Many companies are in cost-cutting mode amid rising inflation and recession concerns. Some, like Microsoft and Alphabet, have turned to hiring freezes, while Walmart, Netflix, Ford, and Oracle have announced more widespread layoffs. One underutilized method to lean out the business? Replacing fully in-person work with remote or hybrid models that allow companies to pull back on real estate costs.
Before the pandemic, real estate costs were between 3% to 9% of S&P 500 budgets in all industries besides energy. That might explain why in a recent survey by workplace software provider Robin, 83% of executives said they expect hybrid work to be a cost saver, while 60% said they plan to reduce office space by 50% or more. Companies have long used office space inefficiently, commercial real estate experts say, but the proliferation of hybrid and remote work has them reevaluating these expenses. Among Fortune 500 CEOs, 74% said they plan to reduce office space.
This then raises the question: Does switching to remote or hybrid work actually save money? And do the potential cost-savings outweigh the benefits of having space to accommodate all employees in person, such as mentorship, collaboration, and innovation?
Mark Dixon, founder and CEO of commercial real estate company IWG, says that companies can cut 50% of their real estate costs by going hybrid, adding that CFOs are “really focused” on the potential savings. The research firm Global Workplace Analytics found that companies can save up to $11,000 for every employee working two or three days remotely per week. The firm says these savings come from reduced rent as well as increased productivity and lower absenteeism and turnover.
Regardless of their current operating model, companies are using occupancy and usage data to help inform future office decisions and weighing those savings against the cost of work-from-home stipends, upgrades to existing space, and new software to support collaboration and project management for distributed teams.
Micah Remley, CEO of Robin, argues that design and technology upgrades can be “pretty cost-effective compared to holding on to a whole bunch of empty space.”
Cost considerations
Companies have been moving toward remote work well before COVID-19, though the pandemic accelerated the trend. Spotify began plotting its “Work From Anywhere” initiative in 2019, and GitHub has been remote-first since its founding in 2008. Cisco went hybrid five years ago, cutting 50% of its real estate footprint. The enterprise technology company says it has since saved around $500 million.
Pre-pandemic, employers aimed for a standard of around 150 square feet of office space per employee, Remley says. That figure is dropping as companies require less space per full-time employee and design new office formats for a much lower daily headcount. “Cubicles and assigned seats are really going away in a flexible work environment. What’s arising is open concept offices, soft seating, more lounge-type seating,” says Remley.
In terms of cash flow, the decision to switch to hybrid work might not offer immediate savings, but companies are likely to break even in subsequent years. Upgrades to office space can be viewed as one-time capital investments, while year-to-year operating expenses, such as rent, decline or are scrapped altogether.
The counterargument
Some leaders are choosing to increase their real estate footprint instead. Companies like Google and Facebook have bought more real estate during the pandemic, while others are simply revamping the layout of their current commercial holdings. “I’m not so sure it’s going to be a cost negative,” Scott Dussault, the CFO of HR tech company Workhuman, recently told CNBC. “I’m not sure if people are going to take less real estate; they’re just going to change the way that real estate works.”
To wit, hybrid work could be a costlier option if companies are not significantly reducing their rent and facilities maintenance expenses while simultaneously investing in technology upgrades and redesigned office spaces. Business spending on cloud technology grew around 35% in each of the last two years, according to Synergy Research Group.
“It does often cost more” to go hybrid, says Lenny Beaudoin, executive managing director at CBRE. “Most organizations historically looked at [real estate] like a cost or liability. I think this moment has inverted that to think about it more like an asset.”
Companies also need to spend more in other areas to accommodate the shift to a hybrid or fully remote model. This may include new benefits, such as work-from-home stipends, upgraded cybersecurity systems, or more IT staff and HR personnel. Beaudoin and Remley point to the proliferation of cross-functional teams to ensure remote and hybrid work models are effective, noting that CEOs and other C-suite leaders are much more involved in these decisions than before.
That’s because real estate now plays a much larger role in employee engagement and the bottom line. For well-run companies, that presents an opportunity.
“You need a great link-up between hybrid work teams, great design, brilliant digital to support it, and the data,” Dixon says. “Do all of those things, and you will have a better company that operates at lower costs.”
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