Office Landlords Face Steep Climb in Reducing Operational Costs

The future of office has been a question mark since the start of the pandemic, and many expect that the asset class would have a new look post-pandemic. Now, as tenants reevaluate how they will use space and integrate remote workers in  the long term, that vision is becoming a reality, whether landlords like it or not. Reducing operational costs will be their immediate answer.

Here’s the rough math: According to the 200 CRE executives Deloitte spoke with for its 2021 CRE Outlook, nearly half of respondents in the US agreed that office rents will decline next year and office vacancy will increase. At the same time, office owners have incurred increased costs to implement health and safety standards to combat the pandemic.  Deloitte anticipates that this will lead to increased operational costs of $19.40 per square foot, which would translate to a 5.8% increase in average annual office rents from the beginning of 2020.

Most CRE companies do plan to decrease operational costs by 20% in the next year to offset re-occupancy and office shuffling. In North America, 46% of respondents expect costs to decrease 11% to 20%. To meet these needs, many companies plan to reduce discretionary costs over the next 12 months, and already, half of companies have reduced compensation, frozen promotions, reduced work hours and implemented furloughs and layoffs to reduce workforce expenses.

In addition to these strategies, Deloitte recommends that companies streamline operations by undergoing an in-depth analysis of business practices and restructuring to increase efficiency. This will likely require adopting technology and digitizing processes or outsourcing operations for non-essential business functions. Upgrading in these areas will allow companies to make data-driven decisions and better manage all aspects of the facility.

So far, companies may be failing to accomplish these goals. Many office owners haven’t created a clear strategy to adequately handle the pandemic or changes in operations costs and office needs. In the survey, only 38% of respondents from the US said that their organization was able to handle both the operational and financial challenges of the pandemic.