How can companies turn their real estate into a competitive edge?

This article was originally published by McKinsey & Company, www.mckinsey.com. Copyright (c) 2021 All rights reserved. Reprinted by permission.

The COVID-19 pandemic has led companies around the world to reassess their real estate—how much of it to have, how to use it, and how much to spend on it. Fortune 50 companies alone occupy 2.6 billion square feet of real estate, and some of it sat mostly empty for long stretches during the pandemic. At times in the prolonged work-from-home experiment, the media, employees, and even company leaders wondered whether large numbers of offices were necessary at all.

We maintain that strategically located workplaces that are built for purpose and integrated into corporate strategies, cultures, and operating models are more important than ever. We also strongly believe that companies should cease viewing real estate as a mere cost center and instead approach and configure it as a source of competitive advantage.

The right approach to real estate can help companies not only to grapple with the universal challenges arising in the pandemic’s wake but also to achieve their corporate goals. Marrying strategy to real estate requires a deep analysis of a company’s needs, as well as data to inform decisions. These decisions are best managed by top strategic thinkers guided by the CEO—a departure from the way companies have traditionally made real-estate choices.

We examined three companies that aligned their approaches to real estate with their corporate strategies and addressed common themes ensuing from the pandemic. These organizations are now positioning themselves for success by using their physical footprint as a competitive edge. We also identified three steps companies can take to transition their real estate from a cost center to a source of support for their larger goals. Companies that act now to rethink their approaches will position themselves most successfully for the future.

The following examples showcase companies that leveraged real estate to compete more effectively. Each company thought deeply about some common questions: the purpose of the workplace in the hybrid era, as well as the right balance between freedom and flexibility, on the one hand, and connection and collaboration on the other. They aspired to create workplaces and policies that would help attract and retain talent—for example, more sustainable commutes, amenities to support the well-being and engagement of employees, and designs that would encourage group work and contentment.

Each company started from a different point of departure: one picked a new location to build a central office from scratch, another repurposed existing offices it leased before the pandemic, and a third redesigned an existing headquarters and upgraded the technology linking it to satellite locations. This variety demonstrates the range of options for reinvention, even in cases where long-term leases may appear to be a constraint.

IncepTech, a Budapest-based digital firm founded in 2014, specializes in building digital products for clients. It had a clear strategy: in a tight labor market for software engineers, the firm wanted to attract the kind of talent that could easily get jobs at the world’s top technology firms.

IncepTech also wanted a space that would help it move away from competing for client work through traditional written project proposals. Instead, it hoped clients would come to the office, discuss their needs, and immediately get help solving problems. In the spring of 2020—just as the pandemic was unfolding—the company began designing a fit-for-purpose software-engineering studio, adorned by plentiful green foliage, with large-pane windows for abundant natural light.

By the end of 2020, IncepTech Studio had been completed. It was located in a newly hip area of Budapest, on the banks of the Danube, a location that provides beautiful views and walkability to restaurants, services, and other companies. Minimalist white or light-colored furniture and transparent room partitions create a sense of openness. The space is designed so that engineers can stare into the distance and think clearly, surrounded by light and greenery. Meeting rooms are suitable for hybrid work, with smart cameras, digital whiteboards, and glass walls for better visibility.

The studio was intended to show employees that offices can be enriching environments. A soundproofed music room—stocked with an electric drum set, a keyboard, guitars, microphones, and a computer to produce electronic music—is open to employees for spontaneous jam sessions. The company hosts get-togethers with staff and external professionals once a month and is planning yoga and meditation events for employees.

IncepTech reports that its offices have been crucial in building its team to roughly 75 full-time employees in a hot market for tech talent. Although a small firm, it has competed effectively against large global software companies and integrators. (In February 2022, McKinsey acquired the company.)

Employees are not required to come to the office. Teams come in when necessary, particularly for intensive brainstorming sessions or last-mile project sprints. The studio has also helped bring in client work, company executives say: the space provides an attraction point that makes clients want to work from it, and the meeting rooms make it easy to include off-site collaborators.

Before the COVID-19-pandemic, roughly 2,700 employees of the technology company Dropbox worked full-time out of one of its offices primarily in San Francisco, Seattle, Austin, New York, or Dublin. When the pandemic began, the company implemented remote work, leaving those spaces empty.

Dropbox quickly realized that many employees were both highly productive and satisfied with remote work, and in the fall of 2020 declared itself a “virtual first” company. The challenge was to give employees the flexibility they craved while preserving a sense of human connection, sustaining the company’s long-term health and mission, and retaining a learning mindset.

Dropbox tailored its real estate solution to these goals. Instead of abandoning all of its office space, it converted some of its former offices into Dropbox Studios used for collaborative work, team events, and training. It optimized the existing spaces for collaboration by removing most desks and creating conference rooms with flexible wall systems and movable furniture so that spaces can increase or shrink depending on need. In some cases, Dropbox cut the amount of square footage it leases. In Dublin, it moved to a new location built from the ground up for collaborative experiences. The new space includes a café, where employees can connect and recharge over free espressos and cappuccinos, and immersive technology for videoconferencing, intended to level the playing field between on-site and remote participants.

Dropbox Studios opened its doors to employees in mid-March 2022, so the concept is largely untested. The company is committed to adjusting the game plan, depending on how its needs as a virtual-first firm evolve. “Human connection is a foundational part of our strategy, and studios play an important role in facilitating that,” said Terry Wiener, head of virtual first for engineering, product, and design at Dropbox. “We’re excited about what we’ll learn in the months and years ahead.”

