By Dave Clifton
Content Strategy Specialist
COVID-19 has left businesses with new questions, new challenges, and a new way forward—especially when it comes to their workplaces. Many companies dabbled in remote work and plan to stay that way; others are already back at work in person; still more will explore a flex work strategy. These considerations and more form the foundation for a new era of real estate planning and execution.
What role does real estate play in operations now?
Not many years ago, a change to the tax code put corporate leases on the balance sheet. FASB Lease Accounting Standard (ASU 2016-02) forced companies to change the way they account for the physical workspace. It was a painful adjustment for many. Now, after COVID-19, many companies carry the cost of their workplace on the balance sheet, but aren’t utilizing facilities in the same way. It calls for a new corporate real estate strategy.
On the surface, the simple solution is to cut costs by cutting facilities. But the simplest solution isn’t always the best one. Instead, companies need to ask themselves a series of questions designed to contextualize real estate within the broader company plan.
Consolidate or optimize current facilities?
For companies with sprawling facilities, the first question in real estate planning is consolidation vs. optimization. It’s important to look at how the space was used before the pandemic and what the prospects are after the pandemic.
For example, facilities with a capacity of 500 before the pandemic may only have space for 300 with new distancing guidelines. If your workforce of 400 is largely staying remote, consolidation might be the best answer. If you’re transitioning to flex work, optimization to accommodate these 400 employees and their unpredictable shifts becomes necessary.
This, of course, comes against the backdrop of cost. Consolidating facilities may save you money outright, but put you at an occupancy disadvantage. Optimizing may not result in immediate cost savings, but could equate to long-term value and cost efficiency.
Centralized or decentralized workspaces?
For companies with a broad real estate portfolio, there are macro questions to answer. If you have three offices in the Houston Metro area, do you still need all three? If your Seattle employees are all remote, do you still need a satellite office there? It’s vital to look at where your workforce and facilities are, and the new relationship they have with each other. It’s likely there are opportunities for change.
In some cases, it may mean consolidating offices within the same city or region. In others, it might mean splitting one corporate office into several satellites. In situations where the whole workforce is remote, it might mean major downsizing to the office or location. Real estate managers need to look at it through the lens of workforce and decide on a decentralized or centralized strategy.
Own, lease or divest?
The final question real estate managers need to ask is what their relationship with facilities needs to be. To answer it, it’s best to rely on insights from real estate forecasting software, such as predictions for workforce growth, cost burdens, and operational figures. Ultimately, the question comes down to ownership vs. leasing.
Most businesses, even large businesses, lease their space. This lease obligation appears on the wrong side of the balance sheet and can heavily affect the financials of the company. For those businesses that do own, there’s the benefit of an asset on the balance sheet—and the tax depreciation that comes with it. Should your business continue to lease? Is this the year that you build or buy? Or, if you’re leaning toward remote work, is it time to divest?
This is perhaps the biggest decision real estate managers need to make. Any long-term decisions they’ll make about facilities are rooted in whether the business owns or leases the place employees call home. This relationship is an important one to distinguish not only now, but for long-term planning and budgeting.
Reassess and strategize for the future
Despite the changes to when, how, and where we work, corporate real estate is still an asset. Leveraged accordingly in this new post-pandemic world, companies can put the real estate on their balance sheet to work in newer, better ways, to justify the cost and maximize the potential.
In some cases, downsizing and divesting will make sense. In other situations, central workplaces will becomemore important for decentralized workers. These realizations need to be the governing factors in company real estate planning for the future. Start by asking the above questions.
Keep reading: 3 Corporate Real Estate Trends To Focus On