Keep this in mind Occupiers! Office Management during COVID-19

Three years ago I was writing about Office Management for Business Continuity Planning situation.

While I was living in Manila, Philippines, it was quite common as a Commercial Real Estate Consultant to assist Occupiers with their BCP strategy given the quantity of earthquakes or typhoons that hit the archipelago every year (see more: https://www.dhirubhai.net/pulse/business-continuity-planning-you-ready-simone-martinelli/)

Moved to Ho Chi Minh City, Vietnam, I have immediately noticed how almost none of the MNCs had/have this risk management solution implemented in their strategy.

BCP will be my first point of agenda for this article about Office Management during and post COVID-19.

However let's take a step back and give a little context to see what is happening in Vietnam and briefly on potential consequences of COVID-19 on its economy and office market.

Vietnam GDP for Q1 2020 is registered to decrease by 7-10% compared to Q1 of previous years. For the entire 2020 economists have provided multiple scenario with the worst one to register GDP -1% growth and the best to be up to 5.5% growth in 2020.

Labor wise we expect a 250% increase of companies' shut down only in Ho Chi Minh City, with 350-400,000 job cuts, 80% of which in Manufacturing, Transport, Tourism, and Retail businesses.

In regards to the Commercial Leasing situation during and post COVID-19 in Vietnam:

• Published Rates of Rental Costs remain the same for conventional office
• Flexible Office Space operators are struggling with occupancy as their short term leases have backfired with companies working from home. Globally, operators are already providing 30-60% discounts or 3-6 free months rent (which they hope they can get back from their landlords). While they might be losing their typical tenants (IT, Start-Up, Back Office), Flexible Office Space Operators might gain new types of occupiers, and the post COVID-19 might register a positive trend as companies will be looking into short term lease commitments. Through the Global Flexible Workplace Platform developed by Savills, Workthere.com, our team is aware of Operators reaction, behaviors, concerns, strategy, and discounts.
• Grade C Building Landlords have already considered Rent Reliefs to keep their tenants as they might be their only source of incomes
• Grade A and B Building Landlords haven't provided a clear feedback on their policies for rent reductions so far. Premium Landlords will try to retain their most prestigious tenants, while they will be requesting financial documentation as stability proof to SMEs which are renting space in their buildings. Given this position, we expect many companies to consider breaking their lease and vacancy to rise.

Once this happens, for the first time in Vietnam we may assist to a temporary transition from a Landlord Office Market to a Tenant Office Market, something that I have experienced in the Philippines, which is both positive for Tenants - obviously - and for CRE Agencies.

SM

Very similar scenarios are applicable on regional and global scale. There is a slight favorable outcome for Tenants out of this situation: Occupiers which are willing to act in an opportunistic way might benefit by taking advantage of this situation and quickly sign new leases at the best Terms and Conditions.

Here you go with my list of actions and strategies that you should keep in mind to save cost and be ready as an Occupier for your Office Management during and post COVID-19:

1. BCP - Many companies have found themselves without a clear BCP strategy resulting in rushing decisions, non-budgeted expenses, etc.. Better safe than sorry, be sure to implement such strategy for your business moving forward, securing contingency offices ready to prevent these situations in the future, perhaps with a Retainer Payment Structure with Flexible Office Operators
2. WFH - Work From Home is not at all a new solution for the workplace. WFH has been widely adopted for years and this pandemic might have helped organizations to understand the benefit of having/implementing WFH. Such solution might also reduce your need for Office Space by implementing Hot Desk set up and Flexible Rotation within different teams of your company. Most of the largest global occupiers have already adopted this solution saving large amount of rental cost every year
3. Relocate your Office - Should your lease be coming to an end or your Lease Agreement gives you the opportunity to break the Contract, consider relocate your office to a more cost effective building, perhaps from a Grade A to a Grade B, etc.. or change in location as I will address further below. Leasing new office at the moment is beneficial for Tenants as mentioned above, as Vacancy is and will increase Landlord might agree to better Term and Conditions for new Tenants. Also this will threaten your current Landlord with the possibility of your company leaving and might force them to accept or consider your renegotiation. Always keep in mind office relocation costs which are quite high
4. Flexible Office Solutions - Always keep top of your mind Flexible Office Space. Such solution can ensure you with Short Term Leases and almost none initial CAPEX Investment as they come fully equipped and fully furnished. A good solutions to restart if you had to exit your lease, and you are not ready for a new long term commitment afterwards. Also, most of the global operators ensure its tenants with the best in class Sanitation services that they have hired to provide your employees with a safe workplace
5. Retain your Staff - Ensure the safety of your employees should you reopen your office by conducting Sanitation activities in your space: Steam, UVC Light, Ozone Gas, etc.. Hand Sanitizer and Medical Masks to be provided at any time to your staff
6. Additional/Small Savings - 1) Consider Record Management Services to virtually store your documents and save costs on storing space and reduce your leasable area OR If you are outsourcing storage in 3rd party space, bring back the storage to your office and temporarily cancel such contract. Given WFH, you should have plenty of space to accommodate your storage needs 2) Temporarily cancel your parking allowances if your employees are WFH 3) Consider outsourcing some of your non-core activities to 3rd party operators to reduce your fix costs and reduce your office space
7. Talk to a CRE Consultant! - In most stable businesses, Office Rental Cost amount from 25% to 35% of fix operational expenses. Commercial Real Estate Consultants are here for you to support your organization to optimize your Real Estate costs! Through our expertise and resources, we are able to approach your Landlord or new Landlords in your behalf and work on innovative solutions which you may have not though about.

