We’re now well past any hint of quarantines or lockdowns, despite the occasional uptick of COVID-19 cases. The world has adjusted to a new norm in this post-pandemic world, and one of those norms involves remote work. Given that this trend has now persisted for years, many companies are going permanently remote in their efforts. New infrastructures and procedures are being implemented to accommodate this. And at the same time, many are downsizing their physical operations and real estate footprints. What many fail to realize is that decommissioning office space and exiting a commercial lease isn’t always easy. And the costs involved can be substantial.
Interestingly, as with any growing need of a specialized service, businesses are available to help with these processes. Experts who have insights into decommissioning office space can save companies significantly. They can also help problem-solve the more challenging situations that on the surface lack an immediate solution. Given that the rate of commercial vacancies continues to grow, it’s not surprising this is a thriving service area. It’s also one that’s being develop on-the-fly as even these experts are learning skills on the job. And with more and more companies going permanently remote, it’s likely these skills will be needed for some time to come.
“Our operating model now allows more people to work from home. Like other companies, we are constantly evaluating how we can tighten our belts and consolidate our space.” – Adam Plake, Associate Vice President, DirecTV
Growing Vacancies in the Commercial World
For larger urban centers, the vacancy rate for commercial properties has been increasing since the pandemic. In the second quarter of this year, however, it reached an all-time high at 16.4% nationwide. This figure is higher than the rate in the years after the Great Recession. Notably, this figure is much higher for places like New York or San Francisco. But it coincides with companies going permanently remote. Recent surveys now show that only 43% of all employees work in either a remote or hybrid situation. As such, it’s not surprising that decommissioning office space is a priority as companies strive to reduce costs. Based on current trends, this is not something that will change any time soon.
Companies going permanently remote reflects a significant stress for commercial landlords. Not only are they experiencing higher vacancy rates, but they’re also struggling with solutions. Of the potential commercial tenants available, many are preferring quality over space. This means existing landlords would have to invest in costly upgrades to accommodate this market segment. Alternatively, these landlords could turn these spaces into residential units. However, this is similarly costly and is often affected by zoning and building code issues. Faced with these not-so-attractive options, it’s not surprising that landlords aren’t very accommodating to existing tenants. This is another factor contributing to the high costs of decommissioning office space.
“[Tenants] look at the costs going in, but underestimate or ignore the cost of removing equipment [when moving out].” – Jay A. Neveloff, Partner at Kramer Levin Law Firm
Common Decommissioning Issues
For major companies that have leased large spaces for many years, decommissioning office spaces is difficult. In many such instances, these companies have made upgrades to their facilities to accommodate specific needs. Over the years, this might include large ventilation and air conditioning systems to keep IT centers working well. It might also include installed generators, corporate kitchens, and various fixtures related to décor. Based on most commercial leases, all of these materials and equipment must be removed. In other words, the space must be returned to its original state. And this is often much easier said than done for companies going permanently remote.
As imagined, there are some situations where the costs of decommissioning office spaces exceed an existing security deposit. In these instances, companies may choose to simply walk away if they are filing for bankruptcy. Rarely is it worth the costs of litigation to force the issue. But if they’re looking to lease a smaller property or maintain credit, walking away isn’t a great option. Not only do they lose their security deposit, but they also may risk securing another property. This could also hurt their chances for venture capital and growth funding. As a result, many companies going permanently remote must fulfill their lease termination obligations. And this is where expertise is often needed in assisting these firms with decommissioning strategies.
“A tenant’s obligations to remove items are only as good as their security deposit or letter of credit” – Jay A. Neveloff
Guiding Companies Through the Process
Given the problems and costs associated with decommissioning office spaces, many look for assistance. In this regard, some real estate firms now offer such services to aid large corporations in their efforts. This can involve something as simple as selling furniture and fixtures on secondary markets. Or it can be as complex as orchestrating a demolition and rebuild of a wall to extract a generator. From A to Z, these consultants help executives determine what’s most practical and cost-effective. Unfortunately, in many instances, win-win solutions don’t exist, and then, it involves minimizing the insults as best as possible. In some cases, sending items to the landfill could represent the path of least resistance as well as the cheapest solution.
As more companies going permanently remote encounter these issues, consultants are getting busier. And in the process, they are learning which strategies are worthwhile and which ones aren’t. For example, installations performed a decades ago may no longer be in vogue. This is especially true for lighting and many technologies. In these instances, there’s no use trying to resell such items for gain. These are the unfortunate situations these professionals regularly face when decommissioning office spaces. And while they do save these companies time and money, the end result is usually far from ideal. But then again, that’s just part of the pains associated with companies going permanently remote.