Episode #6

Return to Office: The C-Suite Dilemma

Contributors: Francisco Acoba, Bart Waldeck
Francisco Acoba, Principal, Strategy & Transactions at EY sits down with host Bart Waldeck to discuss some of the challenges C-level executives are experiencing while planning the return to the office, including how to make decisions for the long-term that are effective both from a real estate and employee perspective.
Workplace 2.0
Workplace 2.0
Return to Office: The C-Suite Dilemma
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In this Episode

Francisco Acoba, Principal, Strategy & Transactions at EY sits down with host Bart Waldeck to discuss some of the challenges C-level executives are experiencing while planning the return to the office, including how to make decisions for the long-term that are effective both from a real estate and employee perspective. 

  • Transcript

Episode Transcript

Bart Waldeck:

Welcome to another episode of Workplace 2.0, Tango’s podcast about all things corporate real estate. I’m Bart Waldeck, your host, glad you could join us. I’m very excited today to have Francisco Acoba from EY join us on Workplace 2.0. He’s a veteran of the corporate real estate space and has deep experience in strategy, operations, and technology, and what I’m mostly interested in is his perspective on all the different dynamics in corporate real estate today as we’re emerging form the pandemic because he’s actually engaged with a lot of large companies helping them work through their return to the office and what the office of the future means for them. Welcome, Francisco, thanks for joining us on Workplace 2.0.

Francisco Acoba:

Hey, Bart, how are you? Good to be with you guys today.

 

Bart:

Yeah, absolutely. Well, thanks for joining. Can you give our listeners just a little bit of background on yourself and the practice at EY?

Francisco:

Sure, absolutely. I’ve been working in the corporate real estate, management consulting, and occupier consulting space now for the better part of the last about 25 years. Worked with a variety of different firms, and most recently here, of course, with EY and the work that we do is focused on helping corporate real estate organizations with all matters relative to performance improvement, business improvement, operational efficiency, transaction support around large separation or integration efforts that may be taking place relative to MNA and divestitures.

We do a lot of work in the technology space in helping clients think about IT strategy, system selection, deployment of solutions. And lately, as you can imagine, lots of work relative to digital workplace, IoT considerations, cloud, and really thinking about next-gen technology and how that can enable the workplace experience.

Bart:

Yeah, it’s a dynamic time to say the least. I think you and I were talking before that the next 10 years in our space is going to be quite interesting and exciting at the same time.

Let’s talk about that, what everybody’s kind of up against at the moment, which is for most companies, planning the return to work. With the vaccinations in full swing and numbers coming down, it finally feels like, unlike last summer right before the Labor Day when we thought we were going back, and then again other times, this feels like we’re really going back and some folks are.

Are you helping companies think through this? And if so, what are some of the main things that you guys are focusing on?

Francisco:

Absolutely, very much so. And it’s been a process and journey over the past year to your point. The thoughts have evolved and perspectives have evolved both internally within corporations, organizations, as well as in the consulting and advisor community as we all collectively try to think about what are all of the key aspects that need to be addressed relative to our return to the workplace.

Clearly, with the recent developments and big push around vaccination, people are becoming more comfortable and in many cases, are beginning to of course venture back out into the marketplace and getting excited about the opportunity to begin to co-locate with their colleagues for collaboration or with their clients or vendors and so forth. There are still certainly concerns and hesitations in the marketplace. But I think what’s particularly encouraging from my perspective is, as we’ve been talking to clients as well as many large landlords, owner operators, investors over the past few months, everybody is trying to do their part and do their best to really figure this out. Figure out the solutions so that people are going to be comfortable and confident when they come back to the workplace.

The timing for that clearly will be different for every organization. Some are now really pushing it hard, and we’ve seen all of the recent press releases and in many cases from some of the large financial institutions. For example, in the New York area or even some of the larger global technology companies that have started to make announcements about opening some of their headquarters, facilities or campuses.

And I think it’s just going to take more and more of that momentum to build to be able to get to a place where we’ll really be able to see where we are, and where do we stand relative to the workplace. How it will be used and how the thinking will evolve around workplace experience and interaction with our colleagues after 14, 15 months – it’s been a long time.

Bart:

Yeah. And I find quite fascinating because obviously we both follow all these things in the news and early on it was, “Hey, we don’t need the office anymore. Everybody can work remote, isn’t this great?” So the pendulum swung all the way to that extreme, and it started coming back. And I even just look at the tech space that we’re in, that we have this interesting kind of continuum from those companies that are allowing for more revoked dynamic workplace, and those who are looking more in-office.

