To quote one of the most successful TV commercial campaigns of the last decade: “We know a thing or two because we’ve seen a thing or two.” As an advisor to c-suite executives charged with guiding their company’s real estate decisions, I have a front-row seat to the decisions (both good and bad) that overworked, overstressed and overwhelmed executives sometimes feel pressured to make.
At the root of the problem is the need to marry inelastic needs (real estate) with elastic demands (labor). A misstep can result in costly distractions. But a well-executed and disciplined approach provides focused efficiency and risk mitigation. Over the years, I most commonly see the following 6 major mistakes made by poorly-advised companies.
1. Miscalculating growth: Headcount, for all companies but especially for startups, is the single most important variable in determining office size. Counter-intuitively, it sometimes makes more financial sense to go long on space (vs. short) based on the level of confidence in internal growth projections. Flexible office options like Regus and WeWork are tools we use to help address very short-term needs (i.e. less than 3 years) when necessary.
- For example. Recently, one of my high-growth tech clients just completed their 4th lease in 24 months. They were a unique example where the CEO needed to avoid a long-term lease commitment due to company exit/sale considerations. Their headcount was on a high growth trajectory and we were able to find the right fit(s).
2. Not considering your options: Commercial real estate is different than residential in almost every way including cost, commitment length, and negotiation complexity. Even if the local market is hot with a low availability rate, a methodical fact-based process led by a seasoned broker will uncover all logical options. Remember, you can’t hide a building!
- For example. Our team was recently hired to advise 600,000 SF of NYC Textile tenants in a single building to find a new home. Their current building was recently sold and the new owner plans to spend significant capital to renovate the building (and increase rents) which means that everyone needs to move out. During the pitch to the tenants, we presented a handful of relocation ideas but we also heavily emphasized the fact that once they picked an advisor, landlords across the city would reach out to that broker to pitch their buildings. And what happened? Within days of getting hired, our team was inundated with options and ideas. You can’t hide a building!
3. Underestimating the total cost: Tenants tend to focus on three main economic drivers: rent, square footage, and term. But what about expansion options, landlord concessions, termination options, cost of building the space, overtime AC, etc.? All these items have a real material impact. Getting into a multi-building process, followed by a leveling of competing proposals with tailored financial analyses including legal fees, architect costs and economic incentives driven by job growth is necessary to understanding the true cost of the deal.
- For example. A recent success in securing termination options for our clients. Think about the ability to have a 10-year lease with termination options sprinkled throughout the term to provide for flexibility…in contrast to the static inflexibility of a traditional 10-year lease,
4. Being stubborn about location: Many of my clients start their process focused on an unnecessarily narrow geographic area. As they learn the market, they often realize that they can achieve better terms with greater flexibility elsewhere. Many regions offer attractive financial incentives and with newly legislated Federal Opportunity Zones, there are even more options around the United States.
- For example. Lower Manhattan was an uninspiring destination for almost a decade after 9/11. But in those intervening years, it became a mecca for residential, retail and office redevelopment and happened to boast optimal commute connectivity between Brooklyn, NJ and the rest of NYC. As a result, many big-name creative companies have migrated to that market and are thriving. This includes Spotify, Conde Nast, JustWorks, Bounce Exchange and Casper. In exchange, they’ve received attractive low rents frequently in developments with economic incentives. Pretty good deal.
5. Hiring the right talent: In hyper-competitive job markets with historically low unemployment rates, analyzing the available labor pools – both in terms of job match and depth – is increasingly important. This is generally only relevant for sites with 100+ employees but depending on the type of talent (i.e. software engineer, call center operators), it’s an important variable to consider.
- For example. One of our high-growth NYC tech clients was evaluating what second city should be the focus of their growth. The usual suspects – Austin, SF – were discarded because of high real estate costs. They ultimately chose Nashville due to quick connectivity to NYC combined with a very deep and growing bench of matching labor talent.
6. Overestimating what you can do on your own: Tenants are really good at running their own businesses. But they are typically not very good at running a well-disciplined real estate process. Hiring the right broker will result in a smooth process that includes the assembly of the right team including workplace strategist, project manager, attorney, furniture vendor, IT/AV specialist, economic incentives expert, and labor strategist. I could cite a million examples but that would be too salesy. My point is that the right adviser on the front end will result in a happy transaction on the backend.