In the November Monetary Policy Report from the Bank of England, a stark forecast for the UK economy was laid out; recession conditions will persist till H1 2024, with a gradual recovery beginning after this point. During this period, the BoE suggests that headcount within businesses will be driven by demand, which in turn will be impacted by the rising costs of energy, household expenses, and the collective approach to either eating into savings or reducing spend.
What does this mean for business and real estate spending?
Well, most businesses post Covid-19 have already embarked on a program of rationalization of real estate assets to align with new working practices. However, for those businesses which have moved to remote or hybrid working (and have made a corresponding reduction in desk count), there are as many businesses that have opted to retain space and instead bring the workforce back into the office (this is especially true in financial services, business services and creative industries which often rely on in-person activities). As a result, many businesses are still carrying a hefty amount of real estate spend in their budgets.
What has now changed?
For many technology, professional and financial services businesses as well as consumer, retail, and manufacturing industries, cost optimization will now become a major focus for Finance teams. Across the board, we are beginning to see hiring freezes, compensation & benefit changes, and sadly redundancies. Whilst during and post Covid-19, real estate optimization was all around changing operating models, now the reality for many businesses is that they will be actively looking to operate with a reduced headcount for the foreseeable future.
Those finance teams currently creating the scenarios for refreshing long-range or strategic 5-year plans should now be considering real estate spending as an area in which impactful savings can be made; either via the re-negotiation (or exit) of lease agreements or the sale of assets. Negotiation of existing lease agreements will depend extensively on the contractual obligations within leases but also on the nature of the relationship with landlords; proactive landlords will embrace negotiation as an opportunity to ensure retention (even at a reduced rate). Sale of assets represents a more challenging prospect; whilst market conditions for commercial properties have suffered during the pandemic, residential property price has remained high. Sales timelines can be challenging to forecast, and with widespread falling demand, achieving the desired sale price for properties may be challenging. This is where Finance teams should be focused on adding value and collaborating with internal and external experts to establish the range of scenarios that maybe experienced. Modeling the impact of these scenarios on the balance sheet with corresponding cash flow and income statement forecasts.
Providing the leaders of the business with this information early is crucial.
This not only helps inform decision-making but also provides context on a key area of expense that could become a strong source of short-term cost savings (and provide an immediate cash injection). It also allows for the correct planning to be undertaken from an operational perspective to prepare for these actions. Those businesses who move quickly to embrace a reduced spend on real estate are not only preparing for the period of recession but are also establishing a healthier position from which they can grow from in H2 2024.
This is the key outcome that this activity can drive, preparing the foundations for exiting a period of recession. Moving early in this area also protects the business from potential falling commercial property value, whilst opening dialogue with landlords also protects relationships by establishing ongoing commitments. Those companies that purposely plan in this space are most likely to emerge from the other side of the recession in a position to succeed.
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