COVID-19 Commercial Real Estate Office Market Response
Mar 23, 2020
The commercial office market has felt an immediate impact from the spread of COVID-19.
Property owners need to consider many issues and develop appropriate responses. Commercial real estate leaders should be considering the following as they navigate this situation:
- Prepare for enhanced cleaning for an extended period – Building operators across the country have quickly implemented enhanced cleaning measures, as suggested by government officials. The length of time that these measures will need to be in place remains to be determined. Consider closing off non-essential, or lightly used, areas to lower the costs and the related burden on cleaning staff.
- Communicate safety precautions to tenants, their employees, and their customers – Stay in regular communication with tenants and their employees. Many people will be working remotely, but when the time comes for them to return to their offices, they need to be comfortable that adequate safety precautions are in place. Mailers, emails, and posted notices should include information about what the disease is, how to prevent it, what the property is doing to be proactive, and how the situation will be monitored going forward.
- Prepare to negotiate with tenants – Tenants will be requesting assistance. Be prepared to listen and offer alternatives. Consider working with a legal team to create a standard amendment/forbearance agreement that allows deferral of rent for a one- to three-month period with a pay-back schedule over the balance of the lease, or upon receipt of government assistance. Consider offering forgiveness of rent for a period in exchange for a lease extension, lease renewal, or rent increase. Communicate with other property owners to see how they are dealing with tenant delinquencies.
- Communicate with lenders – Many commercial properties will be unable to absorb sudden high levels of rent loss and still be able to meet debt obligations. Establish early communications with lender partners to discuss what the organization is experiencing and what the lender can do to alleviate pressures. Most lenders will want to work with property owners in the same way property owners will want to work with tenants.
- Monitor state and federal relief packages – Be active in working with local trade associations to communicate with government officials on the impacts being felt in the industry. There is hope that these packages will consider the impact on commercial real estate owners. Have team members or service providers ready to apply for any available relief packages. Have information on resources that can be sent to tenants to expedite their receipt of funding so they can better meet rent obligations.
- Incident response plans should be reviewed and updated – As operators continue to respond to the rapidly changing environment, they should be assessing how effective and timely their response has been. Encourage open communication between team members to find out what went well and what needs to be improved. Communicate with tenants to find out if they would like anything to be handled differently.
- Evaluate expense recovery – The ability to pass through tenant costs for enhanced cleaning and preventative measures will typically be spelled out in the lease. Some leases will include a reasonableness qualification for such costs or may have a cap on the amount. Consideration needs to be taken as to how such added costs may be emotionally received by tenants dealing with financial pressures.
- Continuously monitor developments in the local business community – Communicate with the management of other commercial properties to gain insights into what they are doing to address various issues. Monitor local trade associations to see what trends, challenges, and opportunities are developing.
- Continue to monitor trends in telecommuting and working remotely – This was an issue the industry was closely monitoring prior to COVID-19. With unprecedented numbers of employees working remotely at this point, organizations will be assessing how effective the arrangements are and employees will be assessing how much they enjoy it. Expect to hear both sides – those that thought it went better than expected and those that thought it was not as effective. Be prepared to discuss both scenarios. Adjust marketing materials and presentations to demonstrate the many positive impacts of working cooperatively, including teamwork, feedback and supervision of employees, social networking with coworkers, customer/client interaction, community networking, and deeper connections to the organization, to name a few. Communicate with tenants to find out their specific experiences and be prepared to address their needs the next time they are due for a lease renewal.
Visit Withum’s COVID-19 Resource Center for insights to help you and your business during this challenging time.
Real Estate Services