The past 12 months has seen a steady stream of announcements from large enterprise businesses that they’re dropping hundreds, even thousands of square feet in office space. A Knight Frank and Cresa survey found that 50% of businesses with more than 50,000 employees expect to shrink their global workspaces in the next three years.
Sometimes, as in HSBC’s decision to leave their iconic Canary Wharf tower, this has been timed for the end of a lease period, but others are paying millions in exit costs to get out of agreements that no longer suit their workplace strategy. Early in 2023, Meta paid out £149m to break the lease on a single central London office building. This willingness to write off such sums demonstrates the value businesses are placing on the alignment of corporate real estate commitments with workplace and people policies.
Over the last three years, remote, hybrid and flexible working policies have shifted from a necessary response of home working mandates to a permanent part of workplace strategy for businesses all over the world. According to a report by the McKinsey Global Institute, office attendance has stabilized at 30% below where it was before the Covid-19 pandemic. Employees are keen to hold on to the flexibility of working from home when needed, and some simply want to work nearer to home, facilitating easier child care pickups and shorter commutes. Others have moved away, taking advantage of the opportunity to not be tied to expensive urban centers, and don’t want to be forced back to large HQ’s.
Changing employee behavior has, unsurprisingly, led to a re-think that’s altering how today's leaders build their CRE portfolios. Traditionally, organizations would hold large buildings on long-term leases of up to 20 or even 30 years, in a small number of core locations that employees would be required to commute to every day. Now, with hybrid and remote working meaning people don't come into the office more than a few days a week, if at all, these buildings are lying empty and represent a huge sunk cost.
Some, like Roblox and Amazon, have decided the solution is to call people back to the office, issuing RTO mandates and putting a stop to employees working from home. The issue with this approach is that research shows people don’t want to - Only 6% of Americans prefer full-time office work if given a choice (Gallup), and 56% know someone planning to quit due to a return-to-office mandate (FlexJobs). RTO mandates like this pose a huge risk to talent retention, without evidence that having people in the office improves productivity and performance.
The question is, why are some businesses still pursuing CRE approaches that are misaligned with people and business needs? Flexible working guide ‘‘How the Future Works" suggests that ultimately, it’s because change is uncomfortable. For managers who’ve spent many years operating within the defined structure of a concrete workplace policy, flexible workspace can feel like the Wild West. Delivering an effective flexible policy comes with new considerations and risks outside the immediate experience and comfort zone of leaders, while a blanket policy with concrete days in the office is easy to implement and understand. However, with the right framework in place, which strikes a balance between top-down guidance and trust in your team, flexible workspace policies needn’t feel out of control and there are huge business benefits and opportunities to be gained.
Thanks to the development of new technologies and the growth of the flexible workspace market, innovative leaders now have the opportunity to embrace fresh approaches that are better for both people and business. An approach we’re increasingly seeing adopted by forward thinking businesses is the pursuit of asset light real estate portfolios that reflect the reality of flexible work by embracing a combination of different asset types, instead of committing to one approach that requires uniformity in employee working styles. One of these asset types might still be a traditional lease, but on tenant friendly terms of 2-10 years rather than the traditional 20+. Alongside these, employees are offered flexible workspace access in some locations, and the use of on-demand workspace platforms like Desana to supplement home working.
These “Agile Portfolio’s” are beneficial for both employees and the bottom line because they allow employees to work in a style that suits them, preventing underutilization of workspace, and can be adjusted and iterated to reflect changing needs and markets. This asset light approach reduces the risk of committing to new strategies, allows leaders to continue to analyze employee behavior, and regularly iterate their portfolio in response. The result is a CRE portfolio that can flex and adapt in response to changing business and economic needs.
Dropbox is a prime example of the value that can be unlocked by shedding outdated lease agreements which no longer serve their people and business. In fall of 2023 they were confirmed as paying $79m to amend their lease and surrender 165,244 sq ft of office space in their HQ. This sum may sound high, but it will ultimately save the business $137m in rent and $90m in common area maintenance fees over the remaining 10-year lease - representing a saving of $148m, on top of the boost to employee happiness and talent retention.
Instead of demanding space be used, they’ve built a strategy that leans into the new world of work and launched an official ‘Virtual First’ strategy, which provides the tools and support employees need to work from wherever they choose to. A core pillar in this strategy is providing their teams with access to Desana for on-demand access to global workspace, whenever and wherever they need it. In the words of Dropbox CEO Drew Houston, ‘employees are not resources to control’. By providing employees with choice and autonomy over where they work best on any given day, employees feel empowered, productive and trusted to deliver their work, to the betterment of the business.
And the result? Dropbox last year reported that since their transition to becoming a Virtual First company, staff retention is at an all-time high and 70% of recently hired employees cite Virtual First as the main reason they applied for a role.
We’re living through a huge period of change for the market, and one that provides a window into how the coming years are set to unfold. Across the world, business leaders are moving, at scale, to de-risk their portfolios by seeking out asset light options that don't tie them into lengthy agreements and offer the ability to rapidly adjust portfolio commitments in response to changing employee numbers and business requirements. Flexibility, and the appetite for more agile real estate strategies, doesn't in any way mean the death of the office - but it certainly does change the way companies use them. The decision by business leaders to end long leases isn’t a rejection of workspace, it's a vital move towards using offices in a more iterative and intuitive way that ultimately supports the future of work and business.
If you'd like to speak to our team about how Desana can help your business build an agile portfolio then book in a demo and we'd be delighted to show you how.