It’s been quite a run, hasn’t it? Higher and higher go lease costs, but don’t worry, sales are up too! EBIDTA will be fine…just get me the space. Rock & Roll!
But then suddenly, the party is over. “You don’t have to go home, but you can’t stay here…..” booms over the speakers.
Wait-why? Well….the sales guys didn’t get the order. Or maybe the board looked at the real estate proposal and uttered words I can’t use here. Perhaps there is uncertainty from the bank or M&A is in your future.
There are a million scenarios that can occur that would dump water on our real estate deals. I know, it’s no fun, but as Mom would say, she’s proud of you anyway.
Plop Plop Fizz Fizz
While there’s no perfect solution (this IS a hangover and it’s going to hurt a bit), let me suggest three quick strikes that can help control cost or mitigate increases.
(1) Forward Sub
Many companies are struggling in tight markets, which means many real estate directors are taking more space than they need at the moment. This results in what the industry calls “shadow space.” Also, the process of looking for space that is not officially on the market yet is called searching for a “forward vacancy. “
Now that you are up on the jargon, here’s the idea: approach suppliers, sister companies, friends at the club and work your broker to find these pockets of shadow space.
Perhaps you can create a “forward sublease” from a supplier, for example. So, you take their extra-unused space for a period of time. The supplier’s CFO would be happy to have the dollars and you can park your people for 12-18 months till we see how this project’s really going to go. Oh, and you can get a discount to market in the sublease and perhaps even furniture.
(2) Do Si Do Your Partner Round
Just as picking your significant other is really, really important, so is picking your landlord. Think about it — your office lease can last longer than many marriages (sadly).
So, the first success strategy is to complete some due diligence. Make sure the landlord appears to be well funded, progressive, and holds assets for a reasonable length of time. In today’s world of social media, a search on Twitter or other venues will tell you a lot. Now, not all complaining Tweets are valid, but worth looking into.
Secondly, I personally have seen the tenant community get weak on negotiating operating expenses. I know, it’s like reading a tire catalog. But you will thank me in 24 months when those pass throughs start to hit.
In most US class A office leases, operating expenses can comprise as much as 50% of the total rent. Work with your broker and real estate attorney and invest time in this provision. You may be shocked at what landlords are trying to pay on your dime.
(3) Density with Dignity
I know, it’s all the rage. Let’s cram ‘em in tight. But I’m actually not a fan of putting people who are in the office 80% of the time too close together.
However, the sales guys and even mid and senior level executives are gone a lot. The industry has a fancy term for how often you are in the office: your “utilization rate.”
What we are realizing is we are paying for the space used or not. The AC runs, the lights burn, the rent rolls. It’s kind of like leaving your car running parked in your driveway overnight – Ack!
Determine which parts of your workforce have mobile proclivities and work with one of the major real estate brokers to develop a flexible workplace. A workplace strategist says to newly liberated executives “I didn’t take away your office, I gave you a building.” You really can and do work anywhere – let’s prove it.
Here’s a bit of math to help you with this approach: 1 executive in 200 feet at $50 per square foot rent cost $10,000 a year for just the office.
Hydrate, Hydrate, Hydrate
Hang in there friends. It’s a tough time to be a real estate director, CFO or tenant rep broker. If you have other creative ideas on how to reduce or mitigate costs, I’d love to hear from you.
Until then, take two aspirin and call me in the morning.