesses had to have physical space to accommodate staff, and 
  2. A growing company could easily get in a compromised position where they were forced to expand in place and pay exorbitant rates.

These real estate firms have a business model that is counting on a return to full time office work to maximize their returns.  Therefore, much of the propaganda produced by them is focused on polarizing the issue into an all or nothing, “office vs. work from home” debate.  It is not all or nothing.  It is about a new capability and new flexibility for both company and staff to choose location on any given day or time as needed.

The amount of money saved by reducing office space under lease is insignificant compared to the advantageous impact that remote work has on business operations.  The greatest benefits come from:

  • Increased Flexibility:  Need to expand headcount by 30%?  You can do that with no immediate increase in office footprint by temporarily moving from a 3/day week in-office average to a 2/day week average.  This relieves the pressure of having to sync # of desks with # of staff.
  • Expanded Labor Pool:  If staff only need to access the office occasionally, they will be willing to commute further including some staff who may only visit the company office infrequently or not at all.  This enables more diversity by hiring from locations outside the immediate area, and can include staff in disadvantaged areas, different time zones, or with physical disabilities that make commuting difficult.
  • Digital Transformation:  Reducing bricks and mortar facility costs allows deployment of resources into IT investments that further supports remote capabilities.

Business leaders need to leverage this opportunity to expand upon both the skills and lessons learned over the last year.   Will you help expand your company with new future capabilities or retreat to the past?

Work is what we do, not where we go.

—–

If you’d like to get more insight as to what other firms are planning, take this five question two minute survey:

Note:  The survey is open to firms with 50 or more office staff only!  Please respond only if you fit that criteria.

Office Transformation Survey

Your individual response will be confidential and presentation of all results will be anonymous.  Respondents will get detailed results and we’ll have future posts here discussing general trends.  We appreciate your participation.

As more companies shed excess office space, we’re seeing forward-thinking CFO’s leading the charge. 

In the latest FL Institute of CFO’s survey with over 100 CFO’s of firms over $50MM responding, 43% expect to reduce office expenses in 2021 and 50% expect office costs to be flat.  That places office expense reductions just behind corporate travel and entertainment.  Check out the results:

Here’s why that is significant:  86% of these companies expect revenue growth and 57% expect headcount growth.  That means this reduction is a result of reduced footprint, not a reduction in staff or revenue.

Due to the long term nature of lease obligations, you can also bet that a significant portion of the flat 50% will take advantage of reduction opportunities as the lease terms roll over.

There are four significant drivers behind this reduction all related to an increased remote work strategy:

  • Staff Retention:  74% of employees said they’d like to work from home at least two days a week according to a PwC survey.
  • Expanded Labor Pool:  A partially remote workforce expands access to talent and increases opportunity for diversity.  Amex is among the firms that have specifically stated that this is a goal.
  • Expense Reduction:  There are savings on real estate expenses for the company of course, and remote work also offers savings to the employee for items such as meals, transportation, parking, and dry cleaning.
  • Productivity:  Global Workplace Analytics did a study that estimates annual productivity improvements from less interruptions and commute time from working remotely at just 2/days/week at $4200 per employee.

Smart executives are getting ahead of the curve and leveraging the opportunity.  Are you?

Work is what we do, not where we go.

—–

If you’d like to get more insight as to what other firms are planning, take this five question two minute survey:

Note:  The survey is open to firms with 50 or more office staff only!  Please respond only if you fit that criteria.

Office Transformation Survey

Your individual response will be confidential and presentation of all results will be anonymous.  Respondents will get detailed results and we’ll have future posts here discussing general trends.  We appreciate your participation.

 

Robots are to Warehouses as Zoom is to Office Meetings.  Covid accelerated both the shift to remote work for office work and the shift to robotics for warehouse work.  Robots don’t need social distancing protocols, can’t get sick or spread a virus, and certainly don’t have to home school their kids.

If you’re not yet familiar with the term AMR (Autonomous Mobile Robot), you will be soon.  If you have a distribution business and have not yet embraced this technology, you are behind the curve.

AMRs have arrived and are operating in your local warehouses.  Certainly, they are operating in Amazon’s warehouses.  They’re transforming the time and motion activities of warehouse management.  AMRs use LiDAR to compare what it “sees” to a very precise map of the warehouse.  They can efficiently deliver products to and from wherever they are needed on demand.  Google also has a robotics division focused on warehouse workflow.

The focus on most AMR implementation at this point is on simply assisting humans.  A logical first step for companies that are hand picking products is a robot that moves carts from the pickers to the loading dock.  This allows the pickers to focus on high value tasks and the AMR to handle the more time consuming transport down long isles.  Fetch Robotics is a leader in this technology and offers units that can pick up and move anything from a small cart to a full pallet of product.  