So on the remote side, you have a Facebook basically saying, “Hey, you can carry on work from home post-COVID. We can make it dynamic. You can come in when you want.” On the other extreme, we now have Google accelerating their return to the office and putting limits, 14 days a year on remote work. And then in between, you’ve got Microsoft who is saying, “Hey, we can do a flex schedule depending on what.” So it’s interesting to see, even within an industry like technology and software companies, to have such a different take on what makes most sense.

Have you seen that play out? Is it really kind of a company culture-driven decision, level of trust and productivity and things such as that?

Francisco:

It is. And certainly right now, I think a lot of organizations and perhaps the majority, are in a little bit of a wait and see mode as to how the first movers fair in this process and how they approach the situation. And as I’ve talked about on many other calls and webinars and discussions, the process of going back to the workplace is one that really, it requires really focused planning and dedicated thought.

We really need to put a plan together so that you can address the needs and concerns of the employee population, and of course, still make this effective and productive for the corporate entity. Without that planning, you’re really coming back into a situation where you’re maybe making assumptions about how things might work and how they did work pre-pandemic, and that that might be sufficient going forward.

The reality is we don’t know. We need to plan some of these things out and think about it, and put in place programs that allow us to be flexible and evolve our thinking over the coming 6, 12, maybe 18 months, so that then organizations can make decisions about the long term.

All of these companies, even the ones that are talking about get back to the office in the next two months, even for those organizations, there’s a lot of unknowns that they have to walk through and manage. And how they approach that will certainly impact the effectiveness of their return to the workplace.

Bart:

We put the term learning phase on that initial return. Real estate is the long game. So you’re making 5, 10-year lease bets, and you can’t just overreact without really knowing what work is going to look like for you as a company. So that kind of brings front and center the need to understand more real-time, what’s going on with the use of space and the need for space. Which tends to, as you mentioned a little bit earlier, bleed into the potentially greater need for IoT and other types of sensors and things.

Sure, we can rely on badge data and reservation data, that can get us so far, but are you finding that there is a greater appetite or need in order to better understand what work really means to invest in IoT?

Francisco:

Great question, and the answer would be yes. The ramp up really started, from what we’re seeing in the marketplace, over the last few months. Earlier in the pandemic at the very beginning, when people were thinking about return to the workplace, and they thought that we would be back in the office maybe by last July 4th or Labor Day, it was more about certainly the people and the space. But now as people have had time to think about this more so over the last year, they’re understanding more holistically what some of the opportunities are relative to the use of technology and digital workplace technology to help with that process.

Being able to use badge data as those of us who’ve been doing workplace strategies for the past 10, 15 years, we all know that’s sort of the least common denominator approach and sort of a very baseline. It’s a starting point, and it’ll give you directional input, but it’s still directional at best.

The opportunity now to deploy IoT sensors in the workplace and really begin to understand much more about how space is being used, what spaces are being used, when are spaces is being used. All these questions, same thing whether you’re talking about individual workspaces or you’re talking about collaboration spaces and team rooms and conference rooms. How are they being used, by how many people, are there situations of potential overcrowding or over density in your workplace environment that you need to manage? Doing this without technology becomes difficult, especially at any scale.

And then of course, as you alluded to earlier, to be able to make decisions about the long term for the portfolio, it’s very critical to have data. We certainly espouse the concept of a data driven approach to these decisions. And the opportunity exists today to be able to do some great analytics and put some real thought around the true actual use of space. And then that’ll allow you to really develop this concept of the hybrid workplace between the office and your remote home and third places, how will that all work? But if you have data to make these decisions, it’s going to help you in the long term make sure that you’re making the most effective decision for the organization. And by effective, I’m referring to not just financially efficient, but also taking into account the needs of the workforce as well.

Bart:

The way I think of it is you’ve got a fix supply of space, and you have a dynamic demand. So you’re trying to find an equilibrium that is more complex than before, and that, you need to pull in the timeframe of an analysis to more real time than last quarter, last year, and for planning next quarter, next year. And it’s almost like a hospitality model to really understand what is needed on a day and day part level.

Francisco:

To that point, there’s a lot of pressure that organizations and corporate real estate heads and others are getting right now from CFOs and others to potentially shrink the portfolio, make this more efficient, reduce our vacancy, reduce the cost of occupancy. And if that pressure continues, and as many organizations are alluding to that they do significantly reduce their footprint in the realm of 10, 15, 20, 25%, if that’s the case, then you have less space, and you have your demand to manage. And as you said before, so now you have less flex.

So you really need to understand what that true demand is so that you can manage things more effectively in that smaller footprint and contribute to those cost measures of the organization but again, still meet the needs and allow your organization to be effective in the workplace.

