Since the start of the Covid-19 lockdown, tenants and commercial landlords have been hard hit financially by the crisis. Office Furniture Heaven asked three of our well-respected NYC Commercial Broker Real Estate colleagues: Bert Rosenblatt, Co-Founder and Owner of Vicus Partners, LLC, Benjamin Blumenthal, Principal Broker at Noah & Co, and Hunter Berman, Senior Account Executive at Knotel regarding their thoughts about the present situation. Previously published on Linkedin.
What requests have you been receiving from clients, lately?
Brokers are getting a lot of calls, but most have been related to navigating the present uncertainties of returning to work, as well as their ability to fulfill their present lease obligations.
BR: About 80 percent of our clients have contacted us about restructuring their rent payments and reducing their expenses in terms of dealing with their landlord. The other 20% are doing well enough to take advantage of the market by extending or renewing their leases at lower post-Covid numbers.
BB: Many tenants are still in a holding pattern and waiting to see how things develop—when it will be safe and clear to return to the office. However, we are seeing a noticeable uptick in interest from tenants starting to figure out their needs post pandemic and plan their return.
HB: I’ve had several clients reach out to me to discuss potential recourse as it relates to their lease and remaining rental obligation.
What are they most concerned with?
Tenants are concerned with their ability to fulfill present financial obligations, as well as the safety of their spaces once they begin returning to work.
BR: Most of our clients are concerned about the financial impact of paying for office space that very few of their employees are going to. Furthermore, all our clients are concerned about providing a safe environment for their employees to work in. Some of our clients have been very good about adhering to Covid protocols, taking temperature and so on, while others have not.
BB: Tenants seem to be most hung up on the lack of visibility stemming from the pandemic and the general uncertainty it creates for the economy in general and their business in particular.
HB: Many of my clients are prepared to see their leases through to the end, but some have asked about ways to reduce costs in the short and long term. They are concerned about business longevity, the changing office space utilization landscape, and how to take advantage of any flexibility available to them; however, with the standard commercial lease, there is not much recourse.
Have you seen an increase in subleasing?
Brokers are in consensus that there has indeed been an increase in subleasing in the market. However, not necessarily an uptick in companies taking those spaces.
BR: I haven’t seen a big uptick in people leasing those spaces. There is a not a lot of leasing activity (it is down about 70... Comparatively from last year).
BB: Many companies see the office as a commitment that was made in a different world, and if they don’t plan to return post-pandemic in the same form, are looking to shed their real estate obligations and sublease.
HB: Yes. Given each tenants’ right to sublease their space, this has been a popular method of attempting to reduce costs. Since the beginning of September, the volume of available sublease product has increased dramatically as businesses continue to evaluate their long-term plans. However, subleasing does come with its additional risks as well.
How are landlords responding?
There has been varying responses in how landlords have been responding to evolving tenant expectations. Brokers agree that it has not been consistent.
BR: Most landlords have been reasonable and sympathetic. That said, and not surprisingly, landlords tend to be doing rent deferment, but not doing rent forgiveness.
BB: From a logistical standpoint, [landlords] are doing everything they can to make tenants feel comfortable, make deals happen and be generally flexible. There has not been a good enough amount of deals done to get a good read on where pricing is currently marketwide.
HB: If landlords and space providers across the market can find creative ways to retain their tenants, that is a win-win scenario. Such scenarios that I’ve seen or heard about are rent “ramp up” schedules and trading increased lease term for additional upfront rental concessions. But not all landlords have the ability to positively cooperate with struggling tenants.
What are the biggest obstacles that landlords and tenants have encountered while making the necessary arrangements to reopen?
The biggest threshold to cross will be navigating tenant fears of being able to come back to work safely. Safety precautions can be navigated between the tenant and landlord, and communication will be very important going forward.
BR: The biggest obstacles are people’s fears about coming back to work. People are scared and don’t want to get on the subways, Metro North, Long Island Railroad… They are just scared to come back. To me that is the biggest issue: how to make people to safe.
BB: Many things that enable people to come back to the office remain open ended or unreliable. Such as such as possible school closures (i.e. childcare), Government ordered protocols and of course, public transportation. So, there are still logistical gears that need to sync before we can have a critical mass return to the office.
HB: Communication between landlords and tenants as it relates to new building protocols was an obstacle in the beginning of the pandemic. Recently, landlords have developed their own rules while adhering to guidelines from the state and the Real Estate Board of New York. This has allowed tenants to plan with some level of confidence for the future.
Have you seen landlords offer financial concessions to enable their buildings and tenants to be compliant with CDC guidelines?
Brokers do not believe this plays a huge factor in the conversation overall.
