The Incredible Shrinking Office: complete guide to downsizing in 2023

Canary Wharf is no more. Banking giants like HSBC – whose skyscraper historically dominated London’s skyline – have fled the capital’s business district in a signal that the return-to-office debate may be about to end.

Employers had previously put up a strong and public fight against hybrid working. Their concerns were obvious. Skyrocketing business rates and inflated commercial rent costs made emptied offices too expensive to afford.

But after three years of alternating between bribes and threats, research by the desk-booking app Envoy shows that 80% of bosses regret trying to force in-office attendance.

Now, rather than risk a long-term real estate investment, many are making plans to switch to a less costly office space. After years of their staff benefiting from the work-life balance that hybrid work offers, it’s time for SMEs to take advantage of the behaviour shift.

Why are companies downsizing?

According to a recent survey by real estate consultancy Lambert Smith Hampton, approximately 27% of employers with fewer than fifty employees said they were planning to downsize their office space this year. 11% said they planned to use at least 40% less space.

This change in strategy is part of a trend that has been ongoing since the end of the COVID-19 pandemic.

As the UK moved in and out of lockdowns, the so-called ‘death of the office’ ushered in a new era of flexible working. Employees swapped out their bus commute for a longer lie-in, causing previously bustling office buildings to become ghost towns overnight.

Four years later, and what had started as a temporary measure is now the most in-demand benefit amongst UK employees. As a result, business owners have been left panicking as their bank accounts are drained to pay for office space that is going underutilised.

Certainly, money seems to be the most significant factor motivating small business owners to make an office move this year. In total, 78% of survey respondents said that they expected to save money by relocating.

This financial incentive is partly being driven by the need to reduce headcount and cut down on staffing costs – a step which more businesses have been forced to consider as a result of the current economic downturn.

Official figures show that, since March 2022, the number of employers proposing redundancies has increased by 90% year-on-year.

Thousands of workers – most noticeably in tech – have been laid off as a quick cash flow fix. In this context, the decision to downsize office space comes as a way to shrink the workforce and save money on payroll and other HR expenses.

Are you ‘rightsizing’ or downsizing?

Cost is not the only influencer behind a scale-down. When HSBC relocated out of Canary Wharf earlier this year, it cited the benefits of its new City of London location.

“A modern office environment, well-connected to major transport links and amenities. The building is being designed to promote wellbeing and constructed to best-in-class sustainability standards, using predominantly repurposed materials,” said a press release.

HSBC’s change of address might be partly financial. But it is also a savvy way to adapt to market changes – a case of ‘rightsizing’, not ‘downsizing’.

Rightsizing is a strategic business decision. It is less about reducing costs and more focused on meeting new business objectives, by identifying the optimum space and layout that works best for the company’s growth plans.

If a company is planning to reduce footprint in order to accommodate a hybrid working environment, this would qualify as rightsizing over downsizing.

Nick Marshall is Director in the Commercial Real Estate department at Lawrence Stephens. Marshall has over 20 years of experience in Commercial Real Estate, and regularly advises companies on the relocation of their office space.

“The decision for companies to relocate is now influenced by factors beyond just hard cash,” he says. “Other benefits include the flexibility offered to employees by hybrid working plans and the associated benefits for mental health and wellbeing, and a decreased number of trips to the office – cutting down on commute costs, time and carbon footprint.”

How might a new office impact the business?

In an inflationary environment, a switch to a smaller office space might seem like a smart way for companies to find fast cash. But, as Marshall warns, there are some caveats to this assessment.

“In many cases, the decision to downsize is easier said than done,” he warns. “Business owners who rent their office space must be wary of the fact that they are tied down by often lengthy leases which they can’t get out of at short notice, simply to reduce overheads.”

The legal stuff

As it is usual for at least six months’ notice to be given to a landlord, the cost savings of a downsize may not be immediate. Tenants may also find themselves having to honour end-of-lease obligations, such as a dilapidation payment, even after they have relocated.

Steven Percy is Partner and Head of Commercial Property at SAS Daniels. Percy recommends that SMEs which currently lease their building first look at their existing lease terms to determine if/when they can terminate early.

“If they have a fixed term arrangement with no break clause, then the only option would be to ask the landlord to agree to a surrender of the lease,” says Percy.

“If the landlord agrees, they may request payment of the remainder of the rent as a condition of the surrender which could be a significant burden on cash flow.”

