That’s a routine question corporate real estate departments are asking themselves right now.
When the virus hit, generally there were immediate reactions. Distancing, working remotely, and web-based teleconferencing all became commonplace. And sadly, there were colleagues who became ill, and jobs that weren’t needed. Many offices, industrial properties and retail businesses closed their doors. Real life health issues and facility issues grew together like never before. A tough predicament for the small business owner or the real estate department in a larger company.
For most, the next focus has been on the company’s finances. What happened to the revenue? What will happen with our costs? What about rent?
What do you do now?
The first person to talk to is your legal counsel. Can we just not pay rent if we can’t do business? What about Force Majeure? Will we go into bankruptcy? As you can imagine, leases weren’t written to be broken. And a lease might be 50 or 100 pages long. But you won’t see the word pandemic in most versions. It’s generally tough to find relief in a lease. And your landlord probably needs to make mortgage payments, or they will lose their real estate.
In the 2008 recession, tenants under financial pressure sought some rent relief from landlords. Having been through several recessions, we don’t recall that as a common request in times past. Some landlords obliged.
We are talking to many corporate real estate departments about this subject right now. What we are hearing mostly is that landlords took a proactive approach after the virus hit and immediately sent out a ‘no rent relief’ message to their tenants. Our guess is they needed to stay in business as well, and they thought the proactive approach would best state their position.
If our clients are being hurt financially by the pandemic, we offer to ask jointly on behalf of the tenant for any rent relief possible. We aren’t hearing anyone tell us, ‘Sure, don’t bother paying’. Some landlords will make other concessions they have available. Some will give some free months of rent in exchange for some extension on the lease.
We do caution our clients that extending a lease can be a bit dicey right now. What will happen in 12 or 18 months, or whenever the current lease ends? Will remote working finally become very common and decrease some space needs? Will distancing actually cause companies to need and pay for more space? Will subleases pour onto the market? At 20% discounts to direct space? 50%? What will that do to direct rates? Most landlords are optimistic about future rents. But it could be that the pessimistic story about future rates is what comes true. Extending your lease now in exchange for some rent relief might not be the best solution if you tie yourself up with what becomes an over-market rent. It’s a sensitive balance.
We work with companies on matters like this all day. We are happy to analyze your situation and suggest a course of action. And help you answer, “What do we do now?”