Bart:

Yeah. You hit on it with the occupancy cost side of things. Obviously, the CFO has always had his or her eye on real estate being a top five expense. Largely, you’re competing between the human resource cost and real estate being up at the top. CFO has always been aware, but it seems as though the other parts of the C-suite now are much more engaged in the real estate equation given the risks, the liabilities, all the changes going on.

How do you see that playing out? Are you getting more audiences with a broader set of the C-suite than maybe you have in the past, where maybe it was CFO centric or operationally centric?

Francisco:

It’d probably be safe to say that in the last 12 months had more C-suite level discussions around corporate real estate than in the past 10 years. Literally, this is a C-suite agenda item at this point. Everybody’s concerned about the workplace and how that’s going to effectively contribute to the success of their organization going forward. So absolutely, this is definitely on the radar screen.

And if you think about pre-pandemic, eyes were just beginning to open up for many companies that in reality, they were probably at best using, let’s call it, 50 to 65%. And that may be generous of their workplace portfolio, the number of seats/workspaces at any given point in time, any day. So if you had vacancy in the range of, let’s call it, 30 to 35% or more pre-pandemic, what does that mean now when a large portion of your knowledge workers have demonstrated that they can, at least a portion of their time, work very effectively, remotely, and work from home?

You might be talking about structural vacancies in the 50 to 60% range. If that’s the case, now, certainly you don’t want to get down to the point where you’ve made things so tight that you have no flex, that you don’t have optionality. But even, again, if that allows you to reduce your portfolio by 20 or 25%, that’s a lot of change for organizations. That’s a significant change.

Bart:

I think even in your neck of the woods, some of the financial services firms in Manhattan trying to step away from that very expensive real estate, maybe go to a satellite type of strategy or other things. I even heard, interestingly enough, talking to a retailer recently that they’re starting to create corporate office space within retail stores for their office employees. So they don’t have to do the two-hour commute. They can go in-office at a local store of the company. So they’re getting creative.

Francisco:

They are getting creative and organizations are certainly thinking about how do they consider potentially more hub and spoke type models for their portfolio and their footprint, even within major metropolitan areas. So it will be interesting to see.

I think that the way that organizations will use the workplace will change going forward. That’s the one thing that we know. What we don’t know is exactly how. To the point you made earlier, to really figure out the how and what that’s going to look like, you need data, and you need to be able to have the opportunity to do much more analysis than what we’ve had to, or been able to do in the past because it just won’t suffice going forward.

Bart:

Yeah. And I’ve heard, along those data lines and along the concept of C-suite, a lot of people we’re talking to have been saying, “Look, I’m getting asked questions from the C-suite that I was never asked before, and I don’t have the data to answer those questions.” So it is kind of helping build the business case for investment in workplace technology, maybe IoT and other types of things.

Are you’re seeing a greater willingness to invest across the board in tech for real estate?

Francisco:

It’s certainly emerging from that perspective. I think that as more organizations realize that they need this data, they need to be able to look at things differently, there are various options as to how to do that, but the opportunity to put the infrastructure in place has never been better.

To be honest right now, if you think about it, you can come in and do the work before all of your employees come back to the office, get things set up, and then when they get back, from day one, you can really start that process of understanding actual use. And the cost of doing so from a hardware and sensor and analytics perspective has certainly reduced over the years. So it’s gotten to a point where it’s certainly much more cost-effective.

I think where organizations need to really think about right now is what are they going to do with their broader, as I like to call it, their integrated corporate real estate platform? What are they going to do with that platform to be able to now ingest this data effectively and use it for these analytics? And how does that leverage and mesh with your underlying space management systems and real estate management systems, lease administration? There’s lease accounting aspect impacts here. It all plays together. How do you integrate that into a solution that really helps you make holistic decisions?

Bart:

One of the interesting things I’ve noticed, being in the space a long time too, is employee engagement has been a topic that’s been in our industry, top of mind, or talked about at least a lot. Like sustainability was at one point, and that’s re-emerging as well. And there was a lot more talk than there was necessarily action, I think in both of those areas, but I feel like the employee engagement side is getting a new day in the spotlight, and you have these major corporations like Salesforce, like ServiceNow, like others trying to be the last mile for the employee, which are new entrance to our space. And we’re kind of feeling this front office, back-office line between the two.

Are you seeing that dynamic play out where it’s almost consumer type of applications for an employee beyond the typical reservation amenity requests and things such as that?

