John Hampton, Senior Vice President, Solutions Development, Jones Lang LaSalle (Aug/Sep 09)
With the global recession in full swing, I asked several executives I know to comment on the cost of commercial real estate in the current business environment. Not surprisingly, their remarks were colored with a range of emotions from anger to resignation.
"We signed a 10-year lease to secure a reasonable price when rates were at their peak," says the COO of a global consulting firm. "Now we are locked in for eight more years, while sales are about 60 percent of what they were two years ago. With revenues down, we've had to let go of some good people, so we are paying for empty offices."
The executive vice president of a well-known technology firm laments, "I have three people working full time to sublet unused office space at several sites. This will recoup some of our losses, but not all, because rental markets have softened so much."
Finally, an executive at a national investment company offers his perspective: "One of our greatest ongoing challenges is matching our real estate needs with the organization's ever-changing employee base. This has resulted in a large amount of under-utilized space."
What interested me most about their remarks wasn't the fact that many executives feel victimized by the economic crisis. Certainly, every business is dealing with some uncomfortable choices as a result of the recession. What surprised me was the notion that there are no alternative business models with regard to leasing office space - that being "locked in" to a conventional, multiyear lease is the only game in town. Fortunately, for the thousands of enterprises that need to position themselves for growth on a shrinking budget, several viable options exist for reducing facilities expenses and capital expenditures while alleviating the burden of underutilized office space.
Align Real Estate with Business Requirements
One of the great lessons learned from a recession is that markets rise and fall unpredictably, driven by forces beyond our control. Having weathered a few downturns personally, my mantra is "establish and maintain optimum enterprise agility." To stay in the race, we must be able to quickly adapt to change: changes in the marketplace, changes in client needs, new economic realities.
This need for agility has given rise to a number of innovative workplace models that are saving companies 60 to 80 percent on facilities costs while aligning their expenses more closely with business demands. In lieu of long-term lease agreements that can sink the bottom line, many corporations are adopting blended real estate strategies that address the requirements of an increasingly mobile and distributed work force while maximizing productivity, professionalism, and service quality.
For example, the global consulting firm whose COO is quoted above invested heavily in office space, furniture, technology, and administrative staff, some of which the organization no longer needs but is paying for anyway. Overhead expenses now limit the company's ability to invest in business development, creating a "catch 22" situation. Going forward, the organization could choose a more cost-effective option: transitioning to a flexible network of workplaces with onsite administrative and technical support, and paying only for the space it uses for as long as business dictates. With more flexible agreements, the company will be able to scale up or down on short notice, while conserving capital for critical operations. Imagine, for example, having a workplace "passport" that provides on-demand access to office facilities around the world. Each location would offer a state-of-the-art, Fortune 500 corporate setting complete with existing infrastructure for Internet, telephony, and video communications.