Getting through a recession demands strategy, agility, and resolve.
In our last article, Recessions and the office market, we reviewed how office real estate has become more vulnerable to recessions with the global economic shift from a manufacturing bias to a services bias. Now, we look at how to remove some risks from your portfolio to come through the Covid-19 recession on top.
Getting through a recession demands a multi-faceted strategy which may involve cost-cutting, finding new income streams, reorganising, managing threats, and careful planning in every area of the business. It also takes a balance of firm resolve along with a readiness to continually adapt.
In the last recession, according to Bain & Co, “Winners excelled in four areas: early cost restructuring, financial discipline, aggressive commercial plays and proactive M&A.” Our specific interest is your real estate portfolio, and how you can manage it to deliver the best results for your business during the short-term as well as planning for the longer term.
To act, or not to act
Real estate executives around the world have been wondering how to adapt their portfolio in response to two primary factors: (1) pressure on profitability, if revenues are hit by the pandemic, and (2) the number of people likely to work remotely long-term. They’re juggling various options like moving out of the CBD, shifting to a smaller space, repurposing or subletting existing space, or going for a distributed model.
The idea of delivering a rapid cost-saving strategy to your board may be appealing, but no one wants to backtrack at a later date. While many companies are seeing a chance to divest themselves of offices, floors, wings or even buildings, getting rid of any of these entirely may flip a short-term solution into a long-term problem, should circumstances change.
Before you make a significant decision to permanently shed some space, consider ways you can better use your space:
Extending or creating new employee amenities within the space
Reorganising your space to make it more appealing for people to come into the office – by creating a videoconferencing zone, focus areas, innovation spaces, bigger kitchen and dining areas, etc.
If your lease permits, sub-leasing excess space on a short-term/flexi basis
Opening the space for use as a business hub for clients, university students, as a spin-out space or an incubation centre, or even for community use.
Investing in real estate, a safe bet?
Interest rates were low enough before Covid-19, but now they’ve fallen even further. Despite the peaks and troughs of the recession, and projects stalled by lockdowns, commercial property remains popular. As Dirk Beller, Head of Commercial DACHCz at Engel & Völkers, points out: "We are currently in a crisis [but] overall, investing in real estate remains a safe investment.”
Governments too are investing, creating a ripple effect in terms of new commercial centres. According to Simon Hope, Head of Global Capital Markets at Savills in London, “There seems to be general consensus across G8 governments… to build their way out of this downturn, turning on a tap of capital for infrastructure projects. This generally bodes well for the real estate industry in the long-term as it potentially creates more assets to invest in as well as reducing unemployment rates.”
What does this mean for corporate real estate executives today?
Look for incentives for moving into newly created business centres (like subsidised rents, reduced property taxes and business tax breaks)
Consider moving to a distributed model using new-build space in up and coming areas (and less expensive) or where there’s access to a new talent pool
Lower rents may be available for a while, particularly if new-builds add more space than the market really needs right now. Even if you’re not moving into a new-build yourself, you could snap up high-quality space being vacated by a company that is – at a bargain price.
Pilot your new spaces
There’s so much uncertainty right now around what kind of space you’ll need, for how many people, and when and how often. For example, offices with ranks of workstations may not work in our new working world where fewer people come in, and when they do, they’ll need to be socially distanced.
It’s vital to create an office that people will want to come back to. This could mean using spaces differently to focus on in-person activities like social aspects, collaboration, innovation and problem-solving, for example. Leveraging amenities and providing additional benefits may help as well.
Big changes like this represent a huge investment, perhaps where headquarters or new ways-of-working rollouts are on the cards. Consider trialing your offices using a pilot space to find out what works best for your staff and business needs. This allows you to start taking the steps now, before plunging into a major investment.
Short-term de-risking checklist
These helpful tips can set your way to take action in the short-term while you develop your longer-term plan:
Review your lease(s) to see if you can renegotiate – on rent, space, flexibility and services
Look for loop holes that could leave you exposed; what are your notice periods; are you fulfilling any contractual requirements; can you leave spaces empty, and if so under what conditions?
See if you can avoid locking into new contracts by consolidating your needs and flexing some current space instead
Double check your insurance policy to make sure you’re protected from weather damage and crime if you’re leaving spaces unoccupied.
Make sure you have back-up options if you shed space and suddenly need more.
“Some of the greatest troubles for commercial real estate firms during the last recession were the legal headaches… Organizations that hadn’t seriously considered and buttoned up their areas of liability were suddenly on the hook for millions of dollars.” – Crowdstreet.com
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