BR: I don’t think there is a massive spend to fix up their buildings. If you’re a landlord of a large building, you may be making more investments into HVAC, touch-free sensors and so on, than a smaller building. I wouldn’t be surprised if I saw a landlord investing into a space, but I haven’t seen too much of it overall.
BB: We’ve seen financial concessions happen to the extent it gets a deal done. But we haven’t seen any landlord get really involved with CDC guidelines and safety measures inside a tenant’s space. Most of what landlords have done has been in the corridors, lobbies, common areas, but they haven’t gone into space for existing tenants.
HB: No, in fact, it’s the opposite. While landlords have done a great job responding to new guidelines, many of these estimated costs will be shared by the tenants as an increased operating expense escalation.
What safety procedures have you heard landlords offering their tenants, and what safety procedures have you heard tenants offering their employees?
The consensus has been that while safety entering the building has been the responsibility of the landlord, the safety of the individual space has been the responsibility of the tenant. And each building will have different resources and will be doing it differently. From temperature-taking, to staggered work schedules, each tenant will be tackling the situation differently.
BR: Landlords taking everyone’s temperatures before entering the building, and having proper social distancing guidelines, a guard to enforce social distancing, touch-free sensors, mask regulations, and one-way aisles. Overall, I haven’t seen tenants making a huge investment into retrofitting their offices yet, but I have seen social distancing plans with employee staggering and scheduling.
BB: In our building, which is phenomenally run by RXR Realty, the lobby is set up with queue lines for in-and-out, and automatic temperature checking. They have an app-based questionnaire to certify that you’re feeling well. Of course, Purrell stations and facemasks are the norm as well.
HB: Since the beginning of the pandemic, Knotel has developed white papers and guides that have significantly helped our customers prepare for their inevitable return to the workplace. Each tenant may have a variation of what is the “new normal”, but the similarities are the following: providing an abundance of hand sanitizer stations and PPE, limiting or prohibiting guests from visiting the office, utilizing one way traffic to adhere to social distancing guidelines, and limiting the amount of people occupying the bathroom at a given time.
When do you think the majority of the workforce will be returning back to the office anytime in the near future? What are the biggest obstacles?
When tenants will be returning to work has been an uncertain variable in the conversation. Safety plays a crucial role in determining when tenants will believe it is a good time to return to work. How feelings of safety will develop over time, or with the development of a vaccine—it is still too soon to say.
BR: I do think in late November, there will be more people than in the summer. What I do think would be helpful, if we can keep the numbers of infections low, that would make people feel safe. But I don’t think we will return to normal until we get a vaccine. My best guess would be not until next August, but I don’t know what steps will need to be taken to get there.
BB: The Manhattan Office Market reported record low utilization over the summer around ~8%, according to most, that number is now closer to 15%. Despite it still being a stubbornly low number, it does represent a ~100% increase. Anecdotally, we've seen an uptick in interest and activity as well since the end of Q3/beginning of Q4. The office market demand will likely follow these utilization numbers in whichever direction they go from here. As soon as people start coming into their office again, they'll start having requirements and the demand numbers will quickly follow.
HB: This varies depending on the tenant and how they are accustomed to utilizing their office space; open highly densified floor plans may not open as quickly as private office intensive installations, where social distancing is easier to adhere to. If employees can continue to be productive working from home, then employers will urge their employees to do so. However, it remains to be seen how overall productivity will be affected by this dramatic shift in culture.
How do you think companies will be able to foster employee collaboration given social distance requirements?
There is a clear agreement that the way offices were designed in the past will no longer fit today’s expectations. How spaces are designed will depend on the existing configuration of the space, as well as the cost of making these new adjustments. The situation changes from day to day, so it has been difficult to assess what both the long term and the short-term solutions will be.
BR: It is hard to feel close to somebody when you are not close with them. In business, it can be harder to communicate, have a culture, to form relationships, and build a brand. There needs to be something that compels you to be in a particular place and working remotely gets rid of that. The way we can overcome these obstacles is by communicating as much as we can. Communicating digitally levels the playing field. Everyone has the same tools. So, there is some opportunity to make the best of what we have.
BB: It takes a lot of work to get culture and collaboration right if you are a remote company and many managers are not trained to do this successfully. I think by this point, it has become abundantly clear to C-suite execs as to whether or not their company can thrive remotely without an office or if their business demands a physical & collaborative workspace.
HB: The ultra-densified office will be a concept of the past. No longer will offices have a 1 employee per 150 SF utilization; we will probably see that shift to a 250 SF per employee number to adhere to social distancing guidelines… It will be fascinating to see how employers encourage employee collaboration. Video conferencing has been a widely utilized tool, but will that be a proper long-term substitute? I do not believe so. However, this should be a short-term problem; once a vaccine is safely developed, I am very confident that we will return to relatively normal operational protocols.