As COVID-19 has wreaked havoc on the CRE industry, many tenants have been forced to make tough decisions when it comes to commercial real estate leases. Marc Betesh, founder and CEO of Visual Lease, a lease optimization solution provider, shares insights on the future of office space.
To date, how is COVID-19 impacting CRE in terms of office space, and what trends do you see emerging in the industry from the pandemic?
Since the start of the COVID-19 pandemic, the commercial real estate industry has been volatile. The pandemic has had a significant impact on office space leases in particular, with many companies debating whether to renew, exit or consolidate leases.
In the early months of the pandemic, due to the stay at home orders in many regions across the U.S. and around the world, many organizations quickly shifted to working remotely. Many of those remote working conditions are still in place, with companies exploring how they will proceed in the coming months and the longer-term future.
Many are evaluating strategies such as shifting from one, large corporate headquarter office to smaller offices across one region or within multiple regions. Other strategies include moving from urban city centers to satellite suburban offices, expanding existing office spaces to accommodate greater social distancing among employees and/or creating permanent remote working arrangements across the workforce. We may also see an uptick in contracting with co-working spaces to have more flexibility, fewer long-term lease commitments and lower overhead.
Based on what we’ve seen with Visual Lease customers, there is no “one size fits all” solution. As long as the future remains uncertain, companies will continue to seek flexibility around commitment terms, locations and space configurations with respect to their office lease decisions. In some cases, they are also asking for—and getting—landlords to include pandemic-specific lease clauses and/or shorter lease commitments. For the foreseeable future, such flexibility will be key for both tenants and landlords and is likely to have a great impact on the future of office space leases.
How have you seen leases change during COVID-19? Are there new clauses that are becoming standard?
When the business and financial impact of the COVID-19 pandemic became pervasive, businesses were forced to make some tough decisions and scrutinize their existing lease terms.
Over the past several months, there has been a good amount of discussion about force majeure clauses included in most leases and other contracts. This widely used clause typically allows for relief for one or both parties in the event of an “act of God.” However, most leases do not extend force majeure to pandemics or other public health crises. Moving forward, we can expect to see lessees ask for this clause to be amended to include specific mentions of “pandemics,” “epidemics” and other similar descriptions. This may also lead to related clauses around government shutdowns, including terms about deferring, forgiving or reducing payments, as well as terms that give landlords greater protection—requiring some level of compromise among both parties.
In addition, we are also seeing tenants and landlords considering features they had not before, including prioritizing the quality of air filtration systems and sanitizing systems.
What do you think the recent CRE activity among major corporations signals to the market?
Overall, recent commercial real estate moves in the wake of COVID-19 show that what used to be considered the traditional office lease model may not work for tenants anymore. Many companies are already evaluating and making decisions that will have long-term implications on the way they do business.
For instance, we have seen big companies with deep pockets paying exorbitant amounts of money to terminate their estate leases before their scheduled termination dates. In San Francisco, Pinterest recently paid $90 million to get out of a lease they had already signed, citing a more permanent shift to remote work. Other companies like Credit Karma have pumped the breaks on moving into new spaces, and instead consolidated existing offices in tandem with letting employees work from home. We’ve also seen several lawsuits from major companies over rent payment struggles, which demonstrates that the financial impact to both lessors and lessees has been significant.
What some of these moves tell us is that there will be variations of the “new normal” when it comes to commercial real estate, personalized for each organization’s needs. Tenants will expect customization and flexibility, while landlords look for stronger protections.
Which industries do you think will continue to rent office space in major cities?
Despite the challenges and uncertainties of the past several months, the commercial real estate industry is alive and well. Plenty of companies across a variety of industries have taken advantage of current price reductions and are signing new leases—and will continue doing so in the months and years ahead.
For companies that have been previously priced out of high-cost cities like San Francisco and New York, the current downturn may be a way to gain premium city spaces for a bargain. Even large companies like Facebook are taking advantage of reduced prices to expand current city footprints, with the tech giant signing a lease in August for 730,000 square feet of prime space in The Farley Building next to Penn Station in Midtown Manhattan.
These forward-looking companies also see the long-term benefits of acquiring the right space, with an eye on what future office needs will look like. Many believe their future plans will need to accommodate a hybrid of in-office and remote work arrangements. Several companies in the financial sector such as J.P. Morgan, Goldman Sachs, Morgan Stanley and CitiGroup have already begun returning workers to office environments, setting the stage for additional employee returns in 2021.
The technology industry has led many of the major office space moves we’ve seen in recent months. TikTok, Facebook and Amazon, to name just a few, have made some of the biggest commercial real estate transactions in North America this year. Many others, including those beyond the technology space in growing industries like healthcare and e-commerce, will likely follow suit.
What should businesses consider when making CRE decisions as they shift operations to accommodate an increase in remote working?
While many companies are considering more flexible or even permanent remote working solutions for employees, very few are abandoning physical office spaces altogether. But a long-lasting impact on the way that people work and do business is inevitable.
Trends we’ve seen emerge over recent months—which will continue for some time to come—include smaller offices, shorter-term commitments and an increase in co-working solutions. It will come down to what makes sense for each business. Will employees be based in or around a specific city, or will they shift to a “work from anywhere” model? Will they have a need to host customers and clients on site? Will they need a formal corporate campus, or could they consider multiple smaller operations? The common thread among these is flexibility, both for business owners and their employees.
Additionally, companies should consider the additional space they will need to operate successfully and safely in the future. Many are faced with a need to house new hardware items like video conferencing screens and A/V equipment to support a more dispersed workforce. Others may need to expand square footage requirements for employees to allow for appropriate social distancing.
What do you think the future of office space will look like?
As we navigate the coming months and eventual life in a post-pandemic world, the way companies use commercial office space will shift.
Many organizations are reconfiguring existing spaces or looking at new spaces to provide more room and flexibility for workers. Open floor plans may be replaced or enhanced with additional private offices, “hot desks”—where employees do not have designated work areas—may become more prevalent, and socially distant work areas could become a norm. Some companies are also exploring opening multiple smaller operational hubs instead of one large space, and leasing spaces outside of city centers. Others are enhancing real estate holdings by adding co-working spaces that give employees more flexibility in where they work and when.
Offices of the future will indeed look different and will require a new way of oversight to manage multiple locations, co-working spaces and flexible office arrangements. As the “new normal” of commercial real estate and lease management continues to evolve at a rapid pace, companies that have a sound technology solution in place to optimize the management of lease portfolios will be better positioned to navigate whatever comes next. Now more than ever, companies are benefiting from partners and technology providers that can help optimize their leases and access the data they need to make more informed decisions about which models work best, for today and tomorrow.