Currently, most AMR’s are simply transporting products from the receiving area to storage or from picker to shipping.  The next evolution will be integration of AMR strategy into warehouse design.  Remember:  You rent warehouse space by the square foot but use it by the cubic foot.

AMR’s need less space to maneuver and they can communicate with each other, optimizing order completion and isle traffic patterns and causing a re-think of pick zones and product placement.

You don’t need to fully integrate AMRs into your facility today.  You can be sure, however, that any new warehouse that you lease today will have AMRs in it before that lease expires.  Smart companies are preparing now for that future.

Work From Home or Work From Office is not an all or nothing premise.  We can do both and also work from the local coffee shop or coworking facility.  Let’s stop the polarized contention that people either hate working from home or love it. 

It doesn’t matter any one individual’s preference.  What matters is that, within the boundaries of our business objectives, both management and staff can have a choice.

Most companies are struggling now with how to determine a remote work policy.  If your firm is one of them, don’t feel alone.  In the latest FL Institute of CFO’s survey, over 70% of firms report that they are in the process of trying to figure it out, while less than 20% have made a decision on how to move forward.  Check out the results:

 

For the firms that have figured it out, we’re seeing customized policies that are each as unique as the product offering of the firm.  Some of the common traits:

  • Varied Schedules – No one size fits all staff positions, tenures, or personal work styles
  • Flexible Locations – Workplace based on events, projects, and changing team priorities
  • Departmental Decision Making – Policies set at local department manager level

Here is one inescapable truth:  Most knowledge workers can effectively Work From Anywhere.  

It is now up to each firm to consider how that understanding will drive their unique company culture, help them to attract and retain staff, and provide them with a competitive advantage.

Work is what we do, not where we go.

—–

If you’d like to get more insight as to what other firms are planning, take this five question two minute survey:

Note:  The survey is open to firms with 50 or more office staff only!  Please respond only if you fit that criteria.

Office Transformation Survey

Your individual response will be confidential and presentation of all results will be anonymous.  Respondents will get detailed results and we’ll have future posts here discussing general trends.  We appreciate your participation.

You pay for warehouse space by the square foot and use it by the cubic foot.

Spalding Sports is the largest producer of basketballs in the world.  They sought our help when they ran out of warehouse space in their Reno west coast distribution center.  At the time, Spalding had 157,000 SQFT of space and estimated that they needed about 36K more for a total of 193K SQFT.  We asked a question:  Why?

Spalding received all of their shipments from the Orient through this facility.  Much of the product arrived in large shipments and was shipped out by the full pallet to major retailer’s distribution centers such as those for Wal-Mart or Dick’s Sporting Goods.  While demand was fairly consistent and steadily growing, they had a fall inventory peak before the holiday season that would render chaos if spent in the existing facility for another year.

We went to Reno to examine the facility.  Spalding had been in that location for about 18 years and had expanded several times into adjoining spaces.  A survey of the space determined that they had 12,500 pallet positions in this 18′ clear building.  Expanding another 36K SQFT, along with some strategic re-racking, would yield another 6,000 positions for approximately 18,500 total.

Remember:  You pay for warehouse space by the square foot and use it by the cubic foot.  Further, some spaces are inherently more efficient than others, and the only true measure of that efficiency is your ability to utilize the space productively.  In other words, what a distribution user really cares about is COST PER PALLET POSITION (C/P). Non-palletized distributors can use Cost/Linear Foot of Storage or similar.

The point is this:  There is a metric that tells the story behind facility efficiency, and it is not Cost/Square Foot.  Any other measure may be interesting, and may have a vague correlation to C/P, although it is the C/P or a similar measure that you should be using to evaluate facilities.  If you have a consultant telling you otherwise, you need a new consultant.

In the Reno market, 30′ clear space was renting for 16% more than the existing 18′ clear space.  So for a 16% premium, you could gain 67% (30/18 – 1) more volume.  In addition these new larger facilities had extra deep bays, eliminating large wasteful staging areas that ran the horizontal length of the narrow-depth existing building.  Spalding determined that they could fit 18,500 pallet positions into 120,000 SQFT.

So instead of needing to increase from 157,000 SQFT to 193,000 SQFT, they could expand by reducing the footprint to 120,000 SQFT.  Even though the Cost/SQFT was higher, the overall rent was 37% less!  Stop using Cost/SQFT to evaluate your distribution space, and realize that less can be more.

If your business is industrial distribution, Amazon is either your biggest customer or your biggest competitor.  

If it’s the former, congratulations on having a great year in 2020.  If it’s the latter, you might feel like you’re playing hide and seek in the jungle with Navy Seal Team 6 using live ammo.  You could survive, but not without a very smart strategy. 

Distribution has just three cost categories:

  1. Real Estate
  2. Labor
  3. Transportation

We put Real Estate first because the decisions that you make there can impact the other two categories significantly.

First and foremost, you need to focus on facility efficiency to reduce labor costs.  

