July 19, 2024
Rationalization often misunderstood as being solely about CRE asset reduction. Whilst this approach might be right for some organizations, it isn’t the only way to rationalize. After all, it's not called portfolio reduction. It’s far more effective to view rationalization as part of your right-sizing strategy. Viewing it in this way aligns assets to policy and reframing rationalization allows organizations to deliver high quality EX whilst making cost effective decisions.
This article reviews the drivers behind portfolio rationalization, key considerations when making strategic decisions, and how on-demand networks can support portfolio rationalization to build an Agile Portfolio.
Real estate budgets have never been under so much pressure, both in terms of team size and budgets. This is pushing rationalization firmly onto the agenda across the board. With increasing raw material, labor, and energy costs, property remains the second largest organizational expense and costs show no signs of slowing down. This, combined occupancy levels of between 40-60%, is increasing top down pressure to reduce costs. But, as we mentioned, whilst cost is driving the requirement for rationalization, it shouldn’t be the only factor in portfolio composition.
There is no set portfolio review candance, but typically an organization would review and rationalize their portfolio every financial year. Alignment with business strategy is essential and this will naturally shift over time, hence the need for a regular review.
The way we work is changing.
You might want to call it the ‘Future of Work’ or ‘Workplace 5.0’ or, more realistically, you might simply accept that what is true today might not be true tomorrow. Because of the fluctuating state of work, it’s impossible to predict workplace requirements for the mid-term. This means that agility and flexibility are your greatest allies in creating a high performing portfolio.
There are four main types of work done within an office environment; individual focused tasks, asynchronous collaboration, synchronous collaboration, and socializing. This means that space within the real estate portfolio now needs to be optimized for these different types of work. How the portfolio is rationalized is going to depend on how teams are configured, what TLAs are in place, and the workplace policy.
Part of the rationalization might be to review the flexibility within owned and leased office configurations. Organizations, like Elastic, have invested in modular offices so that they can be easily adapted based on their purpose. Walls are on wheels allowing for diverse formats such as town halls or focused work.
Another way to increase the adaptability of space is to leverage on-demand networks to accommodate ‘overspill’. Tiffany Owyang Lam, who is part of the Workplace Experience team at Grammarly, recently spoke at a Flex OS event about their requirement for on-demand space to support employees when in-house events lead to a utilization surge.
The square footage of your portfolio might be fixed for the next 5 years, but it should still be reviewed as part of your annual rationalization. Reviewing how space is being used, rather than solely reviewing location, is likely to trigger resource reallocation. For example, if specific teams used a HQ and changing work patterns have created low occupancy, then the HQ could be reallocated as a drop in office and primary event space, rather than the mandated office location. Or, it could be that a HQ space will no longer be used as an event space because this actually puts the office over capacity and impacts the daily office experience for regular users. This work type would then be outsourced to on-demand events venues to relieve the pressure from owned or leased offices.
Traditionally, portfolio risk mitigation would be focused on diversifying investments and lease agreements whilst using data and strategic projections to forecast utilization demand. But on-demand networks mitigate risk differently. By reducing the amount of leased or owned property, organizations reduce associated portfolio risk. On-demand is a great way of expanding a portfolio through the provision of a whole market MSA to use the global flexible workspace and hospitality market. Because there are no restrictions around leases or contractual membership agreements, demand for office space can always be met. In the event that the demand for workspace drops the costs drop proportionally, only ever paying for actual utilization.
No right thinking workplace leader would let a building sit at 25% occupancy, right?
Wrong.
Utilization metrics can be a false starter. They have to be viewed alongside the wider business objectives. So, if your office is beloved by your highest performing commercial team, it could be worth accepting low occupancy in return for the well-being (and exceptional output) of the team that uses it. Optimization isn’t solely about occupancy metrics so when making rationalization decisions it is important to consider the bigger picture in terms of organizational performance.
By integrating on-demand into traditional real estate portfolios organizations are taking an important step towards creating an Agile Portfolio. As the name suggests portfolio agility is about maintaining flexibility and speed alongside traditional CRE investments.
A further benefit of leveraging on-demand networks as part of portfolio rationalization is that the data gathered reflects real-time usage. Insights are shared immediately and can change portfolio investment decisions.
Often, what organizations think they need is different from the real use case for teams using the space. One example of this is a large international customer, who believed they had a fixed office requirement for 200 people in Paddington, London because this is where they’d historically had office space.
However, rather than follow the path well trodden, they decided to activate an on-demand workspace network allowing the team to select the best office space for their needs. After 6 months the data was clear, the team didn’t work from Paddington, they worked regularly in spaces around Liverpool Street.
The reason?
This is where their clients were. The preference wasn’t to be near the owned office space, it was to reduce commutes and work within close proximity of their client base.
This shows the importance of being prepared to review the data and have an iterative approach to CRE portfolios. We’ve seen that when organizations integrate a regular cadence to reviewing their portfolio they are able to stay agile and responsive, they can proactively adapt, and they remain fully aligned in terms of budget and policy.
Image credit: Working From_ Fulton Market which you can book on the Desana on-demand workspace network.
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