Publicly-traded or privately-held. 5,000 employees or 50 employees. A for-profit law firm or non-profit NGO. Almost all companies, regardless of size or mission, share a common bond of having real estate as their 2nd highest expense after payroll. And yet unlike the hiring, real estate costs are fixed and generally inflexible. Due to these high stakes, when companies engage in a strategic real estate process, it’s critical to make sure it’s structured properly from the outset in order to mitigate unwanted disruptions to the company’s operations.
Based on over a decade of experience, I’ve highlighted 4 main ways companies can act smarter with regards to their corporate real estate strategy.
1. Give Yourself Enough Time: Just closed your Series B and need to ramp up hiring overnight? Did you just hire a lateral partner for your law firm? Nothing foreshadows a poorly negotiated deal like a desperate tenant. Although there will be moments when it’s necessary to move quickly to secure a space, this should be the rare exception to the rule. Smaller tenants need to budget 4-6 months, medium-sized tenants require 12 to 18 months, and large-scale users sometimes begin as early as 4 years before a move. The biggest variable is construction time and permitting time which can be as long as 6+ months.
- For example. Several years ago, we were retained to advise a growing 40-person tech company. Flexible spaces (ie WeWork), weren’t options due to a blend of privacy & aesthetic concerns. When we first met with the client, they outlined their headcount projections and we recommended they begin evaluating site selection asap. Unfortunately, due to higher-priority ‘fires’, they delayed the start of the process until the last minute. As a result, the client missed out on their top option which required construction but was unworkable due to the elongated timeline. Ultimately, they were forced to settle for a 12-month sublease as their Plan B in order to accommodate their growth and thereby necessitating a sub-optimal 2-step move over the course of 18 months. Always leave yourself enough time (when possible)!
2. Leverage the Market: Imagine an auctioneer standing at the podium, motivating the crowd to bid higher on a highly coveted piece of art. If successful, he whips the crowd into a frenzy with successively higher bids flowing from the audience. And while this sounds completely unlike real estate, the reality is that the processes have much in common. Think about it like this: as a desirable tenant in the market, your company deserves to be auctioned off to the highest landlord bidder. Particularly in large tier 1 urban markets, the objective in any site selection process is to engineer a process where prospective landlords are competing for your tenancy. Even in cases where the operational and fiscal argument is to simply renew, the object should be to convince the existing landlord of an impending relocation in order to achieve the highest leverage in the stay put negotiation. And the way to do this? Engage and leverage the market.
- For example. Several years ago, we advised a client on a 100,000 SF HQ renewal in NYC. The landlord was a publicly-traded REIT and was specifically focused on achieving high face-rents. When we first engage the landlord for renewal negotiations, they cited a base rent that was unpalatably high – it was clear they viewed us as a captive tenant. As a result, we strategically went “dark” on them and at the 11th hour of our process, the landlord sent us an unsolicited renewal proposal at ~50% of their previous proposal. During the deal post-mortem, we learned that the landlord had heard we were very close to a final term sheet on a new building and they scrambled to retain our client in their building. This wouldn’t have happened had we been more laissez-faire in our market engagement.
3. Just the Right Amount of Space: Not all spaces were created equal. A 10,000 SF space may layout 50% more efficiently than another equally sized space due to differences in column spacing, floor plate shape, convector sizes, etc. It’s always a good idea to have a Workplace Strategist or architect as part of your deal and consultant team to help navigate through the confusion. It’s hard to overstate the importance of understanding this component – the size of a company’s space (usually, more than rent or any other economic term) is the primary driver of the total cost. The ability to find a way to utilize a space that is 20% smaller than another alternative continues to be an enormously powerful vehicle towards cost savings.
- For example. One of my clients is a mid-size law firm. They were facing an upcoming lease expiration and had occupied ‘tired’ space for almost 15 years. When we started discussing market availability and rents, they experienced immediate sticker shock that threatened to derail the process. The problem? They were using their existing square footage as the basis for their cost analysis which equated to prohibitively high costs due to higher market rents. Our solution? Understand their true square footage needs through the assistance of a Workplace Strategist. We successfully analyzed their needs resulting in a final square footage that allowed them to increase their headcount while decreasing their SF under lease by 40%+ by utilizing smaller universal office sizes and most efficiently planned meeting & amenity spaces.
4. Flexibility, Flexibility, Flexibility: Sure you may need 50 seats today, but what will your headcount be in 6 months? 12 months? 48 months? Many landlords in major markets expect tenants to sign a 5-10 year leases. Flexibility provisions such as expansion, contraction, & termination rights, favorable sublease language, and a protective renewal clause are absolutely crucial for all companies. You don’t want to find yourself in an avoidable scenario where you’re long on space but locked into a rigid non-subleasable obligation or short on space but without the ability to exercise missing growth rights.
- For example. A high-grown VC backed startup recently expanded into 50,000 SF of HQ office space in NYC. In order to convince the landlord to fully turnkey (ie construct) the space, my client agreed to a 10-year lease term. However, we were also able to secure various fixed termination options along with a hyper-flexible sublease provision that provides ultimate flexibility in the event of a business contraction. We were also able to get multiple expansion options to accommodate future business growth. Ultimately, the client is well-positioned to manage their real estate in the face of almost any business event.
The importance of navigating a complex office space process and negotiation can’t be overstated. A leases’ high costs and on-balance sheet liability requires companies to be thoughtful in their approach and strategy. Seek guidance and counsel upfront and save yourself the headache at the end.