With the economy potentially on the brink of a recession, it may seem like a natural move for chief financial officers (CFOs) to cut office space budgets. But experts say that achieving real estate cost savings may be more complex this time around compared to previous economic downturns.

"What organizations need to do now is say, 'Okay, in every recession, real estate has been an item we've looked at,' so they're looking at it again," said Julie Whelan, global head of occupier thought leadership and research consulting at real estate services firm CBRE. "But they need to look at it through the lens of how much they've cut during the pandemic and where they think their headcount is going."

The stalled pace of employees returning to the office and hybrid work's firm foothold in corporate work models have led experts like Whelan to peg office space utilization at about 50% of pre-pandemic levels—even as hard-charging executives like Elon Musk and JPMorgan's Jamie Dimon push hard for workers to return to their desks.

The latest round of office space cuts is most visible in Silicon Valley, where announcements from well-known tech companies like Salesforce and Microsoft come almost daily, with many of them unveiling layoffs and adjusting their real estate footprints. "Tech companies were known for holding space for growth. Then all of a sudden, it just stopped," Whelan said in an interview.

Real estate is a huge cost center, with office space typically being the second- or third-largest expense for service companies after labor, Whelan said. Still, she noted, companies shouldn't wield the budget ax before figuring out current office space utilization and their goals for how many employees they ultimately want working in the office. Only then can they focus on the gap between current and future attendance and decide how to manage real estate costs this year, she said.

When CFOs comb through their office lease portfolios, they should also keep in mind that they're in yet another cyclical economic downturn, and because office space is a long-cycle item, it's impossible to time it perfectly, said Eric Anton, senior managing director at commercial real estate brokerage Marcus & Millichap. Office leases can run 10 years or longer.

"You can make the perfect turkey sandwich, but if you have to plan how many turkey sandwiches a company needs to order in a year, that's really hard. Same with office space," Anton said in an interview.

Here are four evolving issues or unexpected variables that CFOs need to track when deciding how or when to cut office space:

1. Savings don't always come from lower rents:

The U.S. office market is showing signs of distress on multiple fronts, with tenants holding the upper hand in most—but not all—markets, experts say. But if you take a quick look at most average asking rents, which are the rates buildings advertise, you wouldn't necessarily see that.

In fact, Class A office rents in U.S. downtowns inched up to $51.41 per square foot in the fourth quarter from $51.08 a year earlier, while asking rents for premium suburban space were $33.58 per square foot last quarter, flat from a year ago, according to a Jan. 26 report from Colliers.

Tenants are getting concessions such as "free rent" periods and money landlords provide to tenants to fit out space, known as tenant improvements. Some buildings in larger markets are offering 12 months of free rent, or tenant improvement allowances of $100 per square foot or more to upgrade space, wrote Stephen Newbold, national director of office research at Colliers, in a Jan. 26 blog post.

Those rents could face further pressure this year. U.S. office vacancy rates rose to 15.7% in the fourth quarter from 14.8% a year earlier, according to Colliers. If that pace holds, vacancy could hit a peak of 16.3% by midyear, a level not seen since the height of the global financial crisis, Newbold wrote. Whether the market is brewing a correction is an open question, with considerable debate about the future of the U.S. office market, he wrote.

2. Yes, location, location, location still matters

It's a new twist on the oldest adage in real estate: location, location, location. Employees are gravitating toward a "flight to quality" in premium office space, and companies looking to entice employees back to the office need to make the commute attractive and convenient, Anton said.

That's likely to be an office above a transit hub, such as Grand Central Terminal or Penn Station in New York, to minimize commuting hassles, rather than the latest "cool" neighborhood, he said. "If I'm coming in three days a week and I live in Greenwich, Connecticut, New Jersey, or Westchester, I don't want to take a train and then a subway, or a train and then walk 20 minutes," Anton said. "I want to come in, go upstairs, and boom, I'm in a Class A landmark office building."

Similarly, there's a bifurcated market even in the weakest rent areas. So far, demand has held up better for newer and more modern buildings with plenty of amenities, experts say. For example, average asking rents across all office classes were roughly flat at $35.23 per square foot in the third quarter of 2022, but effective rents for top-tier properties in some of the largest markets rose 4.2% last year through the third quarter, according to a CBRE report.

3. Office sale-leaseback demand is wobbly

A sale-leaseback is when a company sells its office building and signs a lease, typically for 10 to 15 years, with the new owner. It has long been seen as a way for companies to monetize their assets. In one recent large deal, Biogen announced in September a sale-leaseback agreement with Boston Properties that generated nearly $603 million in gross proceeds for the company.

But in recent years, investor demand for office properties has cooled due to concerns about the office market's outlook. Additionally, investors seeking properties want to buy single-tenant office buildings, and even companies that own their buildings typically have other tenants, said Scott Merkle, managing partner at SLB Capital Advisors in New York.

Still, sale-leaseback arrangements are worth considering because the cost of capital remains lower in the current high-interest-rate environment, Merkle said. Debt costs for many middle-market companies rose more than 400 basis points in 2022, making sale-leasebacks more attractive than they were 12 months ago, he said.

4. There's no magic ratio of space per person

Historically, the real estate world often discussed the right ratio of employees per square foot of office space. That ratio is no longer realistic now, given differences across industries and the varying mixes of hybrid, on-site, and remote work that companies are adopting.

Moreover, even as work patterns are taking shape, it's not entirely clear how to accommodate employees who may not all be in the office at the same time. For example, most tenants are adopting hybrid schedules with at least three days in the office per week, according to Colliers.

Many companies are gradually embracing the increasingly popular "sweet spot": requiring all employees to return to the office on Tuesdays, Wednesdays, and Thursdays. From that, some CFOs are trying to extrapolate the amount of space they'll need in the future.

Hot-desking and other systems are changing companies' calculations. "The ratio per square foot is almost a number that no longer makes sense," Whelan said. Over the next few years, as companies adapt to the new work environment, CBRE estimates companies could reduce the amount of space they need per person by about 15%, according to CBRE's 2023 U.S. Real Estate Market Outlook.