City brokers say owners need to offer “significant concessions” to keep tenants from reneging on their office leases.
“I don’t believe people will all be back to work full-force in three months,” said Michael Silver, founder of Vestian, a tenant rep firm, who says some of his clients are seeking a “rent holiday.”
He believes businesses can realistically ask for up to six months free rent — and should.
“We’re in a brand new era,” said Silver, who also founded Equis Corporation, which he sold in 2011. “The tenants will now find their voice. They lost their voice over the last three to five years.
“Landlords will take deals that they would not have taken two months ago. Before quarantine, people were in the middle of lease negotiations and the dialogue needs to change and owners need to change.”
Silver believes that 80 percent of tenants who ask for a break will get some kind of rent relief if not everything they ask for.
Where landlords will have the power, however, is in choosing who gets such concessions and it is guaranteed to be a survival of the fittest.
“Landlords will want to deal with the tenants with the highest credit rating,” said Silver.
The broker said landlords will need to ask for relief from their own creditors to help tenants, and, he suspects, make up for some of the lost revenue by cutting back on operating expenses. “So there’s going to be a lot of negotiation.”
Silver estimates that 65-75 percent of NYC tenants will seek some kind of rent relief.
Many may also want to implement long-term work from home programs and downsize their office footprints.
In the past few years, Silver said he’s seen many tenants get talked into pricey leases by being told they can “densify” in the space as the company grows.
But, he noted, with the current emphasis on social distancing, a crowded workplace with one desk on top of another isn’t going to be what many companies want in the future.
He believes this new mentality will also have an impact on co-working spaces.
“Companies won’t want to co-mingle with other businesses,” he said. “They all have to be safe. Today it’s about the smart building, but (the future will be about) the safe, clean building.”
Adam Greene, a partner at law firm Robinson Brog, said owners should, “Call the banks.”
He explained, “Right now, the government is working on solutions for small businesses, but not so much the small landlords. They’re going to be in a precarious situation.”
On the upside, lenders overall have been willing to talk.
“So far, everybody’s playing nice. I have not seen one landlord or one bank being aggressive. Everyone understands.”
However, he warned, “The landlords are saying they’re going to be in trouble with the lenders and this will be a next level issue in New York. There are going to be a lot of defaults.”
Greene is seeing that in general banks are more amenable to working with owners while private funds are not.
Greene noted that most lenders don’t want to be landlords, saying, “I don’t think JP Morgan wants to own every piece of commercial real estate in the country. They’re in the business of lending money and getting it back.”
As for owners, they are aggressively working with tenants.
“Landlords don’t want hundreds of vacancies all over the city,” added Greene.
As for what tenants should expect from negotiations, Greene thinks asking for six months rent or renegotiating base rent might be going overboard.
One obstacle could be that lease terms with existing tenants were factored into the formula that determines terms of the building’s debt and owners may only be allowed to budge so much. Greene also believes government assistance of some kind is going to be necessary to help both sides move forward.
“Landlords and tenants will have to work on a package that works for everyone,” he said.
“The landlords, the tenants, the lenders and the government have to work together to make things right.
“If the government doesn’t intervene then that will be the next major problem. This has to be part of the next package. The stimulus package was done well but there are other areas that need to be addressed.
“If you skip the landlords, the landlords don’t have money to pay their mortgages. Banks are taking (landlords’) calls, but they’re all waiting to see what will happen.”
A recently issued report by CBRE notes that if a tenant’s space has been temporarily abandoned, as long as it has remained available for use, undamaged, the tenant will likely not be entitled to a rent abatement.
The report also addressed force majeure clauses, by saying in most cases, it still won’t mean a tenant doesn’t have to pay rent.
However, the report, which was titled, “COVID-19 Implications on Commercial Leases,” nonetheless suggests that owners and their tenants come to a “productive dialogue” on both their needs.
CBRE said that if the tenant’s decision not to work at the office has been caused by government action such as a curfew or shelter in place order, then the scope and duration of this government action should be considered in any discussion about a rent abatement.
Most landlords have opted to keep their buildings open and keep them clean and secure to fulfill their own obligations to the tenant, CBRE has found.
As for insurance coverage an owner may be entitled to, physical damage is generally required to get certain coverage and lease casualty clauses, the report said.
At this time however, it read, “It is unclear whether potential contamination constitutes ‘damage.’”