The COVID-19 pandemic has undoubtedly altered the commercial real estate industry. However, what does that mean for companies whose leases are coming up or need additional space?
1. A Correction in Pricing?
For many of our clients with upcoming leases or who are in the market looking for expansion space, there is concern that they are missing out on a deal – that rents must be decreasing soon so they should hold out for a correction in rental rates. Though this thought process has validity, there are a few factors to consider.
First, the real estate market is typically 6-8 months behind the US economy in terms of reaction to economic changes. Therefore, for companies with leases expiring in the next 2-10 months, it is too soon to tell what the correction in pricing will be in the market. There is not enough data on new leasing activity, particularly office leasing (since there has been minimal activity since the pandemic), to provide estimates on what new leasing rates will be. For office users that have lease expirations in the next 10 months, we suggest asking for a 10%-15% reduction in rent. However, note that owners may not accept this request based on a myriad of factors.
Second, it is important to consider the type of space you are looking for. Life Sciences and Industrial/Warehouse space continues to actively trade, even during the pandemic. Many of these companies have seen an uptick in activity and are looking for expansion space. Already both high-demand product types, we do not see any price correction for these types of space. We expect that industrial and life sciences spaces will continue to be difficult to find for companies looking in the Central 128 market, inner suburbs, and downtown.
2. Impact on Timing – When to Start Your Search
Depending on the size of your space, our suggestion for starting your search had previously been anywhere from 4-12 months before your lease expiration. This was in order to provide time to tour several properties, receive proposals, negotiate terms, have your attorney review and negotiate the lease, space plan with an architect, and make layout changes that may require a permit. While most of the process and timeline has stayed the same, companies with heavy buildouts or layout changes should add in additional time due to delays from some municipalities providing permits.
Additionally, for many owners, particularly office owners, it is unknown when companies will return to their offices or when leasing activity will pick back up. So, should you have an upcoming lease, now may be an opportune time to tour a new office as some owners may be willing to provide additional incentives even if you have several months left on your current lease.
For companies with leases coming up that are unsure when they will have their employees return to the office, another factor to consider is when to start your new lease. We have had some clients push their new lease start date from May to September so they do not start paying rent on space they will not be able to occupy. In the meantime, they will all continue to work from home. Know that owners are amenable to later lease start dates but you need to negotiate an early move in for your furniture and equipment so you do not pay holdover rent at your current location.
3. Renew vs. Relocate
We know that your office space is probably one of the last things on your mind as you focus on the direct impact the pandemic is having on your company’s day-to-day operations. If your space is currently meeting your size needs, can accommodate future growth, and satisfies your current and future prospective employees, it may be best to renew. However, if your space will not meet your needs over the next 5+ years, there may be opportunities in the market to relocate with very amenable terms.
Should you decide to renew, consult a real estate broker before negotiating directly with your owner. In some cases, companies’ current rental rates are well above market rent due to your annual rent escalations. Additionally, some companies may have leverage on their owners if there is high vacancy in their portfolio. Using a broker to negotiate to ensure you have fair market rents, any desired space improvements, and resetting your base years can be extremely beneficial.
Finally, should you be unsure of your company’s future, many owners are also open to renewing current tenants for the short term. As much as you are uncertain of the future and the pandemic’s impact, they similarly are uncertain. This allows you to push off the decision until you are more confident in your company’s future path and needs.