How to Cut Corporate Real Estate Costs in 2024
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Corporate real estate has found itself in a strange in-between state this year.
On the one hand, inflation rates show the promise of levelling off, making for a brighter financial outlook.
But with $2.2 trillion in CRE debt coming due in 2027, it’s starting to look like the jig may soon be up for organizations with larger portfolios – especially those with older and less sustainable buildings.
Office vacancy rates don’t appear to be changing anytime soon. One hedge fund manager has even called for demolishing empty office buildings entirely, since the demand shows no sign of returning.
“Putting this all together, we expect an increase in distress this year as borrowers and their lenders are unable to continue kicking the can down the road,” says Capital Economics’ deputy chief property economist Kiran Raichura.
That leaves CRE leaders – especially those that can’t downsize or sublease – with one hefty mandate from the powers that be.
Cut corporate real estate costs.
In this post, we’ll focus on three tactical ways to make that happen across your entire CRE portfolio.
1) Improve operational efficiency.
The cost of operating office space has never been higher. So it’s no surprise that cutting operating costs is a priority for 86% of CRE leaders.
However, aggressive cost cutting can quickly turn into a damaging slippery slope in two ways:
- Cutting too close on investments that give people a better workplace experience
- Making reactive, one-off decisions that damage long-term growth – even if they reduce costs in the short term
Rather than jumping onto whichever avenue promising the greatest cost reductions, start with improving operational efficiency.
Operational efficiency is a state of maximizing outputs (workplace experience, performance) from your real estate portfolio while requiring fewer inputs (energy, facilities management, resources) to get there.
Reducing inputs reduces costs. It’s also a solid cost-cutting foundation for organizations unable to shed the more expensive parts of their portfolios.
And another thing – by reducing the energy, facilities management services and resources required to operate office space, operational efficiency also reduces carbon emissions. Considering that building operations are responsible for 70% of the 40% of emissions generated globally by real estate, operational efficiency is a must-do for organizations working towards net zero.
4 Ways to Reduce Office Carbon Footprint by Understanding Workplace Occupancy
The so-called empty office crisis has an unexpected silver lining, thanks to hybrid work patterns.
Since fewer people are in the office at the same time, there’s more empty spaces where cutting back on energy, facilities management resources (e.g. cafeteria food) is now feasible.
CBRE has found that optimization of hybrid workspaces can yield anywhere from 10 to 50% space savings.
The most effective ways to pinpoint and optimize these empty spaces leads us to our next point.
2) Use workplace data to steer portfolio optimization.
“How much space do we actually need?”
It’s a question that’s been plaguing CRE leaders for years. Most still don’t have the answer, which makes portfolio optimization feel like an expensive shot in the dark.
The reason this question has such a puzzling answer is because hybrid work patterns have changed employee demand for space. Not just how much space is needed to support employees, but also when and how that space is used.
80% of office occupiers will use hybrid work policies for the foreseeable future. And “the more flexible the hybrid work policy is, the harder it can be to predict employee behaviors, and, by extension, how much total space is needed”, according to a January 2024 report from CBRE.
The key to making this prediction lies in workplace data, which illuminates how employees are actually using the space you have right now.
Workplace data steers portfolio optimization because it shows whether or not current workspaces are meeting employee needs, why and where wasted costs are happening, and whether repurposing, downsizing or upsizing are the most cost-effective next steps.
For example:
- When occupancy data shows empty floors and zones happening on specific days each week, cut costs by reducing use of energy on those days
- Buildings and floors with consistently low space utilization rate are candidates for downsizing
- Occupancy data for individual vs. collaborative spaces shows which spaces should be repurposed
- Portfolio-wide occupancy data measured over time shows when it’s time to upsize, and what types of spaces to add
3) Use different metrics to uncover cost-cutting opportunities.
Office occupancy rates collected from badge swipes have been making weekly headlines for quite some time. However, merely measuring how many people come into the office is no longer a sufficient metric for measuring office performance.
This inability to measure actual performance leaves CRE leaders blind to additional cost-cutting opportunities.
The problem lies both in the metrics themselves and how data is collected.
Occupancy data from badge swipes is an either/or metric. It can’t factor in hybrid work patterns. Employees are either in the office or they’re not.
How long they’re in for, what spaces they’re using and whether their attendance is just performative (i.e. coffee-badging) all remain a mystery.
Space utilization rate, on the other hand, measures how effectively employees are using a given space. That space could be as macro as an entire building or as micro as a small meeting room. Data is collected from workplace occupancy sensors, WiFi signals and workplace booking systems.
Space utilization rate is a comparative metric, yielding data on office performance over the week, the popularity of different types of spaces and which spaces aren’t generating any ROI.
5 Space Utilization Metrics for a Better Workplace in 2024
Using space utilization as a performance metric helps CRE leaders:
- Pinpoint where investments aren’t generating enough return
- Rightsize use of energy, facilities management services and resources in proportion to how much employees use a space
- Pinpoint where to cut costs and where doing so could damage workplace experience.
For example, using space utilization, FM teams could predict how much food to order for the cafeteria on each day. This slashes costs and emissions from food waste.
Closing off underused floors and zones to employees on low utilization days, reduces the frequency of cleaning and maintenance. That’s a hefty cost reduction in addition to the lighting, heating and air conditioning that’s no longer needed either.