Rule #1:  Maximize the cube.  You rent space by the square foot and use it by the cubic foot.  

The cost of 30’ clear space, on average, runs only 8-9% more than 24’ clear space and you get 33% more cubic storage volume.  Amazon’s standard is either 36’ or 40’ clear, so they have done this math.  You had better do it too.

Rule #2:  Leverage fulfillment systems, conveyors, and robotics to reduce labor costs.  Amazon, Walmart, and the other large distributors are utilizing automated storage and retrieval systems (ASRS) that reduce labor costs by more than 50% and speed delivery by providing uninterrupted 24×365 processing.  You business likely can’t afford a Ferrari-equivalent system, but you better get off the bicycle and start considering a car if you want to keep up.

Rule #3:  Location, Location, Location.  One of the most overlooked opportunities for distribution businesses is to re-evaluate placement of legacy locations.  Smart geographic placement is not about where staff live, it is about where your customers live and both time and costs to reach them.  Autonomous trucking is going to turn this strategy upside down, because companies will no longer be limited by the 11 Hour Interstate Driving Rule.  Amazon is already anticipating this by rapidly focusing on last mile facilities in high population areas that can receive goods from these 24 hour continuous driving rigs and deliver in 1 or 2 hours.  Big news:  By the time your next 5 year lease ends, long distance autonomous trucks will be everywhere.  Will you?

The market is always looking for inefficient processes and opportunities to deliver the same goods or services at lower cost.  If you are providing these goods and services using best practices already, your competitors will look for other low hanging fruit first. Play defense with a Smart Facility Strategy.

Metrics Broken

Companies often tell us that their space use is 180/SQFT (or similar) per person.  Well it almost certainly is not.  And it was not before Covid, either, but their Space Utilization Metric is broken.

They may have laid out their space at 180/SQFT per seat, but their staff level is very likely something less than 100% capacity, and the staff’s utilization is certainly far less than 100% of 8-6 M-F availability.  Again, let’s presume all of our discussion is Post-Covid, whatever that might mean to your business.

Using the example above, let’s suppose the following:

  1. Space is laid out at 180 SQFT/seat
  2. Employees are 82% of full capacity for the seats available
  3. Utilization at any given time is 60% given staff at client sites, traveling, at lunch or other meetings, home sick or working remote.

Before you discount #3 as being too low, I’ll tell you that before Covid many large Fortune 500 companies who did this exercise found that utilization ran close to 50%.  What it will look like in the future, now that everyone knows how to work remotely, is to be determined.

Let’s do the math:  180 SQFT / .82 staff / .60 utilization = 365 SQFT per person

The actual number is often more than double what most execs expect.  Being a CFO, these numbers drive me a little bit crazy.  [As I write this, from the office, my company is currently at 3,364 SQFT per person.  Given, it is the week between Christmas and New Year, but it still makes me wince.]

So here’s how to fix it:  You need to monitor utilization.  There are a number of ways to do that with office proximity sensors, seat sensors, phone apps, and entry card readers.  I recommend anonymous entry/exit door sensors that give you a count of staff in the space at any given time.  Then look at peaks (Monday mid-morning) and valleys (Friday afternoon) and use a business day average to understand how much space you need for your next office lease.

Note:  Your next office lease does not necessarily need to start after your current lease expiration date.  Your landlord, given some incentive of course, might be motivated to tear up that existing lease in favor of a new one now.

 

In three separate incidents that I’ve witnessed, move out condition has become an important and major financial negotiation.  Two of the cases involved clients moving out of a property and debate over the “reasonable wear and tear” condition of the premises on vacating.  The other issue was over a proposed new lease with a rider describing the required condition that the space must be returned – in essence describing most of the preparation that a landlord would typically do to prepare a space for a new tenant.

The underlying issue here is not about the tenant’s treatment of the space, it is about the landlord’s increasing financial pressure to preserve precious cash.

In both of the “move out” circumstances above, the tenants planned and budgeted to:

  • remove all trash from the premises and leave broom clean
  • make sure that the heating, cooling, plumbing, and electrical were in safe and proper working order, and
  • properly repair and restore any unfinished construction left by the removal of their trade fixtures.

After doing so and vacating the premises, both received demand letters from the landlords to perform additional work such as: 

  • power wash warehouse floors and VCT tile,
  • paint walls that had been painted any color other than white,
  • remove improvements that were performed by the landlord for the tenant’s benefit prior to the tenant taking occupancy,
  • replace an HVAC unit that was in “poor condition” (although working), and
  • clean cobwebs from the joists of a 24′ clear warehouse

Notable is that both leases required maintaining the premises in good condition, “excepting reasonable wear and tear”.  In one circumstance the tenant was in the space for ten years, in the other eighteen – so these are not new buildings.  What is “reasonable wear and tear” after eighteen years?  While you’d think that a landlord would be happy to have had such a good paying tenant for such a long run and no vacancy, in this case the landlord is threatening legal action if the tenant doesn’t meet the landlord’s (undefined in the lease) opinion of “reasonable” wear and tear.

