Rightsizing in a rough economy

Real Estate Review

Should I look for smaller space; what should I consider before making the move?

We have all experienced 2020 as a challenging year. Among government mandated closings, furloughs, sporadic re-openings, working from home and social distancing, many businesses in Hampton Roads are operating on significantly reduced income. Looking forward and guessing what the rest of 2021 will look like, we may not quickly get back to what used to be called “normal.”

As tenants and landlords come to terms with the changed real estate environment, there are opportunities for both to improve their situation. Many landlords are willing to work with existing tenants to help them through these unusual circumstances. The first path to solving your need to adjust your space is often approaching your existing landlord to open the discussion. Most landlords appreciate having their tenants keep them informed, and often they will come up with solutions that help your situation.

We recently had a client who desperately needed to downsize. We approached the adjacent business to see if it had any need for additional space. As it turned out, the business not only needed to expand, but had also been considering leaving the building because there was no adjacent space for it to move into. We negotiated with both tenants and came to an agreement all parties could work with. We were able to keep both tenants in the building, and the owner had no loss of income due to a vacated space.

Rent as a portion of income

Are you at, or near the end of your current lease and looking to reduce your costs? If you are facing the reality of reduced income, an expense you can control is what you pay each year in rent. If you make the decision that you need to find smaller space, one way to help determine what you can afford to pay is by comparing the percentage of your rent with your total income and trying to get close to that ratio.

For example, if you were making gross annual income of $300,000 and your rent was $24,000 a year, you were paying 8 percent of your income toward rent. If you now anticipate that you will make $250,000 per year, if you apply the same 8 percent, the rent you would want to target is roughly $20,000 a year.

For every business, there are multiple variables going into what you are comfortable paying in rent. Keeping your proportion of rent in line with a change of income is a benchmark you can use for helping judge that a new space will be affordable.

Changes to the way you are doing business

The past year forced people to engage in new strategies to service their clients and customers. The increased use of online meetings and employees not coming to a centralized office may ultimately influence your future operations. If you have always had a 10-person office, but now only three of your people regularly come in, you may want to consider a reduction in space with hoteling stations, or non-dedicated office space used by several employees. You might find new space that exchanges your office centric workplace with more of an open concept, more meeting rooms and fewer private offices.

If you are a retailer, and more people now find you on the Internet than by walking past your storefront, you may no longer need prime space at top dollar. Part of your space decision could be to relocate to a less expensive location. An example of an earlier trend away from more expensive space was shoe stores. As they grew larger, and more people went to them as destinations, many moved out of the higher priced malls and into neighborhood shopping centers. Looking over your sales, you may find that your customer base has changed, and this could also enable you to relocate and reduce your annual rent.

We used to go to our accountant’s office several times a year to discuss our business, deliver tax documents and check on keeping in compliance with changing tax laws. Now we email our documents to the accountant, discuss what we need over the phone, via email or lately on a video call. Similarly, if your customers are no longer coming into your place of business you may be able to transition into less space because you no longer have much “walk in” traffic.

Avoid analysis paralysis

Although we haven’t seen much change in advertised rates, actual lease rates have trended down over the past year. This direction is expected to continue at least through the end of the year. Landlords have become more willing to consider shorter lease terms, free and reduced rent, assistance with moving costs and space improvements to encourage prospects to commit to new leases. Before taking the path of least resistance in the hopes that the coming year will be better, take a look at your anticipated income, how you are using your space and how you are interacting with your customers. This year could become a great chance to improve your bottom line by rightsizing your real estate.

About Michael Shapiro 4 Articles
Michael Shapiro is director of commercial sales and leasing for Drucker + Falk, a Newport News company for 80 years with more than 3,000,000 square feet of commercial space and more than 34,000 apartment units in nine states under leasing and management.

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