The Data
In June of 2020, NAR completed a study that included over 2,300 of their members. In the survey, 75% of the property managers admitted that their tenants were having trouble paying their rent. Only 19% said their tenants were able to pay their rent on time. The individual landlord numbers were a bit of an improvement, with only 13% explaining they were terminating leases and 36% saying tenants’ rent was on time.
This year has been a struggle for many commercial property owners and their tenants. And none endured a harder blow than the retail sector. The NAR study revealed that 56% of the rent extension requests or terminated leases came from this sector. And the office sector wasn’t too far behind, sitting at 38% of the rent extension requests or terminated leases.
While the pandemic has caused a widespread struggle between landlords and tenants, commercial real estate (CRE) struggles are not uncharted waters. Recessions and individual landlord-tenant issues have happened before. So there are clues we can draw from to improve the future of the commercial real estate CRE industry. Here are three specific ways CRE should be handled differently after COVID19:
1. Clear communication between landlords and tenants should become a top priority.
Communication between tenants and landlords, under normal circumstances, can vary depending on their relationship and the terms of each lease. But as financial stress runs high and the economy endures extensive damage, communication becomes imperative. Both the tenant and the landlord should agree on a specific form of communication, perhaps in a written format, to refer back to the items they discuss. In the case of future lockdowns, this line of communication can be used for the tenant to disclose their new open hours or any local restrictions requiring them to close. Having an open dialogue and a record of the conversation may be the key to successfully negotiating rent relief.
2. Commercial advisors should be hired to handle negotiations for leases and lease renewals.
Commercial advisors are valuable assets when it comes to communicating the needs of both parties and negotiating lease adjustments. Their understanding of the industry allows them to see both sides and make realistic suggestions for what details should change. They also have the skill and foresight to suggest lease changes months before the lease is up for renewal. Experienced commercial property advisors are also familiar with economic downturns and how to handle transactions during each of the CRE cycles. Their expertise smooths out the communication process between landlords and tenants, which could help each party avoid costly mistakes.
3. Building design should be considered differently.
Accounting for social distancing space and incorporating sanitizing stations are just the beginning of changes in the physical, commercial workplace. Building design may need to change in some unique and expensive ways. While some companies are changing out their air filters for high-efficiency filtration, other facilities, such as hospitals, have opted to change their HVAC systems altogether. Health properties that are likely to see an influx of the highly infectious virus need negative pressure areas to help prevent it from spreading.
The future of building design may also include further innovations. Earlier this year, a Miami architect, Kobi Karp, suggested that buildings will begin to use more technology. He even mused that perhaps elevators could include voice-command capabilities. And architect Dan Meis echoed the idea of integrated technology, predicting that temperature-taking tech or UV disinfecting will become as common as the use of metal detectors in building entrances. While these examples may just be speculation, COVID-19 is certainly causing building owners to think differently about their properties. Whether a facility is updated or newly constructed from the ground up, health considerations should be a focal point.
Despite all of us taking a hard look at what needs to change, the good news is that tenants and landlords alike are gaining new perspectives. COVID-19 has uniquely shifted business and workplace environments, and commercial property owners are adapting. As we follow the pandemic to the other side of the peak, we will continue to learn how to handle CRE in new and improved ways.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