The third case is perhaps a pro-active landlord’s way of protecting themselves from such an issue, by creating an addendum that gets inserted as Exhibit D to a lease that describes similar conditions as those above including “Replace or restore any chipped or cracked Formica on cabinetry or countertops”.  At the end of a ten year lease?  You’ve got to be kidding, right?  Didn’t the tenant pay for that cabinetry with their improvement allowance?

The cases described here are not about the tenant damaging the property or not fulfilling reasonable obligations.  The issue is that some landlords are looking for every way to squeeze tenants, and money to simply freshen up and prepare a space for the next tenant is not a cost that they can pass through in operating expenses or amortize in the next tenant’s improvement allowance.  And, perhaps, it is also something that they can easily get passed over in the initial lease negotiations.

How to protect yourself?  Notify your landlord of your intended actions prior to vacating the space.  Do a walk through of the space with the property manager to note any damage or repairs required 30 days prior to vacating and make sure you each sign, date, and keep a copy.  On new leases, be very careful as to what you agree to regarding the return condition of the premises.  Companies are usually so focused on getting into a space that exiting conditions are not often a pressing concern.

That still may not be enough to protect you from an unethical or desperate landlord, although it will certainly help.

commercial lease demising

 

Here’s a simple technique that has saved several dozen of our clients literally millions of dollars in lease costs, and is very applicable to the changes happening in today’s market. We call it the Tape on the Floor Option.

Many years ago, a utility client asked our firm to help them secure 25,000 SQFT of Class A office space. After some discussion, they revealed that they’d only have about a dozen employees to start although expected to ramp up to about 60 people within 18 months. Read more

Office market demand has fallen by more than half over this time just one year ago, and rates have remained somewhat flat. Look at this chart comparing Office Market Rent to Occupancy:
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Source: CoStar Group www.costar.com

There has developed a significant spread between “bid” and “ask”.

Unfortunately for many corporate office tenants, understanding the true Fair Market Rent can be a frustrating experience. There are few comparable lease transactions happening, and the ones that are available are likely projects that either had started before C19 or represent renewals by equally uneducated tenants forced by a pending lease expiration to make a hasty decision.

We saw similar results after the 2007 Financial Crisis. Because of the long term nature of commercial leases, the office market did not bottom out until 19 months later.

Here are three tips if your lease expiration is approaching in 2021 or 2022 and/or you plan to negotiate now to reduce space under lease:

  • Recent Transactions – Understand what recent transactions happened and the circumstances behind them. Most relevant are leases that happened in the last 90 days, and be sure to look at both subleases completed and sublets offered. Be sure to value new leases over renewals which may have been made under “pandemic duress”.
  • Base Year – OpEx numbers have been volatile this year as disinfecting and social distancing procedures have been implemented. Most leases are adjusted to 95% occupancy levels and landlords have been cautious to continue to provide services (even as buildings sat vacant or nearly so) so that tenants could not declare default. Renegotiate to reset the Base Year to 2021.
  • Space Reductions – A lease is a financing technique and, like a mortgage, can in theory be renegotiated at any time. If you plan to reduce space and relocate, sooner is probably better than later in terms of net savings. Your landlord has the ability to substitute any space in the building, and maybe in their portfolio, so consider the benefits of a move to a smaller space now.

Many companies are sitting on their hands waiting until the new year or until the vaccine is widely distributed.  When they do act, there will be a flood of space placed on the market, making negotiations more difficult.  Don’t sit on the sidelines, get this figured out now and act.

Are you delaying making decisions on an approaching lease expiration? Many firms are, especially if they have a plan to simply renew in place. This can be a mistake.

That decision delay is fine as long as you protect your negotiation leverage. How? Delay the renew/relocate decision, but not the renew/relocate actions.

The chart below details how negotiation leverage declines as an expiration date approaches, along with the actions that should occur in a lease negotiation process. The timeline will vary a bit based on the size of the space – large users will need more and smaller firms a bit less. The two largest milestones are the point at which new construction options become unfeasible and when a comfortable relocation becomes unfeasible.

Remember that the point isn’t to necessarily relocate, it is to have the option to relocate. Generally, the more time and more options, the greater the negotiating #leverage. Don’t get caught sitting on your hands.

“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:

  1. Lease Contract Obligations
  2. Space and Floor Plan
  3. 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 either ride it out until expiration or renegotiate early with your existing landlord. 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

By Ed Harris
(Editors Note:  Ed Harris is VP of Commercial Tenant Services, a NYC-based auditing firm that specializes in corporate lease review. We hope you enjoy this guest article.)

