Renegotiate, sublet, or leave: How organisations can mitigate the cost impact of surplus office space

Rising rent levels, widespread layoffs and the shift to hybrid working are driving organisations to re-evaluate their property portfolios. We explore three ways they can respond.

The way the world works has changed. Remote and hybrid working are now the norm for millions of office workers around the world. And as a result, many organisations now need significantly less office space than they did before the pandemic. 

Alongside that shift, high inflation and adverse global economic conditions are driving a sharp rise in commercial rent costs, and widespread layoffs. Landlords are raising rates mid-term, pushing organisations to take a hard look at their underutilised offices and reassess their cost profile and suitability for the future.

To avoid overspending on unnecessary space, procurement experts responsible for making commercial property decisions can respond in one of three ways. They can downsize (to keep the cost level of their properties in line with their new requirements), sublet space to a new tenant, or renegotiate terms with their landlord.

Build your negotiating power to keep commercial property costs low

Rising interest and CPI inflation rates are putting financial pressure on landlords. And many are passing that pressure on to tenants in the form of steep mid-term rent increases.

Mid-term rent increases pose a significant cost challenge for commercial property managers. But they also create a valuable opportunity for renegotiation. If you go into those negotiations with the right information, insights, and ideas, you can mitigate the risk of rent increases, and keep your costs under control.

While mounting inflation and interest rates are the driving forces behind most commercial rent increases, they’re also leading to widespread property vacancies. Understanding local take up figures and overall market performance projections is extremely valuable when you’re at the negotiating table with landlords. If occupancy figures for a specific landlord or an area are low, landlords may be willing to consider more favourable lease terms or reduced rent, if it means they can keep a tenant.  

But your continued occupancy is far from the only bargaining chip you have in these negotiations. There are a whole range of ways that you can add value for landlords, and use that value to negotiate more manageable rent levels. In a recent project with a major client that wanted to renegotiate its commercial property contracts, The Smart Cube identified three strong levers to increase bargaining power:

  • The company could use its commitment to ESG as leverage when negotiating rent increases. We saw that by offering to invest in energy-efficient solutions and sustainability measures, it could improve the overall sustainability of the building – creating value for landlords.
  • There was also an opportunity to leverage a ‘blend and extend’ strategy, which comprised an extension of the company’s current lease and blended the existing rental rate with a newly negotiated rate to avoid further mid-term rent increase requests.
  • Finally, because the company’s growth prospects were strong, it could also position itself as an exceptionally strong tenant moving forward. The company’s stability ensured long-term income for the landlord, and its projected growth also represented opportunities to expand the space the company leased in the future – making the landlords eager to retain them.

Understanding when and how to strategically sublet 

When you have excess office capacity, the most direct way to cut your costs is to downsize and ensure that the space you have is aligned with what you really need. However, in large commercial properties, that isn’t always easy.

Relocating to a new, smaller property can be costly and disruptive to your operations. It also means you may be slower to react if your space requirements increase again in future.  A cost-effective solution is to sublet the space you don’t need to a new tenant. However, this carries additional challenges and represents a significant operational decision that must be made very carefully.

Intelligent subletting decisions are made up of three smaller decisions, each requiring its own research and intelligence to execute successfully:

1) Letting the right space go

When you downsize, it’s important that you downsize in the right places. You’ll need to closely monitor office space utilisation, see which spaces are being used, and carefully consider what you can afford to do without. 

Contracts play an important role in deciding where to downsize. Unused spaces in buildings with long-term lease agreements typically represent the best opportunities for subletting to new tenants, as it can help you mitigate rent increase risks. 

There are other factors to consider too, like whether the current incumbent real estate management firm offers subtenant management services. If they do, the whole process of subletting the space you let from them can be very simple – and even profitable.

2) Choosing the right partner to manage your subletting

In cases where your incumbent real estate management firm doesn’t offer subtenant management services, you’ll need to find a new one that does – unless you want to take all of that work in house. That’s a complex commercial decision in its own right.

The Smart Cube recently worked with one client in that position to conduct a full assessment of real estate management partners, and map out all of the company’s subletting needs. Through our research, we were able to identify the strongest partners that could offer every service the company needed, at the right cost – helping them make the most of the downsizing opportunity.

3) Keeping everything streamlined and manageable

When you’re choosing which spaces to sublet, and which partner should manage them, you also need to keep a close eye on the complexity of managing your commercial property portfolio moving forward.

It may make financial sense to sublet five specific offices, in five different cities, each under the management of a different local partner. However, the management complexity that introduces can end up limiting the value of subletting.

Recent research by The Smart Cube discovered that using a single supplier (preferably incumbent) to manage subtenant services in facilities enables a better understanding of business requirements, reduces administrative burden and can decrease operational costs by up to three to five percent.

Make informed decisions for the future of your facilities

If you’re one of the thousands of organisations facing rising rents and underutilised office space, you have some important decisions to make. Whichever path you choose –  renegotiating with your landlords or subletting unused spaces – you need the right insights and intelligence to ensure the decision you make is the correct one.

With costs forecasted to increase further, now is the time for action. To find out how The Smart Cube can help you make informed decisions to help you maximise the cost efficiency of your commercial property portfolio, visit here, or talk to us today.