A Retail Tenant’s Market: COVID-19’s Impact on CRE

The pendulum has swung. Just a few short months ago, the future of commercial real estate looked bright and landlords had little trouble keeping their vacancy rates low. Now, in the wake of the COVID-19 pandemic, tenants have the upper hand. 

As economic uncertainty sweeps across the nation, small businesses are being hit hard. Many of them are unable to pay rent; some have responded by demanding rent reductions or abatements, while others have simply shuttered their doors and vacated permanently. 

These developments have raised all sorts of questions from a commercial real estate perspective, primarily in regard to how landlords should respond. While this is a complex question with many possible “right” answers, one thing is certain: we have transitioned to a tenant’s market, and landlords and tenants alike have much to consider.

Commercial Landlords May Be Forced to Be Flexible

Across many industries, the situation is starting to look dire. Restaurants who have closed their dining rooms and transitioned to delivery and pickup only have taken a massive financial hit. Many other businesses—including retail, hotels, and entertainment venues—have been forced to close their doors completely.

Even as states begin to reopen, consumers remain cautious. With unemployment rates rising and household incomes diminishing, a lasting decline in spending is a real possibility. From a public health perspective, concerns about exposure to COVID-19 could have long-term consequences for restaurants, bars, malls, movie theaters, and entertainment venues.

If these trends continue, many businesses will be unable to afford their commercial spaces at current prices. Even major retailers like Staples, Mattress Firm, and Subway have ceased rent payments in an attempt to force landlords to accept rent reductions and lease amendments. 

This puts commercial landlords in a tough position: do they negotiate lease terms to satisfy tenants, or face the possibility that their properties could become—and remain—vacant? In many cases, landlords will have no choice but to be flexible; the financial burden associated with the alternative is simply not an option.

Lasting Impacts of the Transition to Work-From-Home

According to the Bureau of Labor Statistics, roughly 29% of Americans have a job that could enable them to work remotely. Over the past several months, our nation has witnessed this work-from-home potential become our new reality.

In a matter of weeks, offices across the United States shuttered with little notice, resulting in an en masse transition to remote work. In many ways, the COVID-19 pandemic was an unplanned nationwide experiment in working from home. 

According to many employers, this “experiment” is proving to be surprisingly successful. As states slowly start to reopen and employees trickle back to the office, many businesses could make the decision to allow certain employees to continue working from home. 

Not only would this reduce the density of their workplaces—a smart move in terms of reducing virus spread—it could also allow them to downsize to a smaller office and cut their operating costs. Some experts estimate that 25-30% of American employees will still be working from home at least a few days per week by the end of 2021.

This possibility is not lost on commercial landlords. If demand for office space drops, landlords may become desperate to hang on to their tenants or fill newly vacant properties as soon as possible. In many cases, this could mean making concessions that benefit the tenant.

What Does This Mean For Commercial Tenants?

Commercial landlords often face immense pressure from lenders and partners to keep their buildings filled with quality tenants. From a tenant’s perspective, this may be a good time to negotiate rent or other lease terms. If you’re searching for a new space, landlords with vacant properties may be even more willing to be flexible.

Partnering with a tenant rep is a good way to show landlords that you’ve done your homework and are serious about negotiating. Although these are unprecedented times, tenant rep brokers are skilled at evaluating and taking advantage of current market conditions.

Cushman & Wakefield | CRESCO Real Estate is committed to serving your commercial real estate needs during these trying times. Contact us for more information.