Few areas hold as much impact on capital outlay as real estate and leasehold expenses. Ensuring that your company is not overpaying is integral to fiscal management.

  1. Significant Jumps in Operating Expenses / Additional Rent
    Performing a simple trend analysis of your year-to-year operating expense obligation is a must. And while inflationary and market forces generally create an escalating building operating expense profile, when you see a marked jump in expenses issued to you, a red flag should rise. Causes of significant jumps might include new and potentially lease impermissible capital projects, new expense categories not reflected in your base year, new contracts or vendor changes and/or related party issues, and newly increased or above standard services which are not reflected in your base year.
  2. Change in Property Ownership / Property Manager
    A change in property ownership or property management should always trigger a lease audit. Property management changes create a very real risk of affecting accounting category integrity which is integral to an apples-to-apples comparison to your base year level. Management fee levels and composition, related party vendors, and changing service levels are also common building operating expense issues when a building changing ownership or management. Another potential trap fall in a building transaction is the tenant estoppel which, if not carefully worded, has the potential to sign away rights or leverage. Finally, once a building changes hand, future audit finds and recoveries may become complicated should overcharges be identified in years under previous ownership.
  3. Building Undergoing Capital Improvements or Renovations
    If you are walking into your building and notice construction – audit your landlord. Renovations and capital projects may be subject to your lease operating expenses exclusions, and every project should be audited for permissibility under your lease. And while you are most likely obligated to reimburse the landlord for a true building operating cost, you probably are not obligated to reimburse your landlord for increasing the value of his/her building if it does not reduce building operating costs in the future. And if your building had undergone renovations and/or capital improvements in past and unaudited years, it may not be too late. Those costs were most likely amortized across future years, and there may still be an opportunity for avoid ongoing expenses if they prove to be impermissible per your lease exclusions.
  4. Your Lease is Commencing / Expiring
    Perhaps the most valuable times to have a lease audit performed are at the commencement and expiration of your lease. If you occupy under a base year lease, the valuation of your base year will have material impact on your leasehold expenses throughout the term of the lease. It is in your direct interest to both validate all charges in Year One, and to validate expense levels so as to not undervalue your base year. Likewise, lease audits should always be performed as a standard practice at any lease expiration. Not only might you lose rights to recoup any overcharges after vacating the premises (audit windows), you may lose significant leverages after your move. Lease audits and the potential uncovering of over- or mischarges may also have a material impact on any lease renewal negotiations and construction of lease amendment/renewal language.
  5. Sizable Shifts in Building Occupancy Levels
    Accounting for accurate building occupancy levels is integral to an accurate gross up methodology and can have enormous implications to your operating expenses obligation. This can be significantly magnified vis-à-vis fixed versus variable occupancy-level driven expenses should the vacancy rate in your building be sizable. And of course it directly benefits the fiscally conscious tenant to ensure that occupancy shifts are accurately reflected within a given expense period.
  6. No or Limited Backup Supplied to Annual Reconciliation Statements
    Just as you would not accept your credit card statements if they did not itemize your charges, accepting an annual reconciliation on face value is fiscally unwise. Yearend reconciliations can carry significant and lease term long financial impact – particularly if your lease terms include caps or index-driven escalators. And any failure to timely challenge a landlord’s computations and/or inclusions may forfeit your rights thereafter per potential audit windows as discussed above. Accepting a rudimentary reconciliation, even one broken down to expenses per billing category is to trust your company’s finances to an outside party with a vested interest in maximizing its profits. Whenever an annual reconciliation crosses your real estate department’s desk without sufficient back up to verify expenses and calculations, a lease audit should automatically be triggered.
  7. Building or Landlord is in Financial Straits
    While it might not always be obvious, it is in a tenant’s best interests to periodically inquire into a building and its owner’s financial wellbeing. These are difficult financial times, and few sectors have been hit as hard as commercial real estate. Commercial Tenant Services (CTS) has uncovered multiple examples of landlords in difficult financial straits materially overcharging their tenants. And while we would never suggest that such a situation directly underlies the overcharge in any specific example, the coinciding of the two – a landlord in financial distress and overcharges to its tenants – can be a recurring theme.

It is important to remember that auditing your landlord issued expenses is your right. It is sound fiscal practice and required compliance protocol in many of the most efficiently run companies in the North American markets. Lease audit has become commonplace, and chances are your landlord has been audited by its tenants many times before your inquiry. Nowadays, landlords expect to be lease audited and have generally already prepared for your call.

Edward Harris is the co-founder of Commercial Tenant Services and has over twenty-five years of real estate finance and lease audit experience. Mr. Harris holds degrees in physics and engineering from Columbia University, and an MBA joint degree in Real Estate Finance and Operations Research from the Graduate School of Business at Columbia University.

The role of office space to accomplish daily work has changed forever.  That is one thing of which we can be certain. It is undeniable that for most companies, we have learned through field testing that staff can work remotely for some period of time with no loss in productivity and remote work can offer attractive personal benefits to the staff.

