Risk Management

Space Case

Underutilizing office space is frustrating and costly, but there are ways to minimize the impact.
Alix StuartOctober 1, 2009

Long rows of darkened offices and cleared-out cubicles are not only bad for morale, they’re bad for the bottom line. Today, many companies find themselves with as much as 50% of their office space going to waste, according to Kevin Farrell, CEO of corporate-real-estate advisory firm Northmarq. Even more frustrating, most are locked into rents that are much higher than current asking prices, as rates in major cities like New York and San Francisco have dropped about 10% in the past year. While it’s hard to get out of leases entirely, experts say there are some ways to mitigate the drag of excess space.

Organize. Many companies don’t even have all their lease documents in one place, leaving them vulnerable to excess maintenance charges and automatic lease renewals at above-market rates. Farrell says the lease database and auditing services his firm offers have been growing in popularity, with demand up 30% in the past year. The cost is usually less than that of a lease automatically renewing, says Farrell, and leads to an average 10% reduction in lease operating costs.

Early extensions. Companies with good credit that have two years or less left on their lease may find better terms if they agree to extend the lease for five to eight years, says Bill Goade, CEO of real-estate advisory firm Cresa Partners. In doing so, they can usually opt to either get better rates per square foot or pay slightly above-market rates to shed some of their space. “Landlords are certainly willing to work with creditworthy tenants to stabilize their buildings,” says Goade, “but it’s a give-and-take. If you cut space, they’ll build in some premium to the rent to offset it.” At the other end of the spectrum, those with bad credit may be able to threaten bankruptcy, he says, but success with that gambit is limited.

Outsource. A growing number of firms are handing over the keys — or at least the talk about the keys — to outsourcers, who can handle lease negotiations as well as cut better deals for services like security or cleaning, says Rakesh Kishan, CEO of UMS Advisory, which helps companies structure outsourcing arrangements. That can yield 15%–20% savings on real estate, he says.

Telecommute. One option that may be particularly appealing for smaller companies: eschew real estate altogether. Sharon Gottlieb, CFO of Logicmark, estimates the Virginia-based company saves at least $60,000 per year by having its 7 employees work from home, a model it has used since she and her husband started the medical-alert device maker in 2006. Part of the savings comes from outsourcing warehousing and fulfillment tasks to a Wisconsin-based company and manufacturing to China. Employees meet once a month to share ideas and concerns. “This model really works for us,” Gottlieb says, “but it would be very, very hard to have 100 employees and do it.”

Comparison of office rents in major cities in the U.S.