Francisco:

Yeah, there are. And I think it’s certainly, at this point still, I would say it’s the organizations that are on the more leading edge and really thinking about this holistically. But yes, there’s definitely an interest in the occupant facing technology in the form of workplace apps or workplace experience apps and how they can be used going forward.

One of the big pushes that we’re hearing more and more about now is the whole concept of the touchless environment. And that starts with your arrival in the lobby of your building. And it goes all the way up through the day and how you work through the day and how you potentially order your lunch, how you reserve a space in the office, how you make arrangements for your meeting rooms, your collaboration requirements. The touchless concept is big. And again, it’s a means to make people feel more comfortable and safe in the workplace environment. And that’s one of the key hurdles that we have to overcome as we’re going back.

Bart:

It’s interesting because in the past, there’s been resistance to some of the IoT and tracking type things. Finding a sensor ripped off a desk and in the garbage can next to it and people worried. But now to your point, there’s almost a trade-off and it seems to be a willingness, like most data transactions, for lack of better word, where if I get something back in value, i.e. safety or feeling more comfortable, or having the ability to book amenities and other things easier to make my job easier, I may be more willing as an employee to be tracked at a deeper level. We have all these PIP regulations and other types of things.

How is the privacy part playing out in your opinion?

Francisco:

Yeah, it’s interesting. We’re still seeing, certainly when you think about GDPR and other requirements and starting in EMEA, but I think that’s going more broad now as well from a requirements’ perspective. So that’s there, that’s going to be a concern. But I think there’s also the reality that, especially with many of the newer generations in the workplace, they’re on social media 24 hours a day. They use these apps to collaborate and find their colleagues, and they want to know where their colleagues are in the workplace so they can go meet with them and sit with them and have that opportunity for dialogue. In many cases, they’re given the opportunity to opt in to these aspects of the solution.

And I think that to your point, by opting in, so what do you get back by opting in? And for a lot of folks, I think that they’re beginning to see that the benefits that they get back outweigh the fact that they’ve now allowed someone to see where they are in the office at any given point in time.

The other option of course, is there’s ways to do this with a lot more anonymity. It doesn’t have to be identifying individuals. It’s just identifying an individual or a person – an occupant. I don’t know who that person is, but in the end, certainly if you know who it is, you can get to a different level of analysis and understanding by group and by demographic of location and so forth.

At least you know how is the space being used based on density and when, and over time, that data is still very, very valuable in real estate planning, scenario planning and thinking about what is going to be needed going forward.

Bart:

Absolutely. Let’s ground ourselves in the near term here. Obviously, portfolios are turning all the time. Renewals are coming up, and we’re in a climate of uncertainty where we’re, as we discussed, making long term bets and making quick change is difficult, but you have a reality often of a renewal coming up, and what am I going to do? What should I do?

How are you advising in that kind of situation, given the uncertainty that most face today as far as how this is going to play out?

Francisco:

Great question, and a lot of organizations are beginning to face that now. Certainly again, a year plus into this, it’s just normal turnover cycle with your properties. You leases are coming up, what do you need to do? And again, it’s one of those situations where it’s difficult to make the long term decision right now, because there’s still some unknown. We don’t know, we don’t know yet.

So in many cases, it’s a matter of working to, even if it’s a short-term, put renewal in place or extension for a period of time until you can get your folks back and get grounded in your thinking around the workplace and the portfolio going forward, and then make those decisions in the next 12 to 18 months.

One thing that we are talking with a lot of clients about right now is the need for increased levels of flexibility in the portfolio. So shorter term leases are very much under consideration despite the potential impacts on operations or even from an accounting perspective, the complexities there. Short term renewals or short-term leases, but also organizations, even in this environment, are still heavily considering the opportunities relative to service offices. And how can I further infuse that model into my portfolio to provide more flexibility? So that’s a real concern right now.

Bart:

We’re hearing the flexibility as well. We’ve also heard the term flexibility premium. So you’re going to have to pay for that flexibility, but maybe that’s the better bet than locking into a five, 10-year term without having the certainty of where it’s all going.

Francisco:

It certainly will be interesting in the US but in other countries where also there have been historically longer-term leases, how is that going to impact the market?

Bart:

Yeah, I never thought about that. Very interesting. Well, it’s a crazy time, a good crazy time as our industry is, and I really appreciate you providing some insights into kind of what you’re seeing out there and joining us here on Workplace 2.0. Looking forward to hopefully having you back as this continues to mature and evolve. It seems like if we fast-forward two months and the world is completely changing, we’ll have a different conversation.

Francisco:

That’s right. No, thanks so much for the opportunity to connect with you and your listeners today. And I certainly look forward to the opportunity to continue the dialogue. Thanks so much.

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