While this may not be the outcome a small business owner is looking for, the situation does still create an opportunity for SMEs to evaluate and assess their rental contract and negotiate a more agreeable deal for the firm.

“Looking at the positives, downsizing opens up the opportunity for tenants to enter into negotiations with a landlord of new premises for what will presumably be a lower rent on, possibility, more favourable terms,” says Percy.

“For example, a break clause could be agreed to ensure the tenant has some flexibility, or they may be able to avoid rent reviews thereby fixing the rent exposure over the term.”

Culture shock

It’s equally important to consider the impact of an office move on organisational culture, not just budget.

That’s because any decision that affects when or where your people work will likely have an impact on employee health and wellbeing. This is especially true if downsizing is being implemented in conjunction with redundancies.

Scarlett (not her real name) is a copywriter for a tech company based in London. The business switched to a smaller office space earlier this year as a result of layoffs. Scarlett says the transition period has been concerning for staff.

“As soon as downsizing was announced, the mood in the office shifted,” she tells Startups. “It was tough to wrap my head around the change in environment. I definitely felt concerned and anxious. Focusing on my day-to-day work and targets became an uphill battle.”

To avoid alienating the very people that generate the business, it is important to keep employees engaged with, and updated on, every aspect of the downsizing process.

Design a clear and empathetic communication plan that addresses timelines and floorplans. Plus, provide a way for people to give feedback, ask questions, and raise concerns, such as hosting a dedicated Q&A session.

The same is true if the company is also rightsizing, and introducing a move to hybrid working. Even if the workforce is crying out for more remote working options, bosses must consider what issues a reduction in in-office days might create.

For example, do you have a hybrid work policy in place? What communication channels are in place? How might it impact performance evaluation, or knowledge sharing? The latter point is crucial for younger workers who tend to require close training and supervision.

“Younger employees may find their development stunted by the move to working from home on a permanent or semi-permanent basis, and it is vital that the decision to downsize does not have a negative impact on such staff,” says Marshall.

Other practical things to consider when downsizing:

• What amendments to make to marketing materials
• How the relocation might impact employee commutes
• When to update clients
• When to update the company Google Business profile
• Precinct traits, like the number of parking spaces
• Potential loss of office resources (eg. meeting rooms)

Could coworking be the answer?

George Marment is Senior Surveyor at Making Moves London. Marment warns companies to consider both their current and future working policies when deciding to downsize.

“The key is to stay flexible,” he advises. “A change in headcount brings a requirement for relocation, but if office space generally isn’t being used it’s important to determine why.

“Ultimately, we are finding clients wanting to prioritise collaboration, and this often means retaining similar-sized high-quality spaces to accommodate staff coming to the office and working from home on broadly the same days.”

Of course, small businesses cannot afford to bankroll multi-million pound premises for the sake of it. But the answer here could be to invest in a space with flexible payment plans, in order to keep options open until a full picture of employee office attendance can be drawn.

Faced with this dilemma, many have turned to cheap coworking space as a solution. Flexible payment plans, where businesses pay membership fees rather than commercial rent, meaning they are not tied down by a long-term lease.

Research has shown that SMEs with a team of ten can save around £20,000 per year by using this method. In fact, it’s estimated that a coworking desk is around two times cheaper in London than renting traditional office space.

Collaboration is also easier for small firms based in a shared office. Members come in all sizes – from sole traders to large enterprises – but share an open floorspace, giving entrepreneurs access to networking opportunities.

Should you stay or should you go?

Today’s work landscape is transforming under our very feet. The shift away from conventional in-office routines has demolished the reputations of corporate districts like Canary Wharf, yielding new ground to an era defined by adaptability and flexibility.

SMEs must now decide whether to downsize, rightsize, or stay the same size. The threats are equal to the opportunities. Short-term added costs could lead to long-term savings. Meanwhile, the risk of a negative impact on company culture is balanced by the opportunity to implement sought-after employee perks like flexible working arrangements.

The solution may well lie within the embrace of coworking spaces, where cost-effectiveness, adaptability, and collaboration live under one roof.

Whatever the destination however, small business owners must plan appropriately for the journey. Conducting an impact assessment, and designing a clear communication plan, will keep employees and stakeholders on board, and ensure that – wherever you’re going – you’re moving forwards, not backwards.