Based on this last point of the above list - Talk to a CRE Consultant - allow me to provide you with some recommendations that we can provide to Occupiers.

Assuming that Landlords are in the same situation as you are, with operational risks knocking at the door, revenues drop, etc.. a professional and experienced CRE Consultant might help you by proposing:

• FLEX & CORE - Office Portfolio Strategy widely use by large MNCs. Flex your office throughout the city, run a survey to your employees: where they would like to work from - boost their engagement and happiness by locate their office near the school of his/her kid, next to the gym, reducing commuting time, or few meters away from the grocery store. Leave your CORE employees and activities in your smaller Headquarter and save rental costs with satellite offices in a less expensive part of the city or in less premium buildings
• Secondary Districts - Implement a Transportation Package and Service to your employees to commute to non-CBD District and relocate the office there to benefit from less expensive rental costs. Secondary Districts are always in need of pioneering tenants, as decentralization is a typical phenomena worldwide nowadays
• Review specific Articles of your Lease Agreement - Force Majeure, Pre Termination, Bankruptcy. Your CRE Consultant might help to look in depth in your Lease Agreement to find possible loop holes or content to utilize while renegotiating with your Landlord. Remember, CRE Consultant only job is to draft, review, negotiate Lease Agreements, we might be aware of opportunities that you aren't. Also, breaking a Lease might not always be as simple as it sounds
• Look for SubLeasing Opportunities - Should or shouldn't not your Lease Agreement be already inclusive of this Article, contact a CRE Consultant to seek subleasing opportunities for your under utilized space. There are different forms of subletting a space, perhaps you may be able to earn back some rent temporarily
• ROFR and Cap & Collar Agreement - If you need to sign a new lease however you have concerns on the size of space you might be needing given the current situation, consider signing a ROFR or Right of First Refusal on the next available space next to your unit or on the floor above/below you. Add a Cap & Collar clause which will do yours and the landlord's interests setting minimum and maximum terms for the rent price in advance to avoid future unpleasant situation for both parties. Landlord will be offering such space to your company first in case a new Tenant is about to sign it. In this way, you may temporarily save Rental Costs on your total needed space
• Blend & Extend - Old school CRE solution. Now, this only might work if your lease will expiry let's say in more than 12 months. If you are trying to use this technique while your lease end is only 2-3 months away, you will lose your leverage with the Landlord. Very simply, assuming your lease will be expiring in the next 20 months and your company is financially stable and not worried of committing to additional 24-36 months on top of your lease, propose a further extension of your lease term with a Reduction of the Rent or at least a Cap and requested for a "Blended" Rental Rate.
• Rent Paybacks - To propose such solution, Occupiers might be ready to provide to the Landlord Financial Statements, Measurements that they have been implementing to reduce operational expenses during COVID-19 (as Landlord will want to make sure you will not try to save money on Rent only), identify which benefits you are bringing to the Landlord (Example: Prestige Company, Coworking providing flexible office/meeting space to all Building Tenants, etc..) and history of relationship with such Landlord in case we can prove what a diligent Tenant your company has been so far. Shouldn't be possible to achieve a simple Rent Relief, a Consultant might still try to request a Temporary Reduction with Payback in lump sum or multiple settlements. Paybacks with Service Exchanges might be also proposed on a dollar-to-dollar base (example: Law Firm providing Legal Services in exchange of the Rent; Event Company promising Platinum Sponsorship in the next event; etc..)
• Use of Security Deposit - Very unlikely to be approved, however with a good leverage or argumentation, your Landlord might agree to utilize part of your Security Deposit as a payment for the Rent
• Management Fee - On top of your base Rent, you are paying a Management Fee to cover for the Landlord expenses on maintenance, cleaning of common areas, etc.. as this cost is way lower than previously budgeted for the Landlord, as most offices have been closing down, Landlord might consider temporarily deduct such voice of cost

There is no guidelines nor textbook for this kind a situation. CRE Consultants can help to negotiate with your Landlord or new Landlords without the need of threatening your Landlord that you will vacate. A good Consultant will suggest so only as his/her last shot, to avoid tension. Also, always keep in mind high relocation costs (legal, construction, movement, employee disruption, etc..).

We can propose Innovative Solutions and help implementation as per the lists I wrote above.

So it is time to get creative to seek the best outcome for all the parties and financially survive to this terrible situation that is and will affect everyone in many ways globally speaking. Clearly it is a case-by-case situation, a CRE Consultant can elaborate possible strategy specific to your situation.

Hope this has been helpful for you. I'd be happy to hear your comments from fellow consultants and seek improvement/new ideas. Also, looking forward to get in touch with Occupiers that are seeking support.

[email protected]

-SM