As office leases come up for renewal, how should you plan for how much space to hold onto?
It’s a question made all the more complicated by the uncertainty around how current hybrid arrangements will evolve. In Charter’s recent survey of 507 business leaders, 63% said their organizations had solved the question of workplace location, but the majority weren’t confident that their decision would hold going forward.
It’s also one that’s built on a premise worth interrogating, says Mai Ton, Charter’s CHRO-in-residence. She suggests asking something else first:
Are there better places to spend that money?
The office is just one component of the employee experience, notes Ton, and may not always be the best use of funds in making that experience a positive one. “There are a lot of things you can do for employees that would go further than just giving them real estate to go back in the office to work harder,” she says.
One alternative strategy could be holding on to just enough square feet to give people “a change of scenery,” she suggests, with a few collaborative spaces to use as needed, diverting some of the cost savings to things such as mental-health app subscriptions and company offsites that emphasize fun and connection. “The more progressive you can get with taking care of your employees,” Ton says, “it will just drive longer-term loyalties.”
Some other considerations to help guide your decision-making:
What can you negotiate?
“I cannot imagine a better time to negotiate a lease, from the tenant's perspective, than today,” says Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia’s Graduate School of Business. That extends to the length of the lease as well, meaning that even with some degree of uncertainty about what the future holds, dropping down to a smaller office footprint may be less of a high-stakes gamble.
Does an HQ still fit your needs?
Think about what you want the purpose of your office to be. If it’s primarily to meet employee desire for another place to go, as Ton noted, or to foster team-level collaboration, having one larger central space may make less sense than a network of several smaller offices.
That’s especially true if many of your workers now live further out from a city center: “Organizations are finding ways to accommodate their workforce by having a much more distributed network of spaces,” says Lenny Beaudoin, CBRE global head of workplace and design (though it’s worth noting that more leasing would be in CBRE’s interest as a real-estate investment firm). “We’re bullish on the growth in co-working to accommodate that flexible demand.” And Van Nieuwerburgh points out that elevated vacancy rates mean there’s a wealth of square footage available for sublease, another way to achieve more flexibility in both geography and length of time commitment.
Are you willing to experiment?
If fully letting go of office space feels radical, know that current economics may make it easier to reverse that decision should employees end up wanting a consistent place to gather in person. In a recent National Bureau of Economic Research working paper titled “Work from Home and the Office Real Estate Apocalypse,” Van Nieuwerburgh and his co-authors analyzed leasing data in 105 US markets to project that office values will fall 39% by 2029.
What’s your current sharing ratio?
According to the most recent data from CBRE’s Annual Occupancy Benchmarking Program, around a third of organizations are currently targeting a sharing ratio, or number of employees per workspace, that’s greater than 1.5 employees per seat, while another 31% are aiming for somewhere between one and 1.5. Only 5% said they were planning for a 1:1 ratio. (The remaining 31% had no specified target.)
The ideal ratio, says Beaudoin, is one that creates a feeling of density. “Nobody likes to go eat in an empty restaurant, and no one wants to come into an empty office,” he says. Holding onto your current space as a hedge, then, may not be as safe a bet as it seems: Having enough unused space to make the office seem like a dead zone can actively undermine the employee experience, pushing away even those workers who might otherwise want to come in. Instead, Beaudoin recommends, “Get more people into a contiguous space that's a meaningful, vibrant, fun place to be.”
Consider if the money spent on real estate could have more of an impact if it were reallocated elsewhere, such as to employee mental-health support or other benefits.
Renters currently have the upper hand to renegotiate lease terms, including length.
Prioritize creating a feeling of density, which will make the office more appealing to employees, over holding on to empty space just in case it’s needed.
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