The lasting impact of coronavirus on office tenants
The coronavirus pandemic has affected all aspects of business, with office space as one of the most visible illustrations of changes that have occurred. As companies navigate working from home, social distancing in offices and the lasting effects of the pandemic, many wonder how the commercial real estate landscape might look in the coming months.
As office tenant specialists, Wally & Co. has fielded many questions on this topic, from clients as well as news outlets (National Real Estate Investor and Kansas City Business Journal). Here are some of our insights about pandemic-related uncertainties.
Coronavirus effects on market rental rates
Landlords will not lower asking rental rates in response to the pandemic. Here’s why:
It would be a sign of weakness that landlords will not be willing to send.
Assuming the average lease term is five years, only 20 percent of tenants are in the market at a time, so 80 percent of tenants cannot renegotiate their leases unless it is beneficial to the landlord (as in an expansion of space).
There is a wait-and-see attitude assuming there will be a vaccine in the relatively near future.
Coronavirus effects on market vacancy
It is common to see reports nationally to the effect that office leasing demand has slowed due to shelter-at-home orders, and working from home leads tenants to reassess commercial real estate needs. This no doubt will add to vacancy rates, but CoStar’s latest Kansas City research projects that Class A vacancy will rise minimally in 2020 — from 8 percent to 10 percent.
However, it’s also common to see national reporting that ongoing space requirements will prevent leasing activity from grounding to a complete stand-still, although overall leasing activity could remain subdued until green shoots emerge and business confidence is restored.
How should I respond to all the real estate uncertainties?
First, realize your landlord does not know how to react either. Second, realize for everyone there are two responses – pre-vaccine and post-vaccine. Because the length of the pre-vaccine period is uncertain, many landlords and tenants hope a “return to normal” is not that far off.
What does a “return to normal” mean?
I do not think we will ever truly return to the old “normal.” Too many employers and employees have learned that remote work works well. Many employees now appreciate how nice it is not to spend an hour or more in the car every day commuting to and from work.
The awareness of how readily sickness can be spread will forever change our view of being at the traditional workplace. We will never view elevators, breakrooms, shared refrigerators, vending machines and communal coffee pots the same way.
What needs to change to fix this?
Many of our clients have surveyed their staffs about return to work. The results about their safety concerns are eye-opening. Employees are anxious about how tenants and landlords will make the workplace clean enough to return. Social distancing is just the start.
Tenants need to contact their landlords to drive the discussion about deploying hand sanitizer everywhere, installing touchless elevators and touchless restroom fixtures, conducting temperature screenings for all employees and visitors, and much more rigorous cleaning services — “regular” janitorial services five nights per week isn’t going to cut it.
Employees will expect frequent cleanings during the day (conference rooms after every meeting, for example) in addition to eliminating shared telephones and keyboards. There will need to be a clean desk policy to allow desks to be sanitized every night.
Who will pay for this?
Tenants will. All of this costs money, and landlords will pass through these added costs to tenants in the form of higher operating costs and/or higher rent. But if accounted for appropriately, tenants should accept this and balance these costs against the price of having had to shut down business for weeks, months or worse.
When should I start planning to negotiate my lease?
Once your company has determined what your office needs might look like for the foreseeable future or you have three years or less on your lease term, it’s the right time to start preparing for negotiations. Contact Wally & Co. to discuss your situation. We’re happy to help tenants navigate these unprecedented times.