Commercial real estate, like most industries, has been impacted by the COVID-19 pandemic. An industry that was once predicted to soar in 2020 (source: UBS Asset Management’s US Real Estate Report), is now starting to see the impacts of the global pandemic. While an economic recovery will be imminent, it may be slow going for a while, as there are still unknowns and businesses continue to figure out with the future of work looks like.
One such area where we are seeing change in CRE is in office leasing. Whether companies are experiencing short-term loss in income or long-term changes in revenue, changes in leasing opportunities are affording companies of all sizes new options that provide cost-saving solutions.
We have identified ways in which the pandemic is continuing to affect commercial office leasing trends and what to consider from both the tenant and landlord sides of the equation.
Subleasing as an option
As both Forbes and JLL report, the amount of sublease opportunities are now greater than during the dot-com boom. A sublease can often provide more competitive rents and flexibility. Generally, we are also seeing shorter lease terms with tenants opting for extensions rather than committing to a longer lease term up front as economic uncertainty and the changes in the workplace continues.
Coworking continues to play a role
As we see COVID-19 vaccinations continue to increase, the likelihood that coworking spaces will re-open is high. And, with companies continuing to allow for flexibility (or for those that have already downsized their commercial properties even in the short-term) we may see an uptick in the amount of coworking memberships. We believe the changes resulting from the pandemic will be positive for coworking and that these business will remain strong.
Flip side: larger spaces needed
For those companies bringing employees back to the office, some are deciding to maintain social distancing guidelines for the long-term. These companies may need to invest in more space so that communal areas, desks and office pods can have the additional space needed to maintain safe distancing. However, this combined with likely changes in human resources policy to allow for some percentage of at-home work may offset this need. Certainly, in businesses that demand in-office workers, the amount of space needed may actually increase.
High priority placed on health and safety
In the same way that social distancing and more square footage may play a role in bringing employees back to the office, so may building safety and renovations. Tenants will look for updated HVAC systems, touchless technology and other amenities that support additional health safety needs. We have also seen an increase in building cleaning protocols, work sequencing, on-site COVID-19 testing and PPE in the workplace.
Changing lease terms
Financial uncertainty has prompted some tenants to negotiate shorter lease terms than we’ve seen in the past. Requests for 3-year terms are not uncommon. Landlords that want to attract and retain tenants will need to consider updated lease clauses. Forbes suggests lease clauses that speak to
Flexible termination
Specific pandemic force majeure clauses
Shorter lease terms
As we’ve seen tenfold in the workforce during the pandemic, flexibility is key to success. Whether a new way of working or a new revenue stream, companies learn to pivot. In this time of continuing change, it’s important for tenants and landlords to work together to keep options open and to explore opportunities for mutual benefit.
The KimbleCo team is here to help. We provide both landlord representation and tenant representation services. Contact us to talk through your commercial real estate needs and let us help you plan for 2021 and beyond.