• Wed. Apr 14th, 2021

Companies Are Shedding Their Real Estate Footprint In Droves

The data does not lie. The great real estate contraction is upon us. 

Wherever you look on the planet, companies are shedding their real estate square footage. There is irrefutable proof that the pandemic is shifting the way of work right before our eyes.

Not only are downtown centers currently mimicking more of a ghost town than a bustling hive of entrepreneurialism, but they also won’t look anything like what they did pre-pandemic once the virus has been adequately neutralized.

We may never go back to the way it was. If that is the case, senior leaders should be preparing for dramatically different workplace practices post-pandemic.

Cast your eyes to Asia, and you’ll find a similar pattern to that of North America. In Ho Chi Minh City (HCMC), grade A office buildings’ vacancy rate increased to over 18 percent by the end of 2020 from 4 percent pre-pandemic. Worse, rents have plummeted by roughly 50 percent in terms of the per square meter per month cost. According to reports, the Metro Manila office vacancy is forecast to increase to 14 percent this year. 

In the US, epicentres of high-tech are feeling the real estate pinch. The Greater Boston region has witnessed sublease space nearly double since the onset of the pandemic. More than 3.5 million square feet of prime office space has been put back on the market. Like Manila and Ho Chi Minh, the regional vacancy rate has also risen, from 12.3 percent to 15 percent across Boston. San Francisco—the hub of high-tech—is no better. That city’s office vacancy rate reached 16.7 percent by the end of 2020, with no signs of it letting up in 2021.

Cities across the US are feeling the hit, even if they’re not known for high-tech. In Phoenix, the vacancy rate has risen to 13 percent. In Salt Lake City, it’s 15.7 percent. And Manhattan? It’s somewhat nerve-wracking to know that the vacancy rate increased from 10 percent in 2019 to 14.2 percent in 2020, a 420-basis point surge. 

My home country of Canada has both bright spots and outright horror shows. Vancouver is in somewhat good shape with a modest vacancy rate increase to now sit at 5.7 percent. Toronto has seen its availability shift from 3 percent in 2018 to 4.7 percent in September, 2020 to 7.2 percent by the end of the year. 

But the real horror is in Alberta, where Calgary saw its vacancy rate balloon to 29.5 percent and the capital city of Edmonton to 20.1 percent. Across the country, Canada’s downtown average office vacancy increased to 13 percent in 2020, compared to 9.8 percent a year earlier.

There are at least two rather apparent reasons companies are shedding their square footage footprint. The first is depressingly sad; some firms let go of employees due to economic issues, so the space is no longer required in the short or long-term. 

Second, CFOs have taken the opportunity of the pandemic to sharpen their pencils and find significant cost savings from their real estate portfolios. If employees can work from home productively, many finance leaders are using it—and the fortuities of the pandemic—to trim millions off of existing leases. Some companies are even seeking to sell the buildings they own.

What to make of it all?

I see no reason for the real estate office space collapse to discontinue in 2021. I reckon that by the end of the year, the majority of big cities will witness vacancy rates in the high teens through the high 20’s.

That’s not the problem. Savings are a good thing for CFOs to commandeer off of their real estate portfolios.

The challenge that I’m concerned about, however, is not about square footage, rather a) what that square footage looks like post-pandemic, b) how the real estate footprint is used in a ‘new hybrid way of working,’ and c) how organizations are preparing now for a post-pandemic world of work.

Too many leaders are simply trying to survive. But what has to be happening in parallel is an all hands on deck approach to re-engineering how work will be performed once offices are once again safe to work from.

The culture is going to change. The way people collaborate is going to change. The manner in which we think, create, converse, meet, action, respond, and deliver will change.

The real estate footprint point from above is a harbinger; it’s the canary in the coalmine. 

My next few columns will tackle what organizations and leaders should be doing now to get ahead of the coming workplace and work-operations calamity. 

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My 4th book, “Lead. Care. Win. How to Become a Leader Who Matters” recently published. Amy. C. Edmondson of Harvard Business School calls it “an invaluable roadmap.” 16+ hour, self-paced online leadership development program is also available.