A Deep Dive: Leasing During COVID-19

As the COVID-19 pandemic continues, the real estate industry is seeing major shifts. While there are downturns in certain sectors, others are booming. One thing is certain: We can expect to come out of 2020 with a whole new perspective on leasing, from how our office and retail spaces are set up to whether force majeure clauses are a contractual issue.

Principal and Managing Director of Avison Young, Nick Banks, recently chatted with John VanDuzer, CPA and partner with James Moore & Company, to talk about the future of American real estate, including issues related to leasing. Although everything is still uncertain, Banks predicts that we could see some interesting developments as the industry adjusts to the new normal.

Leasing During COVID-19

Banks describes leasing as being “needs based” up through May and part of June. However, he’s starting to see what he describes as “opportunistic leasing” with surviving companies.

For example, tenants who couldn’t get the retail or office location they wanted prior to the pandemic might jump on new available properties. These vacancies are due to closures, bankruptcies and delinquencies, but it’s a positive sign for the market. Some businesses are still doing well and want to take advantage of lower prices while they can.

The Future of Offices

Office space is a particularly interesting topic during the pandemic, since our entire idea of what’s healthy has changed. Suddenly, sitting a few feet away from coworkers in an open space doesn’t sound so appealing. As offices slowly reopen, businesses are considering how to use the space and their employees’ time more efficiently.

“We’ve witnessed these pendulum shifts where you think back 10, 15 years ago, everybody was in an enclosed office,” said Banks. “There were very well-defined workspaces, and maybe it was an average of 300 square feet per person.”

But as Banks explained, the pendulum swung to more open environments as people worked in shared flexible settings. The dawn of COVID-19 has changed the swing yet again. “Companies have realized that some people can still remain productive regardless of where they work, whether that’s at home or some other type of flexible solution,” he said.

Banks points out that there are numerous issues with reopening offices. Questions range from air filtration and elevator capacities to how businesses will handle people using public transportation and leaving for lunch at once. Those are some of many factors that owners must take into account, which will likely transform how offices are leased.

An Impending Shift in Retail

Retail continues to be a hot topic in real estate thanks to the shutdown. Over 25,000 stores have closed during the pandemic, and 30% of restaurants might not survive. “Some of the governmental assistance programs have certainly helped with ,” said Banks. “There’s also been a lot of efforts from landlords trying to help their tenants survive, forbearance rent deals. Lenders have been working with the landlords to give them forbearance on their debt service.”

As for the future of retail and these retail spaces, Banks points to the lack of potential tenants for backfill.

“We’re just starting to enter into the time that where some of those subsidy programs and some of those forbearance agreements that have been made are starting to burn off,” he said. “I think now we’ve kicked the can as far down the road as we can.”

He suggests that the key here will be creative uses of retail space, like medical facilities, gyms and even distribution centers. As those needs grow, former retail space can be repurposed for efficiency and to keep lease payments coming in.

Will Force Majeure Be an Issue?

Finally, force majeure is a hot topic in the real estate sector—that is, an “occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract.” Plenty of tenants and mortgage holders are relying on this concept to demonstrate why they haven’t been able to pay rent.

Banks predicts that we’ll see more litigation over the coming years to address this problem. However, he’s also seen a cooperative spirit between government agencies, landlords, tenants and lenders.

“I would say the spirit of most of this has been we’re all in this, we want to help each other get through it,” said Banks. But some of this is going to…lead to a different lease language that we’ll become accustomed to seeing in future leases.”

Despite the issues that the industry faces from COVID-19, leasing isn’t necessarily expected to go down. What we will likely see is changes in everything from office setup to contractual matters. We recommend working with your real estate CPA to make sure your leases are adaptable for whatever the future holds.

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