Return on Investment (ROI) is a measurement of the value that is achieved from the results of any investment. It is most often calculated based on a Cash Return / Cash Investment formula, although there are other objectives of investments such as goals for sustainability, staff satisfaction and retention, diversity, community service and goodwill.

Office space will play an important role for the vast majority of many companies for years to come. There is no denying that corporate offices provide advantages besides simply housing staff: culture, brand statement, identity. They are also a necessity for staff that do not have good work from home settings, such as those with small children at home or inferior connectivity.  It just probably will not continue to have the same “everyone in the office from 9 to 5 Monday – Friday” role that has become a rote habit for most of us.

Check out this chart from a poll of over 100 CFO’s from companies with greater than $50 Million in annual revenue. Approximately 75% said that going forward, staff will likely be working from home at least one day per week. Just under 10% said that staff can WFH 5 days/week.

 

Office space is an asset, a tool that a company can use to achieve objectives. Imagine seats in an office used the way an airline utilizes airplanes. A plane provides the highest ROI when it is in continual use and fully occupied. If the planes on that airline’s daily route are consistently only half full, they will likely not provide enough ROI, especially as compared to full flights operated by competitors. The airline needs to reduce the amount of flights flying that route, and that will reduce the number of airplanes that it needs.

So it is with office space. If the seats in the office are consistently half full, they will not provide the ROI that they had in the past, especially as compared to more efficient offices operated by competitors.

It is the CFO’s job to maximize ROI. The solution is to rethink how the company uses office space. It is a complex process, although there is a simple methodology to get it done. We’ll discuss it in our next post: Evaluating Your Future Office

In case you missed it, the previous post was: Where Do We Go From Here?

#PostPandemicOffice

We want to hear from you: How will Work From Home change how your firm uses office space? 

Newton’s First Law of Inertia:  An object at rest tends to stay at rest.

A Landlord’s First Law of Inertia:  A tenant in place is likely to renew.

How likely?  It is hard to find precise data although many Real Estate Investment Trusts report that in excess of 80% of their commercial portfolios renew.  With those kind of odds, most landlords will presume a low risk of vacancy at renewal time and in-place tenants will be offered less favorable rental terms than a new tenant coming in off the street.

Does a renewing tenant often pay more?  Absolutely. These tenants justify it with a number of flawed justifications:

Reason:  “We’re still paying less than the Landlord’s “asking” price.”
Flaw:  Nobody will end up paying the “asking” price.  The only amount that matters is the true market rate, adjusted for concessions such as free rent and improvement allowances.

Reason:  “It would cost a lot to move.”
Flaw:  It’s probably less than you think, and many firms never actually do the homework to determine the real cost.  Further, many prospective landlords will either provide a move allowance and/or a free rent period equal to or greater than these costs.

Reason:  “It is a hassle to move and a bad time due to limited staff resources.”
Flaw:  The productivity gains that are typically accomplished by improved workspace and layout often reduce facility costs 15-20% or more, and most tasks can be outsourced to relocation firms that specialize in corporate relocations thereby requiring very little staff involvement.

There is a term for this flawed mindset, Captive Tenant Syndrome, which I’ll cover in my next post.  Until then, don’t be caught sitting on your hands.

Nearly every office worker worldwide has taken part in a forced remote work exercise. Incredibly and perhaps surprisingly, we’ve passed with flying colors and demonstrated our ability to adapt to a non-office environment.

The experiment is not over. We’ve learned some things, but not everything.

We’re finding a significant portion of companies are wrestling with the long term implication of Work From Home (WFH). The challenge is that everyone has an opinion and they are not consistent – most staff love WFH, some hate it, and productivity results vary by department, tenure, and even personality type. Making a blanket policy “Anyone can work from home up to X days/week” will not be the right way to manage it.

For companies, here is the important consideration: Your competition will offer it. Some prospective hires will value WFH over salary. The competition will be able to reduce their operating expenses if they’re using less office space. Your staff may feel micromanaged by being expected to clock in 8-5 M-F when that is no longer the social norm.

Everyone has an opinion. Workers think the solution is whatever their personal preferences may be. Landlords and the global real estate firms that represent them insist that offices will remain vital. The CEO’s of many large companies (Morgan Stanley, Twitter, PayPal, Nielsen, Barclays) are either declaring their obsolescence or questioning the need for the notion of a daily M-F workplace.

Here’s the answer: There is no single answer. Like a custom tailored suit, your firm will need a solution that fits your unique work and culture. The issue is complex.

Over the next few weeks, we are going to interview top executives, real estate industry experts, and cultural thought leaders to understand “Where do we go from here?”

Next up: “The Office is Not Dead. The ROI Has Changed.

