“Digital by default.” “The end of the office as we know it.” “Office centricity is over.” What do these phrases have in common?
Unfortunately for commercial real estate professionals, these phrases are excerpts from Tweets, LinkedIn posts, and articles in the media recently. What the authors of this content may not have considered is the social impact of their ‘thought leadership’ on the people who occupy office space – the people who rely on each other for inspiration. They certainly have not considered the creative fallout as a result of moving to a ‘digital by default’ world.
I believe it is fair to say that by now, most people miss their previous lives, even the more monotonous parts like packing your lunch, brewing your morning coffee at the office . . . heck, some might even miss their morning commute (I know I do – I am way behind on my podcast consumption). What I hope all these feelings of longing for normality prove is that humans are social creatures that crave personal interactions.
We thrive on having a sense of community and rely on professional relationships to succeed in our careers.
Now, as the modern-day office tenant struggles to predict what offices will look like post-COVID-19, we are seeing some tenants abandon their own company fundamentals leading up to the outbreak.
The ‘battle for talent’ hasn’t ended
Remember the ‘battle for talent’ era? It was not that long ago when office tenants leveraged their cool, trendy spaces as a recruitment tool. As a matter of fact, the office was quite often the driving factor for talented human capital when evaluating their job prospects in the open market.
Not anymore! Get used to setting up your home office and building your own office furniture!
I bet all the vibrant, young professionals are frothing at the mouth in anticipation of their next Zoom Happy Hour!
“Post-work drinks? Nah, let’s go on Zoom and play a game of “Can you repeat that, Derek?”
“Hey, want to go for lunch? Nah, let’s UberEATS the same meal and eat it at our computers. I hope our Uber drivers are perfectly in sync and our food arrives at the same time.”
“Are you going to that networking event? Yeah! I am really looking forward to battling for airtime on Google Meet.”
Fingers crossed this is not our new reality. After all, when COVID-19 hit we were all treating the pandemic as a temporary problem. When did this notion change?
Three months into staying home and we are now witnessing influential companies make knee-jerk reactions in the middle of a pandemic.
Have any of them thought to pump the brakes, wait and see, evaluate the sociological and economic ramifications of these proclamations that the world is evolving, and it does not include commercial real estate?
Back to my point above, isn’t the current state of the world temporary? If it is not temporary, don’t you have much more grave concerns than reinventing how your company occupies office space?
Impact on your bottom line
Worse still, the repercussions go beyond damage to company culture; they will directly impact your bottom line.
Companies seeking to rapidly shed office space will need to consider the financial reporting implications of not occupying the space they are contractually bound to.
The accounting framework publicly traded Canadian companies operate under is called International Financial Reporting Standards (IFRS).
Under ‘IFRS 16 – Leases’, an office lease is considered a right-of-use asset. Key word to remember here is “use.”
What this means is that if the leased office space is being used for business purposes, then the lease expense is recognized over the course of the lease term.
Here is where we make an important distinction for companies making rash COVID-19 related real estate decisions.
If the company decides to downsize before its leases expire, then it must take an immediate hit to its statement of profit and loss. The term for this situation is a lease impairment.
From a real estate perspective, a lease impairment may result in two scenarios:
- The company is successful in subletting its excess space and would mitigate losses through recouping rent. Bear in mind sublet transactions rarely result in a 100 per cent rent recovery. Therefore, the rent delta would need to be reported as an immediate loss.
- The company is unsuccessful in subletting the excess space and must write off the entire right-of-use asset, resulting in a huge loss. The longer the remaining lease term, the larger the loss.
Institutional landlords are not likely to concede to early lease terminations or consent to non-viable sublet agreements as the contractually binding lease is the foundation of their business. Simply put, landlords rely on tenants to pay their rent as they are profit-oriented enterprises, not charities.
If you have not come to this conclusion yet, there is always the least disruptive option of going back to the office once a vaccine is created and using your space.
By writing this letter I am not claiming to have all the answers to your current real estate dilemmas.
As a matter of fact, I likely confused you by posing more questions. Nevertheless, I would ask that you please think dynamically and recall how it felt to walk into the office, a place that was once part of your identity and that you associated with your profession.
One thing I will proclaim is the connection you felt with your team because of the time you spent together in the office cannot be replaced with Zoom.
Remember these experiences when planning for the future.
EDITOR’S NOTE: The opinions expressed within this Open Letter are those of the author, and do not necessarily reflect those of CBRE.