Making decisions about real estate commitments

As the economic ramifications of the COVID-19 pandemic sink in, financial managers around the world have important decisions to make. Top of mind will be commercial real estate.

Maybe, like Morgan Stanley Chief Executive James Gorman, you feel your business "can operate with no footprint”. Maybe not. Regardless, here is what you should be asking as you make decisions about your future office space needs.

Take stock

First, form an accurate picture of your company’s situation. Is real estate the best place to make cost reductions right now? When James Owen, FCMA, CGMA, the CFO of London-based management consultant Egremont Group, realised the severity of the COVID-19 crisis, he immediately analysed every cost line of the profit and loss (P&L) statement. “We attacked from largest to smallest,” he said. Egremont is based in central London, and rent was high up on the expense sheet.

Nick Ledger, ACMA, CGMA, the CFO of Third Seven Capital, a New York City boutique investment bank, took a similar tack. He too started with the monthly P&L and compared which operating costs were fixed versus variable. “What's absolutely mandatory for us to stay in operation, and what are things that we think we can reduce?” he said.

Ledger and his partners chose to temporarily forgo their salaries. Next on their list was office space. He decided to look into downsizing with the option to upsize again later. He also negotiated a discount on rent for the weeks in which his company cannot use the space.

Next you need to understand the details of your commitments. “What do you own and what do you lease? When do those next rounds of leases come up for renewal?” said Byron Carlock, PwC’s real estate practice leader.

Consider the logistics, too. When Owen approached his C-suite team about downsizing, they had a host of questions for him: When would we realistically be able to use the property again? How would we physically exit under a lockdown? What do we do with the staff? What do we do with the office furniture? The answers to those questions will depend on the unique circumstances of each business. In Owen’s case, he had to let go of some staff recently hired for a growth strategy and reluctantly had to furlough others, while the rest are having to work from home for now. As for the office space, he renegotiated a new lease with break points and intends to break it as soon as possible after the pandemic subsides.

Consider telework

Ask yourself whether a virtual workspace makes sense for your business. That was the case for Ledger, whose entire staff has been working from home during New York’s lockdown.

For many, it won’t be so clear-cut. More likely, you will need to decide what percentage of staff could work remotely and how much real estate you could do without. EY’s global real estate, hospitality, and construction leader Mark Grinis said that for many companies it is 20% to 30%. To calculate this, he said, think about each business division and which tasks can be done virtually. If you run a larger company, talk to the division heads. From there, you can work out your physical space needs.

Be aware that working from home is not for everyone. You should weigh the impacts it will have on your staff, especially if you are instituting a more permanent policy. You do not want lower employee productivity to offset the cost savings. “It has to be a little bit fluid in how you roll out that policy and how you’re being sensitive to their needs,” Grinis said.

What can you do for employees who are struggling? How is their mental and physical health? When Owen’s team started working remotely in March, some of them developed back and neck problems. Many lacked appropriate office chairs, computer set-ups, or lighting. So he gave staff a one-off budget to upgrade their home offices.

There is another potential downside to reducing your office space. “You lose company culture if you’re not together,” said Owen. “It’s challenging. We’ve played about with [the videoconferencing apps] Zoom, Teams, FaceTime, WhatsApp, and Houseparty. We even introduced a quiz night and the Egremont Arms [social drink] to retain our cohesiveness.”

Carlock stressed the social implications, too. “Two years into this, how healthy will it be for people to be part of a company and not know, face to face, any of their peers? We’re all social animals, we need interaction, we like knowing who we work for.”

Then there are the challenges that come with having to monitor your employees remotely. “How are you going to be evaluating people?” Grinis said. “How will you measure their productivity to make certain that it’s really working?”

Think about the bigger picture

Even if your company is not in dire financial straits, this is still a good moment to think about your real estate commitments and ask whether you have the right kind of space. According to Carlock, you should be asking:

• Are the locations we have still the right ones?
• Do they give us access to talent?
• Do they give us access to the tech that we need in that particular market?

Stop to assess whether your assets are still relevant to your present operating strategy. Are you in the right location for your people and your management? What about your customer base? And have you optimised across all your sites? “We believe most companies can save 1% on their top line through efficient management of their space,” Grinis said.

Think longer term

To know what to do in the present, you have to think about the future, too. What do you want your company to look like on the other side of the crisis? In Owen’s case, he sees a co-working space on a pay-to-play model as the most appropriate solution for his firm going forward. The company has some office-based support staff, and it may need to occasionally rent a room for all-hands meetings. But, he said, “The bulk of our team are consultants, either based at their house or a client’s site — they are rarely, in theory, in office.”

Ledger is looking to do something similar. His firm’s footprint is already quite small, with 20 to 25 people, some of whom already work remotely, and office space for 10 to 15 people on a hot-desk basis. But even they would prefer something smaller, with the option to book a conference room when needed. For health reasons, they may need to rethink the hot-desking, too.

Indeed, the return to work could force companies to change the way they use their space altogether. According to Carlock, any return-to-work plan should involve testing, tracking, and tracing, in addition to proper sanitation and social-distancing measures. Then you will have to think about how to accommodate social distancing in the longer term, whether that means allowing employees to work from home for longer, or, if you can afford to, increasing your office space to allow for more distance.

Act fast

When Owen decided to renegotiate his business’s lease, he took it directly to his C-suite team; there was no time for voting in a committee, he said. Then he went straight to the landlord.

“Open dialogue with the landlord was critical,” Owen said. “We’ve been very straight with them about the genuine economic state of our business.” Ledger did the same. “We’ve had the conversation about downsizing as well, and they’re open to that because they want to make sure that companies can stay in business,” he said.

He stressed the importance of being proactive, even if it is uncomfortable. “The most important thing is to have the conversation early and often,” Ledger said. “You don’t know unless you ask in that situation.” Because he approached the property owner right away, he managed to get a two-month discount on rent.

Look for creative fixes

“Have a human conversation, not a transactional conversation — that allows for more creativity,” Owen said. He had to renege on a lease he had negotiated just before the crisis but was able to strike a new deal instead. “We’ve negotiated a payment holiday and a whole series of quite smart break points in the new contract,” he said.

Landlords are looking for creative solutions, too — they do not want to force their tenants to liquidate. Do not be afraid to explore new possibilities, such as a shorter-term lease. “Downsizing is part of it, but the other side is finding more flexibility,” Grinis said.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.

— Portia Crowe is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.