Follow me on LinkedIn or email me wb@avocatgroup.com with subject #PostPandemicOffice and we’ll make sure you get notified of new posts on this topic.

If you go into the grocer and purchase, for example, three pounds of salmon, you can be relatively certain that you now possess three pounds of salmon.  However, if you lease 30,000 SQFT of space in an office building, can you be relatively certain that you possess 30,000 SQFT?  Absolutely not.

Here’s why:
To start, there is the concept of “rentable” and “usable” space.  In summary, “usable space” is the space actually contained within your walls, and “rentable space” is the same number plus your proportionate share of all common elements such as elevator lobbies, bathrooms, fire stairs, and mechanical rooms.  If you lease half of a floor, the rentable calculation would apportion half of those elements for your use and add that amount to your usable calculation.

The American National Standards Industry (ANSI) has created very detailed specifications on how to create accurate measurements.  For example, dimensions are taken from the interior of glass windows to the mid-point of the wall for any walls shared in common with other tenants, etc.  This standard has been adopted by The Building Owners and Managers Association (BOMA) and some landlords agree to adopt these standards.  Fair enough.

But there is another scenario which can cost you thousands, perhaps even tens or hundreds of thousands of dollars over the term of your occupancy:  Phantom Space.  This is when either the usable or the rentable numbers or both are inflated above the actual or proper numbers.  Sometimes this occurs because the Landlord or their representatives choose to ignore the ANSI/BOMA standards in favor of their own.  These may be based on a measurement of the landlord’s choosing (the drip line of the roof for example) or could be, well, anything that they decide which may or may not be based on a real metric.  Illegal?  No, because all aspects of a lease are negotiable – including the basis for measurement – and the landlords that do this almost certainly have very smart attorneys who put language in the lease that will indemnify them and prevent recalculation to any reality-based standards.

Do you think this is a low risk concern?  A May, 2014 article in the Wall Street Journal details how the MetLife Building has somehow grown from it’s original 2.4M SQFT in 1979 to 3M SQFT today.  Indeed, NYC is notorious for floor measurements that have in some cases exceeded the outside measurement of the actual building.  Many real estate firms, including one quoted in the article that purports to represent tenants, turn a blind eye to the practice and shrug it off with the attitude, “It’s an important enough market that they (the Landlords) can make their own rules”.

How do you protect yourself?  Take these precautions:

1. Insist that measurements and rentable adjustments be done in accordance with ANSI/BOMA standards.  Note that The International Property Measurement Standards Coalition mentioned in the article is working towards a global standards, although it will likely be years before it is adopted in any significant way – and more likely never by unscrupulous landlords.

2. Hire your own architect, rather than relying on the Landlord’s architect.  The architect, like most professionals, has a fiduciary responsibility to their client.  Make sure that you have someone on whom you can rely for accurate and honest representations.

3. Include language in the Lease document that affirms measurement to to ANSI standards and allows for adjustment if a discrepancy is discovered.

4. Be certain that you have a tenant representative that insists on the items above, manages the transaction to meet ANSI compliance, and will not passively accept the non-conforming measurements of unscrupulous landlords.

When it comes to Phantom Space, Less is More.

There are many hurdles for getting staff back to work.  Here’s our LeasingBetter C19 Workplace Checklist of best practices to help simplify your process.   Feel free to download and/or print it out if you find it useful.

Also be sure to keep checking the CDC Employer Information for Office Buildings for the most recent updates.

We are working with a multi-location user with several leases in an unnecessarily precarious state of month-to-month lease term. As they are finding, this situation leaves them extremely vulnerable…more so than they imagined.

In Florida this month-to-month tenancy is a tenancy at will which is cancelable by giving “—not less than fifteen (15) days notice prior to the end of any monthly period.”  So rather than requiring a notice period equal to the rental period, that is, one month, as little as fifteen (15) days notice is all that is necessary.

Consider a month-to-month holdover with rent paid in advance for the month of January. The landlord could terminate this tenancy at will in Florida with a notice delivered on January 16th. (See Florida Statutes Sections 83.02-83.03).

In the case of our client, they require unique tenant improvements and industry  permitting prior to occupancy in a new location. With only weeks to vacate and occupy a new location, they would need to close their doors for up to 3 months.

The good news is that this situation is easily avoidable. Have a real estate expert take a look at any leases expiring within the next 12-24 months to fully understand your timing and requirements should you decide to vacate your space. At minimum, a single page addendum should be permissible requiring either party to provide at least 90 or 180 days notice in a month-to-month or holdover situation.

As originally posted by Casey Bourque on LinkedIn

It’s only when the tide goes out that you learn who has been swimming naked. – Warren Buffett

As I write this, COVID-19 has about 80,800 confirmed cases worldwide and 1,323 in the US. The operative word there is “confirmed” since by reason there will be many thousands that are unconfirmed and undetected. The virus spreads exponentially so, and I don’t mean to sound like a pessimist, it will eventually arrive like a tsunami.

