Corporate Real Estate Consolidation and Subleasing: Pros and Cons
For over a year, the pandemic has forced corporations worldwide to reimagine how they do business. For corporate real estate leaders, this meant striving to generate income and prevent revenue loss in a fragile market. Now, workplaces are finally beginning to reopen their doors, but it’s clear the hybrid workplace is here to stay.
While only 18% of companies actually plan to reduce corporate real estate according to the Verdantix Future of the Workplace survey, 98% of CRE leaders said they anticipated their organizations would be less dependent on the office in the future, according to the CBRE Future of the Office survey. As a result, many are considering subleasing or consolidating to recoup costs.
After all, corporate real estate leases can extend as much as 20 years and offer little room to negotiate. Before you pursue these strategies, here are a few important points to consider.
Consolidating and subleasing for economic recovery
With or without a pandemic, companies aren’t subleasing in an attempt to make money or take advantage of the market. Subleasing surplus corporate real estate is simply a response to changes in business. The immediate goal is to recover the rent obligation and mitigate financial risks. Additionally, consolidating office space to save revenue is another way for companies to deal with unused square footage.
In the second and third quarters of 2020, corporate tenants offered a record 42 million square feet of corporate real estate space for sublease, according to Connected Real Estate Magazine. But what was born of necessity is quickly becoming the norm in many companies - especially those who have chosen to continue their remote work policies indefinitely. In the coming months, as we gain control of the pandemic, corporate real estate leaders are weighing their options.
3 signs you should consolidate corporate real estate
Companies occupying multiple offices are wrestling with what to do with unused space, and many have chosen to consolidate by closing at least one location. This improves revenue and can bring other benefits as well - including more efficient operations.
Here are three signs you should consider consolidating office space.
- You had opportunities to improve space utilization before the pandemic. Is your company paying for square footage that’s sitting vacant? Even before the pandemic, many large organizations were paying to heat, cool, and manage offices that had an average space utilization of only 40-60%. If this sounds familiar, you can achieve considerable savings with corporate real estate consolidation. Even if your entire workforce returns, it’s unlikely you’ll need more space than you had before.
If you suspect you had underutilized real estate but you’re not sure, consider implementing occupancy sensors as you reopen your workplace. This will give you accurate data on peak occupancy, average occupancy, and how employees actually use your office space. You might discover you can reduce the number of desks or consolidate two half-empty floors into one.
- Employees don’t want to return to the office full time. Nearly one-third of working professionals are willing to quit their jobs rather than give up working remotely, according to a survey by LiveCareer. Demanding everyone return five days a week could cause some of your best and brightest to look for other opportunities. Of course, many employees still want access to office space so they can collaborate with their colleagues in person, meet clients, and find a quiet place to concentrate. By consolidating, you can retain top talent without paying for more space than you need.
- You’ve already invested heavily in remote work technology. For many enterprises, the technology to facilitate company-wide remote work wasn’t in place at the start of the pandemic. They made significant investments in the technology and processes necessary to stay fully operational. If this arrangement is working well, why not consolidate some of your corporate real estate and recoup a portion of your investment?
It’s worth noting that consolidating isn’t an ideal solution for every organization. If you are planning to bring most employees back into the office, they’ll need plenty of space to maintain an appropriate physical distance.
Beyond safety concerns, you also need to consider employees’ comfort and overall experience. While the average office space per employee has been steadily shrinking over the past decade, the pandemic caused many workplace leaders to rethink office design. Rather than focusing on maximizing occupancy at all costs, they are more concerned about providing the right types of spaces for employees to do their best work.
The pros and cons of subleasing
The future for corporate real estate leasing isn’t nearly as dire as some analysts predict it will be for retail and hospitality entities. CRE tenants continue to pay rent, and rental rates have remained steady. However, a significant portion of office space is still sitting empty.
There are a few pros and cons to consider when determining what to do with this unused space.
Pros of subleasing unused corporate real estate
Sublease contracts are often much simpler and more straightforward than other commercial leases. This makes them easier to manage and offers more flexibility for the original tenant. Companies can also do their part to reduce their carbon footprint by repurposing unused square footage.
Another one of the advantages of subleasing is a quick transfer of partial rights. Subleases prevent companies from breaking their contractual agreement and prevents loss of revenue due to penalties and fees.
Cons of subleasing unused office space
Subleasing isn’t always possible depending on your company’s location. Some zoning laws prevent businesses from leasing space in office buildings. If you decide to sublease and haven’t consulted the building’s zoning laws, you may face legal issues. Of course, subleasing also brings additional management responsibilities.
You’ll need to keep track of who is coming into the building each day, what rooms and equipment they’re using, and which organization is covering that cost.
And there’s always a risk of subtenants skipping out on their obligation to pay or leaving you to cover damages.
How one company successfully manages multiple tenants with workplace software
While consolidating or subleasing corporate real estate requires additional planning, it can open the doors for incredible opportunities.
When pharmaceutical company Vertex consolidated their office space into a large building in downtown Boston, they began renting out space and lab equipment to small biotech firms. This saved money while fostering innovation within their industry.
The company’s director of global operations manages tenant billing with iOFFICE’s integrated workplace management software (IWMS).
Tenants can easily find and reserve parking spaces, rooms or equipment, and Vertex runs reports of utilization to manage chargebacks. Aside from streamlining billing, it also helps tenants easily navigate their environment.
No matter how you decide to better align your real estate with demand, invest in user-friendly technology that will help you manage it and help tenants use it.
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iOFFICE | Corporate Real Estate Management For A Changing Landscape: The future of real estate management belongs to corporate real estate leaders who are flexible. But you can only seize these opportunities if you have full visibility into how occupants are using your spaces — and how your game plan impacts your portfolio. www.iofficecorp.com
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