LEASE AGREEMENT REFERENCE GUIDE 1400: THE CONTINUING CORPORATE ASSAULT ON OCCUPANCY COSTS $24.95
The Continuing Corporate Assault on Occupancy Costs
Downsizing, Merging and Calculating Lease Buyouts
In case you’re wondering whether the cataclysm of corporate real estate downsizing is over—it isn’t, and it might not ever be. Consider a couple of examples from the mid nineties to appreciate the scope of this trend. At the beginning of 1996, PacBell announced it planned to cut its administrative office space by 28% over the next five years. That surgery would reduce the Baby Bell’s administrative space from 9.5 million square feet to 6.8 million square feet. PacBell apparently had recomputed the amount of office space needed for its average administrative employee, and slashed it from 322 square feet to 150 square feet. What was PacBell up to with such drastic action? Cutting occupancy costs—that’s what. The company had resolved to reduce them by 25%.
Despite all the downsizing that has already happened, corporate America remains intent on further reducing its occupancy costs for leased space. In many large companies, occupancy costs for corporate facilities are second only to payroll and benefit costs for employees. This means companies can first cut staff, then get rid of the real estate it used to occupy. The financial allure of this one-two punch against corporate overhead is almost too strong for the chief financial officers of this world to resist.
It’s also noteworthy that PacBell’s plan was voluntary. It wasn’t caused by a merger, acquisition or other external corporate event. It was motivated by a desire to get ready for the corporate war that’s already happening in the telecommunications industry.
Mergers usually spawn similar drastic reductions of staff and leased space. Look at what happened when Manufacturers Hanover merged with Chemical Bank. The merger triggered a dramatic elimination of office space occupied by the two institutions prior to their marriage. Before the merger, each bank occupied about 4 million square feet of space, either leased or owned—approximately 8 million square feet in the aggregate. In 1995, at the end of a long term space consolidation effort following the merger, the bank occupied a total of 6.5 million square feet.
Terminating Existing Leases
Downsizing companies normally have only a few options when they make wholesale reductions in their portfolios of leased space. They can: