Over the past three months Dumbo is moving reduced about 200 offices to warehouse space and about 100 more to small office space. That’s double what the New York-based transportation company did in the same period last year, and several times higher than it was before the pandemic.
The transport company takes a seat in the front row. all-pervading spending cuts ahead of a recession as businesses try to do everything they can to avoid laying off workers. Ditching office space is one of the many levers companies are using to cut costs. Some companies forgo attractive perks such as Complimentary Meta Laundry Servicewhile the more mundane among them are hosiery crappy snacks as well as get rid of free coffee. Others freeze hiring for new positions and suspend travel. Many others are much more careful about their software licenses than they used to be during the pandemic, even as they potentially allow more people to work from home. In other words, more people may be able to work from home again, but this time they may be stuck with Microsoft Teams, even if they prefer Zoom.
Of course, none of these cuts mean jobs are completely safe. There have been some high-profile layoffs in tech this year, and more are expected to come. However, it is important to understand that 140,000 technical layoffs only a small part this year general technical employment, which number in the millions. Notably, many of these layoffs followed a period of active hiring during the pandemic, while other industries saw contractions.
In terms of the economy as a whole, layoffs were close to historic lows at less than 1 percent of total employment in October, according to the latest available data. Bureau of Labor Statistics data. Meanwhile, 10.3 million vacancies were opened. Companies fear of making the same mistake many did it early in the pandemic, laying off swarms of workers only to spend the next two years trying to hire them back as the economy quickly improved.
For now, instead of layoffs, expect big cuts to everything else — especially real estate and remote access software.
Come back to the office, meet the crisis
Historically, companies have always cut real estate spending during economic downturns, even before telecommuting turned office space from mandatory to optional. A recession in the coming months could be particularly harsh for the commercial real estate market. This summer, the consulting firm Gartner found that nearly three-quarters of CFOs wanted to downsize their real estate organization by the end of 2022, the biggest downsizing of any type.
These cuts are likely to disrupt companies’ plans to return to the office. So far, the proportion of days worked from home has been remained remarkably stabledespite the fact that this summer and fall, many companies have accelerated their plans to return to the office.
Rebecca Kehoe, a professor of human resources studies at Cornell University, says companies that haven’t been too pushy to return to the office are the most likely to cut real estate spending. But even companies that have asked employees to return to the office more often may also have reduced office space.
“This could actually be a push for organizations to be open to a more remote approach,” Kehoe said. She added that telecommuting has the dual benefit of helping companies retain employees and perhaps mitigate their frustration with, say, a lack of a raise.
According to Arpit Gupta, an associate professor of finance at New York University, the extent of real estate cuts will depend on the type, size and age of the company. For large conglomerates, real estate can be a small part of their spending, while for startups it can be a big expense.
“From their point of view, this is one of the main expenses that they have to deal with, and if in fact they can get rid of it in a way that their own employees are happier than before, then it seems to make sense. in every way. “Gupta said.
The decline in real estate may be most significant in tech, which has suffered the brunt of a potential recession and has been more accommodating to remote work in the first place. Meta, for example, recently announced in its earnings report that spending $3 billion to get out of lease this year and next, a move they hope will save money in the long run. The company expanded the possibility of remote work for all levels of employees in 2021. Of course, Meta also turned to layoffslaying off 11,000 employees this month.
Economy-wide, these cuts will certainly be significant, but fortunately for building owners, experts don’t expect these cuts to go on forever.
Econometric Advisors division in a real estate services company CBRE expects the US office vacancy rate to exceed about 19 percent next year. They are currently at a 30-year high of 17 percent. Julie Whelan, CBRE’s head of global landlord leadership, doesn’t think companies can reasonably reduce office space.
“Companies have made so many cuts in space during the pandemic that they will have to be very careful not to cut too close during the crisis,” she said.
Goodbye Zoom corporate account
As companies continue their so-called digital transformation, they will rely more on software. But while software spending is expected to rise, it’s not happening as fast as it used to, and there will be cuts in some areas.
Gartner expects overall IT spending to rise 5 percent next year. Enterprise Technology Research (ETR), which polls CIOs and other IT decision makers about their software spending decisions, expects IT spending to grow by about 4 percent this and next quarter compared to the same quarter a year earlier ( these estimates have declined over the year). However, given that inflation is at a colossal level 7.7 percent in the past year, companies will have to be more choosy about what software they actually need.
According to ETR data, companies are most likely to reduce their Internet technology spending through consolidation, with a third of organizations saying they are doing so. This usually means looking for multiple software licenses that offer the same technology and getting rid of one of them. In many cases, this decision-making will benefit big tech companies like Microsoft and Google, which offer many different offerings—video conferencing, chat apps, spreadsheets, documents, performance management, cloud computing—under a single license.
“If you’re a Google Store, you’ll use Google Enterprise Content Management in Google Workspace,” said Eric Bradley, director of research at ETR. “But more often than not, larger organizations already have a Microsoft 365 license, and since you already have it, you can use it.”
This means that employees with a license for a video conferencing tool Increase for example, may soon make calls through Google Meet if they already pay for its email service. Or they can opt out of Twilio communications software if they already have a license from Microsoft that has a competing product. Or they may lose Dropbox if they already have file sharing through AWS. Companies feel they won’t put their business at risk because they’ll still have a version of their software—maybe just not the one employees prefer.
According to Alexander Bant, head of research at Gartner CFOs, these cutbacks represent something of a reversal of what we saw earlier during the pandemic, when executives were much more generous with software that made remote collaboration and productivity easier.
“They chose several different collaboration tools. Different regions and leaders had more carte blanche with the software,” he said. “Now they want to consolidate.”
Consolidation is unlikely if the software is seen as an integral part of the ongoing operation of companies or if it is in an area where companies are afraid to take risks. According to ETR, the key areas where spending growth is the highest are cybersecurity and data analytics. Sales related software is also relatively safe. This necessarily means that some things will fade into the background.
“CFOs are really prioritizing software that drives short-term sales over long-term innovation and new product development,” Bunt said.
How drastic the overall reduction in corporate spending will be will depend on how severe the recession is and how long it lasts. For now, though, people’s jobs are relatively safe, and the talk of cutting costs revolves more around real estate and excess technology than people.
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