During an economic downturn, many business leaders make reductions in operating expenses a top priority. Venture-backed companies start paying much closer attention to cash burn rates, preparing for scenarios where raising additional capital might be less assured. During these times, spending across the board receives a lot of scrutiny. “Every penny counts,” as the saying goes, especially when companies need to consider salary cuts or layoffs.
When looking at the balance sheet, perhaps nothing stands out more than rental and office expenses. For companies with any excess office capacity, these can be particularly challenging to stomach. Companies lacking space for new employees, in turn, may well see remote hiring as another way to increase the workforce without spending money unnecessarily on new offices.
On its surface, this seems reasonable. However, we suggest downturns may well furnish the most opportune time for regional expansion. After all, as noted in an McKinsey study published in the early 2000s, some of the most successful companies during the recession of the early 1990s outperformed others by investing more in acquisitions and increasing their operating expenses at precisely this time. Let’s look at some of the reasons office expansion into new regions might be worth considering during an economic downturn.
Value and Flexibility During a Recession
Often, the very best leasing terms can be secured when demand softens. At these times, landlords and brokers may be more willing than previously to support attractive sub-lease options, flexible termination clauses, lower upfront deposit requirements, shorter lease terms, and, of course, reductions in pricing per square foot. With the range of options on market, the opportunities to negotiate more favorable terms may be stronger than ever.
For companies prioritizing expense reductions in aggregate, opening up new offices in talent-dense, less-saturated regions can also mean substantially lower costs overall. The price per square foot for real estate in regions such as Nashville, Kansas City, Indianapolis, Orlando, and Charlotte can be as substantially less than the costs seen in cities such as San Francisco, Boston, or New York. As companies consider scaling back rental expenses in their higher-priced technology hubs, they may want to contemplate expansion opportunities elsewhere.
Risk Mitigation and Customer Readiness
The benefits of regional expansion go well beyond cost savings on real estate. By expanding locations, companies can reduce the risks associated with a particular location coming offline for any reason. In a post-Covid-19 world, risk management warrants more attention. Natural disasters and even geo-political turmoil can impact specific regions more than others. Recently, we’ve also learned about the perils of global supply chains too dependent on single suppliers or countries. Ensuring operational continuity requires more planning than many thought previously.
Additionally, expansion better positions businesses to be closer to the customer. This can be helpful to make it more efficient to reach customers in person and to augment digital marketing with localized brand awareness efforts. Customer support and sales teams, organized by region, can also better align their working hours with the customer. This increases net productivity without imposing unreasonable schedules on employees. Lastly, multiple offices can function as a destination to host customers as well. For organizations attentive to the lifetime value of their customers, these are all meaningful considerations. Office space still offers unparalleled utility for organizations to promote collaboration and deep relationships within and across an organization.
Expansion and Hiring
In a previous blog, we talked about how concentration hurts talent strategies, and these principles apply during economic downturns. By finding opportunities for expansion outside of tech hubs, companies can strengthen their foundation for responsible growth. Many less-saturated regions furnish access to exceptional and diverse talent at reasonable compensation levels. New locations can be attractive for existing employees looking for opportunities to move to more affordable locations to save money on housing. In fact, companies can, in many cases, increase employee retention levels, reduce salary expenses, and provide a higher quality of living opportunity for new employees and transplants
Office locations offer tremendous value to support hiring and growth initiatives across a business. They provide space for collaboration between employees and face-to0-face meetings with customers. Rather than making quick decisions to reduce office exposure during a downtown, consider the opportunities to expand presence in cost-effective and responsible ways.