Rapidly rising real estate costs over the past few years—whether paid for by property owner or tenant—coupled with the prospect of weaker earnings in a softening economy, have companies redoubling their efforts to cut that key part of corporate overhead.
Sprint Nextel, for instance, announced last week that it will consolidate its operational and co-corporate headquarters in Overland Park, Kansas, from a site in higher-cost Reston, Virginia, while Hewlett-Packard recently said it wants to lower its per-employee real estate costs by one-third before 2010.
Corporate real estate cost controls can range from the obvious—closing underused facilities and moving workers to cheaper sites—to demanding more services or flexibility in office leases, such as including a clause that gives a tenant the chance to buy its way out of a lease in the event of a substantial downsizing.
Hewlett-Packard’s cost-reduction efforts are seen as some of the most advanced, since the company tracks real estate costs per employee on an annual basis, said Eric Bowles, director of global research for CoreNet, a professional association for corporate real estate executives.
HP finance chief Cathie Lesjak told analysts about the one-third reduction goal in December, citing trends in telecommuting and teleconferencing as a driving force behind the company’s real estate plans.
“We are doing that in recognition that we have a lot of mobile workers, so everyone does not need a dedicated cube today,” she says, adding that since newer computer screens take up less space, H-P also can get away with a smaller per-employee footprint in its offices.
James Fisher, a Sprint Nextel spokesman, said the company is consolidating its Reston leased space from nine buildings to seven after layoffs left unused office cubicles. Sprint said last month that it’s cutting its workforce by about 4,000 employees and will close 125 stores.
Among its other efforts to save on real estate costs, Fisher said, is what’s known as an “office hoteling” software program that manages employee shared office space so that those who work at home or on the road have dedicated space when they come into regional headquarters.
“It’s part of our encouraging people to work from home whenever possible,” he says.
Ann Hamann, vice president of marketing for PeopleCube, a Framingham, Massachusetts-based firm that sells similar scheduling software to companies, said demand has been growing rapidly. “Almost all large companies have some sort of program like this. It helps them manage their mobile workforce more efficiently.”
Jason Fox, executive director of commercial property services at financing firm W.P. Carey, said a strategy more frequently used by companies, given the tougher lending environment, is seeking sale-leasebacks as a means of reaping gains on property that’s been on the balance sheet a long time and as an additional source of capital.
For example, last month W.P. Carey financed an $87 million sale-leaseback for Berry Plastics of Evansville, Indiana, which used some of the proceeds to finance the acquisition of Canadian plastics company MAC.
Bowles of CoreNet said two big employers, Bank of America and Rockwell Automation, each had the foresight to do sale-leasebacks of office buildings a few years ago, which now potentially gives them a lot more leverage in managing leased space in the event of layoffs.
Companies are also increasingly using new technologies to cut their building operating expenses, hiring consultants to perform energy audits that can include recommendations for building improvements that reduce long-term energy costs. “The green building wave is definitely real,” Fox said, as companies realize “an energy-efficient building is paying off.”
Ed Noha, a managing director at Jones Lang LaSalle, said occupancy planning, or the collection and analysis of data on the use of clients’ space, has become an important tool in helping clients save money. (Real estate has emerged as among the top five or so cost categories that executives have to manage, he added.)
“We did a study of about 10 companies and found that, on average, they had about 26 percent vacant or underutilized space,” Noha said. Yet those companies’ managements thought the underutilization rate would be closer to 7 percent to 10 percent. “That’s huge,” he said.
As a result, Noha said, his firm helped a major financial company save an estimated $48 million in occupancy costs over a five-year period by maximizing the use of space and getting rid of underused properties.
“The best way to save money in real estate,” he said, “is don’t occupy space you don’t use.”