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.

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

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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

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.

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.

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.

 

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.

 

 

 

Your company has multiple leases for office or industrial space. You’re represented by a Big 5 Landlord Rep firm, and it’s not working out so well. You’re under pressure to improve it, along with a hundred other things that need improved. So you plan to create an RFP for RE services. I get it. Read more

 

When choosing professional services, there exists an old adage that the largest providers are the safe bets. “Nobody ever got fired for hiring IBM” was the well known saying implying that a large company offered at least the reasonable perception of reduced risk over smaller firms. In regards to technology consulting, those advantages may have been real or simply perceived. When choosing commercial real estate advisors however, often the risk increases significantly as the size of the provider firm increases.

Read more