Will office tenants abandon elite locations for better value?

Tenants and landlords alike are changing the way they think about office space.

By: Randal Mercer, Founding Partner – CRE Consultants

Businesses eye cost effective options.
Businesses eye cost effective options.

Despite unprecedented challenges this year, the office sector is not obsolete as some doomsayers have projected. Office properties will survive, and even thrive—however, they must evolve.

Office users and landlords alike are beginning to reimagine the traditional role of office space and its respective size allocation. Business owners are asking themselves questions they haven’t considered for years or perhaps never considered at all:

Suddenly, the answers to all of these questions are more pressing than ever.

Real estate cost savings will offset revenue loss

As many companies begin to budget for 2021, flatlined revenue or even revenue loss may be an unavoidable reality. With this in mind, tenants may look to cost-saving strategies to mitigate projected downward revenue shifts.

Reduced real estate expenses have not often been identified as a quick route to lowered expenses, particularly in highly coveted corridors where demand remained high, and correspondingly, asking rents remained elevated. But this may change.

Two options for businesses to reduce their rental expenses: get a rent reduction at their existing location or strategically relocate to a new location with lower rental costs.
Two options for businesses to reduce their rental expenses: get a rent reduction at their existing location or strategically relocate to a new location with lower rental costs.

Depending on the industry, clientele and other business initiatives, the average rent overhead typically hovers in the 5%-6% range. Now that many companies have operated entirely remotely for several months, they may be tempted to bring that number down or rent more space to accommodate distancing for less.

The appeal of strategic relocation

There are two options for businesses to reduce their rental expenses: get a rent reduction at their existing location or strategically relocate to a new location with lower rental costs per square foot.

Often, companies don’t need to move far in order to drastically reduce their expenses. For example, a recent analysis compared the total rental cost of a 4,000 square foot space across two submarkets: Collier County’s North Naples submarket, and Lee County’s neighboring Bonita Springs submarket.

A clear differential was evident. Bonita Springs’ Riverview Corporate Center was more than 50% lower in cost than the average North Naples space just 5 miles away. In dollars, that’s close to a staggering $100,000 per year in savings. In five years, over $500,000.

Image isn’t everything: the appeal of submarkets “up the road”

Many offices operating in elite locations might swear by the phrase “image isn’t everything, it’s the only thing.”

For years, office tenants clambered and competed to call the most coveted addresses home. They were lured by corner offices, image-elevating interiors, and collaborative spaces that were touted as the pinnacle of productivity, creativity, and innovation.

Some tenants will move portions of their businesses to remote operations. Others will opt for more distance-affording layouts, which may mean acquiring more space than they currently occupy at a reduced cost per square foot.
Some tenants will move portions of their businesses to remote operations. Others will opt for more distance-affording layouts, which may mean acquiring more space than they currently occupy at a reduced cost per square foot.

The events of 2020, however, may convince business owners to shorten the phrase to simply “image isn’t everything.” Some tenants will move portions of their businesses to remote operations. Others will opt for more distance-affording layouts, which may mean acquiring more space than they currently occupy at a reduced cost per square foot. Either of these scenarios could spur an aggressive shift towards value over a perceived image conscious  location.

Adjacent submarkets just “up the road” are the natural geographic alternative as tenants seek enhanced value without sacrificing image and quality. Just one submarket north lies top-of-class space with a great image and updated interior and at a rate tracking less than half your company’s current rental expense—a pill that may be a bit easier to swallow in uncertain economic times.

Further, if the enticement of cutting rental rates in half isn’t appealing enough, a move into a neighboring submarket may have a highly advantageous ancillary benefit. Shifting office locations into another submarket may yield a more far-reaching talent pool formerly constrained geographically by an office address in a high-rent corridor.

Flexibility will be key to success

As tenants and landlords both continue to weather unpredicted challenges, the name of the game is certainly flexibility.

Tenants will need to reevaluate needs, priorities and financial capacity in order to make strategic shifts that keep profit margins on target. The savviest of landlords will make smart decisions to either help existing tenants stay in place or entice new tenants with creative and diverse concessions.

It won’t be the strongest who wins, but the most adaptive.

For more market insights, visit creconsultants.com, or email Randal.Mercer@creconsultants.com.

Link to article on Naples Daily News.