The Great Restructure: How office leases are being renegotiated

This article appeared originally on ASAE.

By Mindy Saffer and Gregg Witt

With many organizations moving to completely remote work, commercial real estate occupancy has significantly dropped, and landlords are willing to make big concessions. This means associations can adopt a new real estate strategy to fit their workforce plans.

Current office real estate markets are soft and favor occupiers, presenting associations with a unique opportunity to significantly reduce their real estate expenses. For the first time in years, landlords are entertaining creative lease restructures and have a renewed appreciation for their tenants.

Before embarking on a restructure, it is critical to understand what your organization’s future footprint will look like. As more associations embrace remote work and a hybrid workforce, they are hiring staff who work at home and who will infrequently, if ever, be in the office. Staff reluctance to return full time to the office is another consideration that is affecting the decision. A choice to restructure must consider these factors, as well as predict the use, need, and purpose of the office post-pandemic.

Workforce Strategy Influences Real Estate Decisions

As associations contemplate the future of work, many still see the value in having a physical space to connect and collaborate with colleagues, donors, members, and volunteers. The rise of remote work also means most associations will likely adopt a hybrid work model.

Two key steps should be taken prior to developing a real estate strategy. First, understand your workforce strategy. Create a plan that attracts, enables, and ignites your workforce irrespective of their location. Leaders will need to make decisions about who works in the office, including the frequency. Organizations must also consider their staff’s personal concerns and reluctance about returning to the physical office. Once leadership reflects on these issues, a workplace strategy will commence that addresses the future office and the physical design it takes.

Second, the association will need to decide on the purpose of the office going forward: a return to normal where employees are working and meeting, an office that provides flexible opportunities or a place to only meet and collaborate. Each of these will require a different amount of space, perhaps as little as 90 to 125 square feet per person compared to the 200 to 300 square feet per person or more most association models used pre-pandemic.

A new workplace strategy will lead to unique office design and layout. Staff will need to become comfortable with different office paradigms where space is no longer owned but shared using concepts such as free addressing and hoteling. Whatever purpose is determined, the association will want to create an office environment that encourages staff to return. Only then, when your workforce and workplace strategies are clearly defined, can a strategy for negotiating a lease restructure with your landlord occur.

Lease Restructure Opportunities Abound

Many organizations need a real estate strategy that will take advantage of today’s market. Prior to office shutdowns in early 2020, association real estate transactions were typically triggered by an event: a lease expiration, early termination option, or a change in space requirement. Historically, landlords often agreed to restructure the lease if the association was growing—regardless of the lease termination date—but they were less interested in re-evaluating the lease mid-term if the occupier’s footprint was shrinking.

Today’s rising vacancy rates shifted office market dynamics, prompting landlords to be more flexible. As occupiers reimagine the workplace and develop new occupancy strategies to support a hybrid work model, many aim to shed space and reduce costs. In the past, a lease restructure required the occupier to extend the lease term five to 10 years beyond the existing expiration, a transaction referred to as “a blend and extend.” Landlords were hesitant to entertain this option unless the occupier was within three years of the lease expiration. This window of time was often shorter if the nonprofit had a termination option.

Today, landlords are willing to restructure leases with five years or more left on the term. Some even provide rental abatement, reduced rent, or will absorb your excess space in exchange for a lease extension of as little as one to two years. Your landlord may even consider a buyout of your early lease termination option without requiring an extension of your lease term. Instead, they may be willing to accept other lease concessions, such as your cash allowance and/or free rent. As part of these restructured leases many landlords are offering large tenant improvement allowances that will fund some—or all—of your new and reimagined office.

Organizations Have Time to Make Choices
There is no one size fits all. Associations that do advocacy work for their members are tending to want employees back in the office. Associations whose members are not planning on going back to their offices are getting pressure from their members to drastically downsize their footprints. Some executive directors and CEOs feel their employees are just as productive at home and want to reduce overhead. Some think the association will thrive if everyone is in the office collaborating.
There is not a right or wrong answer. It is best to understand what is needed to continue to serve your members and maintain and attract the best talent while keeping costs within industry standards. Time is on your side to figure this out. We expect the market to remain soft, creating opportunity for successful restructures through 2023.