August 11, 2022

MEGANEGANE

Just Do It

Companies Plan Additional Cuts to Office Space Amid Looming

During the coronavirus pandemic, executives gave office workers more flexibility to work from home, enabling businesses to sublet office space or hold off on renewing leases. These moves helped to bring down corporate expenses and improve efficiency. Many employees have continued to work remotely or under a hybrid model even as revenue has recovered—and in many cases grown.

Companies including consulting firm

Korn Ferry,

business-listings provider

Yelp Inc.

and government contractor

Leidos Holdings Inc.

are scrutinizing their space needs again as they contend with high inflation, rising interest rates and an uncertain economic outlook. Many businesses also have a better sense now of how many people will come back to the office on a regular basis.

Office space reductions tend to yield long-term savings as less money goes toward rent and other office-related expenses. In the short term however, companies often face one-time penalties when they terminate yearslong leases ahead of time.

At LinkedIn’s new flagship office, desks are no longer the primary focus. With dozens of different work settings and conference room setups, the company is using its office as a hub for its hybrid workforce. WSJ gets an exclusive look inside. Photo: Karl Mollohan for The Wall Street Journal

Yelp on June 23 said it would shut its offices in New York, Chicago and Washington and trim the size of its location in Phoenix. That equals planned reductions of 420,000 square feet, resulting in nearly 180,000 square feet of remaining space. The San Francisco-based company said it occupied 876,000 square feet at the end of 2019, before the pandemic.

Yelp, which sells advertising products to restaurants and other businesses, doesn’t need a physical presence in these cities because it can operate successfully on a remote basis, Chief Financial Officer

David Schwarzbach

said. Mr. Schwarzbach declined to comment on how much the company expects to save by shutting down these offices. Yelp plans to sublet them to other companies and allocate some of the savings toward benefit packages for employees, he said.

“If we have a recession, we believe that we are continuing to set up the business in a way that we can respond rapidly and make the right operating decisions,” Mr. Schwarzbach said.

Yelp is already subletting some of its office space in New York and San Francisco. Those subleases, which were agreed to last year, remain in place until at least 2023, and the company is still marketing unused space that isn’t sublet yet, he said.

The company, which is going fully remote, had 4,400 employees at the end of 2021, up 13% from a year earlier and down 26% from two years earlier. Yelp last year took $11.2 million in impairment charges to reflect sublease agreements, which include a lower rate than the original lease, a filing showed. Yelp plans to retain offices in San Francisco, London, Toronto and elsewhere.

Vacancies have increased across the U.S. over the past year. About 17.5% of office space across the country wasn’t leased or was leased but available for sublease at the end of the second quarter, up from 16.5% a year earlier and 13.2% five years earlier, commercial real-estate firm

Cushman & Wakefield

PLC said.

Occupancy rates also remain below prepandemic levels. During the week ended June 29, the average occupancy rate in 10 major U.S. metro areas was 44% down from over 95% before the pandemic began, according to Kastle Systems, which operates security systems in U.S. office buildings. Kastle tracks how many people are entering buildings based on anonymized data from its swipe-entry systems.

“When you’re coming into potential economic headwinds, that puts even more pressure on figuring out where you can cut expenses, so any resource that you’re not fully utilizing is a target for companies,” said

Mark Ein,

chairman of Kastle.

Los Angeles-based Korn Ferry plans to decide by the end of the year whether to shrink its 900,000 square feet across 85 offices by 10% to 15%, based on data on worker attendance it is gathering, CFO

Robert Rozek

said. The company generated over $10 million in annual savings from giving back roughly 230,000 square feet to its landlords since the pandemic began, he said. The savings came from leases the company didn’t have to pay for, leases with negotiated early exits and leases for which it sublet all or part of the space, Mr. Rozek said.

“There’s probably more space that we can wring out of the system,” he said. “I want to see how many folks are actually coming back into the office and then I’ll form a point of view in terms of our next steps.” The company hasn’t set a minimum number of days for people to work in the office, Mr. Rozek said. Korn Ferry employed 10,779 people as of April 30, up 37% compared with the prior year and 32% from April 2020.

Mr. Rozek, on a June 22 earnings call, said he “believe[s] that there will be a sort of a second wave…of real-estate reductions.” At Korn Ferry, that round of reductions will likely result in additional annual savings of under $10 million, though the exact amount is unclear, he said.

Companies that are under pressure during an economic slowdown are likely to weigh long-term lease commitments much more carefully, said

Julie Whelan,

a lead global researcher at

CBRE.

“I would expect that in the face of companies’ pullback in hiring or a contraction in the employment market, it would have follow-on effects to the real-estate market,” Ms. Whelan said.

About 52% of companies expect to shrink their office space over the next three years, up from 44% a year earlier, a recent CBRE survey among 185 businesses with U.S. offices found. That’s compared with 39% that intend to expand, up from 29% a year earlier, and 9% that foresee no change, down from 27% a year earlier.

Leidos Holdings, which provides information-technology and engineering services, last month said it plans to “get rid” of 25% of its office space. The Reston, Va.-based firm occupied about 8.9 million square feet of office space at the end of last year, most of which is leased, a filing showed.

“Mondays are pretty empty. Fridays are pretty empty. And that means we have too much real estate,”

Roger Krone,

the company’s chairman and CEO, said at a conference last month. Leidos Holdings didn’t respond to a request for additional comment.

Write to Mark Maurer at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8