Gilead Sciences, a global leader in biopharma, began to think deeply about a modernized real-estate plan before the COVID-19 pandemic. It's Foster City, California, headquarters—the central node of its master plan—had seen the company through decades of pioneering science. However, many competitors were moving to a different model: the discovery, research, development, and manufacturing of a single drug routinely happen in different parts of the world. Against a growing drumbeat of remote work, Gilead needed a real estate strategy to increase connection and collaboration, speed up the transfer of technology, and attract the best scientists. But how best to position one of the world’s largest research-anchored HQ campuses?

After a series of analytical workshops, Gilead decided to buck the trend and double down on its HQ. Instead of selling or leasing off parts of it, the company invested in a redesign. The campus vision called for the labs and buildings to “follow the molecule,” so the discovery, research, development, scaling up, and manufacturing teams work in spaces that flow from one to the next. To promote a sense of organic connection, Gilead created inspirational spaces, including a state-of-the-art, 65,000-square-foot well-being center with a gym, meditation areas, and mental- and physical-health resources. The company also added a cutting-edge laboratory and research infrastructure and accelerated its digital-engineering transformation by adding process data systems that let labs connect with one another seamlessly.

Every HQ space is being digitally enabled so that employees can instantly videoconference with collaborators elsewhere. Immersion rooms have multiple high-definition screens and one-touch teleconferencing technology, so users feel as though their colleagues were in the same physical environment. Labs at headquarters and around the world are adding remote systems to help scientists monitor experiments from anywhere, as well as augmented-reality glasses and screens so that remotely located participants feel as if they were standing in the lab.

Focusing Gilead’s real estate strategy on scientific efficiency rather than operational economics served the company well during the pandemic. When COVID-19 hit, Joydeep Ganguly, senior vice president of corporate operations, and his team engineered and delivered a Biosafety Level 3 (BSL-3) laboratory on the main campus in only four weeks, so Gilead’s scientists could work with the virus safely. Amid unprecedented urgency to create drugs, the innovative campus and laboratory systems played an important role in attracting crucial talent to the company.

“Too many operations strategies focus solely on near-term cost imperatives,” said Ganguly. “While this is important, there is far greater value to having the operations-footprint vision serve a greater role by catalyzing innovation, engaging and attracting talent, and enabling corporate ambitions.” The company will continue to invest in its headquarters, to evolve the “flash lab” design, and to invest in next-level collaboration technology. “At Gilead, we continue to believe our master plan will catalyze the collective brilliance of our colleagues and serve as a magnet for top scientific minds,” Ganguly said.

The first step in developing real estate as a competitive advantage is for leaders to determine the corporate metrics and objectives they want to achieve. Next, they must identify the moments that matter for employees, suppliers, and customers to achieve those metrics and objectives. Real estate should be a multidisciplinary issue linked directly to corporate strategy, so the third step is to set up a steering committee to assess the current real-estate footprint and ensure that it aligns with corporate objectives and the moments that matter.

Before the pandemic, the most common objective of real-estate policy was simply to reduce absolute costs or costs per employee. After COVID-19, if the goal of a company remains to reduce the cost of its real estate, it can simply have its staff work from home, where many employees are quite happy. However, for some companies, a fully remote workforce may not always yield the best productivity, connectivity, diversity and inclusion, innovation, loyalty, or apprenticeship results.

Real estate can address many objectives. They include accelerating innovation, upskilling the workforce, advancing digital and technological transformations, stimulating collaboration, creating an optimal hybrid model, diversifying talent, and getting closer to customers. An organization’s real estate should result from its strategy and operating model.

To set a baseline, organizations can start by identifying and measuring the most important metrics across different types of real estate. To determine how much office space a company needs, for example, key metrics could include how employees feel about their company, sales per salesperson, throughput, errors and omissions, and greenhouse-gas emissions. Then companies can experiment with different alternatives, run pilots, and choose optimal solutions based on the metrics.

In a world where many employees can work remotely, the riddle that companies must solve is which moments of togetherness with other employees, suppliers, or customers actually improve outcomes. The moments that matter rely on having the right people working on the right things at the right times—and in the right places.

But few organizations know which moments matter most. They could include onboarding new hires, apprenticeship relationships, brainstorming meetings, challenging conversations, experiences that foster social cohesion, resolving customer complaints, selling to customers, or unplanned collaboration. The location, size, and design of the workplace should all support the most urgent requirements for togetherness.

Traditionally, real-estate choices have been made by a real-estate team that typically reports to a chief procurement or operations officer. The most important decisions are escalated to the CFO.

But today’s real-estate team has new responsibilities, namely: making the current footprint consistent with corporate objectives and the moments that matter. This calls for a different set of decision makers. The CEO can set the real-estate agenda, supported by the chief human-resources officer (CHRO), the CIO, the CFO, and the head of real estate. Experts from all these domains can help make real estate a source of competitive advantage.

In the wake of the pandemic, historical precedent or cultural or industry norms should not shape real-estate decisions. Today, a company’s larger goals must serve as the guide. CEOs and executive teams know what makes companies successful and are best positioned to create a physical environment to match. Merging a company’s approach to real estate with its strategy is a change in the way things have been done and a new responsibility. It’s also a once-in-a-generation opportunity to act boldly and emerge from the pandemic stronger and more competitive than ever.