Since the COVID-19 pandemic began, many employees are working from home. Offices have sat mostly empty during the pandemic, as it’s estimated that 54 percent of Americans now work from home. A new study quantifies the damage on the U.S. office market and projects that almost 15 percent of U.S. office space is tenantless. In the second quarter of 2020, there was 14.2 million more square feet of unleased office space than the first quarter — the biggest stall since the Great Recession in 2009, according to a report released in June by a Chicago-based commercial real estate services company. Additionally, companies signed leases for 53.4 percent less office space (or 24 million square feet) during the second quarter, compared to the first quarter. Companies have delayed making commitments during the pandemic until uncertainty abates, which with the recent spike, isn’t estimated to be any time soon.
With many businesses rethinking their office strategy and downsizing from expensive office spaces in urban or high-profile suburban areas, tenants and landlords are evaluating their short- and long-term strategies with respect to leased space.
We have seen a similar trend with retail businesses scaling back and closing locations. This creates opportunities for those businesses that are thriving or desiring to grow because it is opening up new commercial retail space. This provides an opportunity to take advantage of the newly available A+ locations in the commercial real estate market.
Step 1: Assess if you are ready to grow.
Just because A+ space is available doesn’t mean it is right for your brand. If you are losing money because customers haven’t returned to your business due to COVID-19, reconsider your growth strategy. The build-out often takes six to 16 weeks depending on local geography and the permitting and construction process. Make sure you feel confident your business will be able to weather whatever the situation is at that point instead of just where things are today.
You may also want to rethink the type of locations you target, especially as we enter flu season and see an increase in the number of COVID-19 cases. If consumers remain less likely to go inside spaces, think about looking for endcap spaces that would allow for a drive-through, pick-up window, or outdoor seating. Your target areas could change, too. If you are looking in an office-centric area, acknowledge that most people are working from home now and for the foreseeable future. What was once an A space in an office-centric area may no longer be space because of changing work habits.
Step 2: Talk to a broker.
The best retail locations are rarely advertised in traditional ways like window signs. Instead, brokers typically lease the space before they ever officially hit the market. Brokers often know if a brand is struggling and who’s behind on rental payments. Their relationships with the landlords often reflect who is considering closing, so they know of locations that may come available soon.
To secure prime real estate, establish a relationship with a broker in your area if you haven’t already. There is a strong likelihood that this will be the only way to catch those ideal locations, even in the current market.
Step 3: Be flexible on terms to get a deal.
Reletting space is expensive for landlords. They have to pay another broker’s fee, offer yet another tenant improvement allowance, and any time-space is vacant, they are missing out on potential rental income and reimbursements for common area maintenance expenses and real estate taxes. As such, landlords may be more willing to negotiate, especially since there are fewer prospective tenants in the current market. Not as many brands are looking to grow, while many are hoping to sustain or are retrenching.
Consider the expertise and size of the landlord you are leasing from. Smaller landlords may have less liquidity than big corporations, and therefore, have less money to give in tenant improvement allowances. If you are willing to take less allowance money, they may be willing to give you a break in price per square foot and also offer more upfront rent concessions to obtain a new tenant for the long-term.
Existing tenants that are struggling, but not ready to close may also have some recourse with their landlords. As previously mentioned, landlords do not want to lose a tenant because it costs them money. Many are also struggling due to the pandemic, so they may be willing to work with you to avoid having to relet their space and incur the out-of-pocket expenses referred to above.
Consider asking if they can decrease your rent in the short-term or let you defer payments that are tacked on to the end of your lease. They may also be able to decrease your square footage by adding this unused space to another tenant or vacant space next door, thereby decreasing your monthly rental and CAM payments. If you communicate your situation, versus simply not mailing them the rental check on a timely basis, landlords may be more willing and able to work with you.
With many businesses are struggling and closing locations, if you are doing well and willing to grow, there are more prime locations available. Assess your cash position by updating your budgets and projects to ensure you are financially set, perform your due diligence to meet with local brokers, and allow them to find the best spaces that may not be on the market.
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