How COVID-19 will influence cost-savings strategies

Part 1 of 2: Look for the next article where Michael will discuss specific steps CFOs should take to reduce costs.

The continuing uncertainty due to the pandemic and the global economic fall-out have left many CFOs wondering how to not only survive, but thrive in the current and future environment. As the spread of the virus continues to rise in many states across the U.S., companies need to realign their spending and become more agile to move forward. Now is the time to get the house in order and eliminate inefficiencies — and that starts with the second largest expense item on most company’s income sheet — their real estate portfolio.

It’s not just COVID-19 that’s disrupted the way many corporates do business; it’s also the pandemic’s ripple effects. In order to create a cost-savings strategy, you’ll need to factor in everything from portfolio inefficiencies to the heated debate over reopening schools, and even the new ways people are working. CFOs must take all of this and more into account for their real estate footprint — not only to make them more financially sound, but also to increase their agility to respond to the evolving demands of the business in a time of uncertainty.

In the last five months we’ve learned a great deal about the new ways of working and how technology can enable business performance. The fluidity between the physical and digital workplace means that employees can use technology to be productive — creating a “work anywhere” ecosystem. But that’s not the only factor to keep in mind. JLL’s Future of Global Office Demand Report shows that 44% of employees have missed the human and social interaction that the office makes possible. Offices are also an important facilitator for clear workday routines and distinctions between personal and professional lives. Just because we’ve seen an increase in our ability to work from anywhere doesn’t necessarily mean there will be a corresponding decrease in the demand for office space.

Pre-COVID corporate real estate inefficiencies

Even before the pandemic, many corporate real estate portfolios had high vacancy, low utilization and inefficient layouts. According to JLL’s 2019-2020 Occupancy Benchmarking Guide, most organizations had north of 20% vacancy — and they were only utilizing 60% of their occupied space. During the pandemic, utilization plummeted to close to zero, since most employees were working remotely.

For many organizations, their real estate portfolio hasn’t kept up with the evolving needs of the business and how work was done. Change is difficult — often requiring tough decisions, capital investment and asset write-offs.

Due to the pandemic, employers have realized there’s more than one way — and one place — to get the work done. Working from home, quite frankly, works for many and may be the safest option in the near term, especially with the potential of reclosings and reopenings. There’s also the uncertainty of whether or not schools will reopen, which will affect whether parents are able to come into the workplace. Times are changing, and according to a PWC survey, 54% of CFOs plan to make remote work a permanent option. All of which means that the office as we know it will need to adapt and change alongside of society.

Now is the time to address inefficiencies that were put aside before. For businesses to survive and grow, it’s important that CFOs and corporate real estate leaders are strategic when re-evaluating how their space needs will differ in the future. Throughout the pandemic, occupational density has gone into reverse in order to comply with social distancing. But once a vaccine becomes available, there will be a greater focus on face-to-face interaction that also factors in health and well-being as employees seek those connections that only occur in an office. Your real estate footprint itself may or may not change, but the way you use it definitely will.

Pulling the right levers

While many CFO’s are shifting their focus from cost cutting to rebuilding revenues, addressing those pre-existing space inefficiencies in their real estate portfolios to cut costs can increase an organization’s profits much more quickly. By way of example, the blended net profit margin for the S&P 500 for Q4 2019 was 10.7%. For every $30 million of expense savings, to have the same impact on profits an organization would need to generate $280 million in additional revenue (assuming the same historical cost structure to support that additional revenue). These unprecedented times present a significant challenge to revenue growth for many businesses. That’s why CFOs need to determine which levers would best help them achieve those savings. These might include actioning excess or underutilized space through asset write-offs, lease buyouts, lease restructuring, lease impairment — which allows the write-off of a lease so it’s no longer on the income statement — or accounting restructuring, to name a few. For space where the future need is known, now is the time to renew and renegotiate leases to lower rents. This provides property owners income certainty, something that many are seeking.

Disruption also provides an opportunity — the investment community is more forgiving to those organizations who exceed expectations during a crisis than those who under-achieve and waiting could hamper the ability to execute those cost-saving strategies because everyone else will be doing it too.

Time is of the essence when it comes to neutralizing the pandemic’s impact on a company’s bottom line. Our next installment will expand on specific steps CFOs and their organizations should begin taking immediately to pave the way for a much healthier position going forward.

Michael Billing is a Managing Director of Consulting for JLL. He can be reached at michael.billing@am.jll.com