Perhaps because my entire career has been focused on business continuity, I’d suggest that we personally look at the best case, worst case, and develop a probable case plan with some contingencies.

Best case: The government and public implement containment procedures that slow the spread, the most susceptible are substantially protected with extra care, the warm weather calms the spread as it does with most traditional flu seasons, and perhaps we even develop a vaccine or at least get enough test kits available so that every clinic and drugstore can administer them.

Worst case: The virus spreads like wildfire (think Stephen King’s The Stand) and continually mutates faster than vaccines can be developed becoming increasingly lethal.

Probable case: A combination of the above, hopefully and likely trending to the best case. It will probably come swiftly and mostly go, and life will go on. It will have a horrific death toll and cause all types of economic turmoil. It will be a sad and difficult memory, although hopefully the lessons learned will help future generations (that sounds even to me like I expect to be gone, which I don’t) be better prepared for such events.

One of my favorite clients has been PSS World Medical, who a few years ago became part of McKesson. For a couple of decades they were the largest distributor of medical supplies to doctor’s offices in America, and built their business on their FedEx type motto “Next day delivery of medical supplies”. We’ve completed over 200 leases for them and dozens of moves, many of them quite major consolidations of large distribution facilities.

And like FedEx, they had urgent medical supplies that “absolutely, positively” had to be delivered the next day. Lives could depend on it. And so they were, and the distribution system went on every day, year in and year out, regardless of what issues, holidays, natural disasters, or other obstacles appeared. And whatever disaster happened, and there have been a few, life eventually returned to normal.

To that point, especially given the current situation, medical products need to be delivered today and tomorrow and next week. Health workers, who will be revered like the firefighters after 9/11, will need to put themselves at risk. Those of us who are able need to take whatever precautions we can to slow the transmission. But we won’t quickly stop it.

This event, from a business perspective (and I realize business is not the most critical concern at the moment although it will be after the health issue is mostly contained) will likely also arrive like a financial tsunami for both individuals and any businesses that are highly leveraged and/or without a strong financial cushion. Per Warren Buffett’s quote, we’re going to find out which ones were swimming naked. Many thinly capitalized businesses will default on invoices and rent payments. The spigot of revenue is going to completely shut off at least short term for many, which will become a trickle down problem for everyone that does business with them.

Statistically, I fall in the unfavorable survival category based on age for both my family and our business. And while I and you fully expect to – and hopefully will – survive, we owe it to both our families and our businesses to provide continuity during this tough time and keep everything buttoned up so that life can go on as it did before once this all ends. And it will end. And the world will go on as it did before.

 

The City of London realized, shortly after WWII that they would need a new airport, now known as Heathrow.   The job of determining the location was entrusted to Alfred Critchley, a successful businessman.

Consider the many criteria that must be considered when choosing the location for a major airport: Transportation access, proximity to the population, geotechnical suitability, environmental impact, utility infrastructure, land acquisition costs, many others. Read more

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Almost all options are written with the assumption that rates will climb forever upwards.  That just doesn’t always happen, and even when it does rents may not keep the steady pace of the 3% (or whatever) specified increase compounded over the lease term.  Some options are literally not worth the paper they we’re written on.  However, there is another reason why exercising an option may not be your best strategy.

Here’s why: Read more

 

 

One of the great embarrassments to the FL Economic Development folks, who try to lure businesses to relocate to sunny Florida, is that we are the only state to apply sales tax to commercial real estate leases.  (Note that some other states have excise or gross receipts tax that may count revenue from leases, but no others have a specific sales tax.) 

Fortunately, there is a method for businesses to get a 100% absolute dollar for dollar tax credit:  Simply make a charitable donation to the FL Tax Credit Scholarship program. Companies can set up a monthly contribution that is equal to the tax (5.7% of commercial rents including OpEx paid directly to the Landlord).  These are collected by a qualified administrator which you can access from this link: Step Up for Students

It’s a simple concept, with a powerful impact:  Each $125,000 in annual lease obligation produces a sales tax obligation of $7,125 – enough to fund one full scholarship for a low-income child.

So while there is no real option to avoid the expenditure, it is a win-win positive charitable impact by directing the tax  toward K-12 private school tuition for low income kids. It also helps your firm to make a positive impact on the local community.  And who knows? The kids you educate today just might be your future workforce.

Step Up for Students is the Florida Institute of CFO’s (fiCFO) Statewide Charity of Choice and they administer the program. They’ll also help to educate your landlord(s) to make the setup as easy as possible. The process is really quite easy.  Here’s the link to get started.

The state imposes a cap on the statewide contributions, so the earlier that you register your intent, the better your chances of being approved.  You can stop or back out of future contributions at any time. It is a no-risk, no-cost way to benefit under-privileged kids and make a positive impact on your local community.  Go do some good.