We just passed over the continental divide moving from the landlord friendly market to the tenant friendly market. This tenancy market change is the economic effect of the social distancing shutdown response to the pandemic.
It’s been a landlord’s market for the last 10 years or so. A vibrant economy has created strong business growth, high consumer spending,business owner confidence and therefore a high demand for space. The high demand for space created low vacancies and in turn, high rents and little tenant negotiating power.
It was a pay to play environment, meaning only those with lots of cash could afford the best spaces to rent. There were many barriers to entry into certain areas or buildings due to affordability. Landlords could choose from the pool of tenants who they wanted. This led to bidding wars between tenants effectively driving the rental rates up. If you wanted to play, you had to do it at the landlords will.
At the same time the value of commercial properties has increased because rent value increased so dramatically. The high value of commercial real estate has resulted in very sophisticated landlord friendly lease documents,aggressive property management and powerful well-educated leasing managers.
The tenant’s bargaining position has been very weak. That just changed.
The Covid – 19 anxiety, social distancing shutdown and the resulting economic collapse has already had major changes to the retail tenant market. Landlords are already losing tenants,especially those retail tenants already weakened by e-commerce, non-essential product or service providers, and those tenants whose products or services are negatively affected or impossible to provide while social distancing.
Tenant groups in trouble include sporting goods retailers, fashion retailers, sit down restaurants, theatres, travel agents, fitness and yoga studios and hairdressers. Examples include Reitman’s,Victoria Secret, Hertz, JC Penny, Pier 1. Some tenants expect to re-open; how strong do you The Effects of COVID-19 on Your Premises Lease -- Vol #2 Look Forward to Lease Term Renewal think they will be in the light of decreased demand and no sales since March 1?
The office space leasing market has also been dramatically affected as tenants learn to work at home, reduce their staff and therefore space requirements to accommodate lower sales,and/or find it impossible to access their suites by elevator.
As businesses fail, unemployment will increase,the demand for product will decrease, further contributing to business failure and creating more vacancy. The negative demand for space will progressively continue until there is a vaccine. The recovery will be slow, and we expect that vacancy will progressively increase and rent progressively decrease until the economy begins to recover.
What can I expect as I renew my lease term?
1. Consider re-negotiating all terms and conditions of your lease, not just rent. You now have a strong negotiating position.
Look forward to better rents, more term length including renewal options, and more favourable assignment provisions. Predicting rental rates using pre-covid-19 standards is a thing of the past, much like the world we knew. Rental rates are now subject to the affordability of what a business can pay, as consumer spending winds down from its historic high and revenues along with it. We cannot predict where the bottom of rental rates will go, but they will not be as high as they were.
2. Consider relocating to better premises on better terms.
Watch for space in your market to become vacant and therefore available for lease or sale.Space that was seemingly never available in hard to get into markets and buildings will start to become available. Rents that landlords were able to charge no longer make sense because of high supply and low demand.
3. Consider approaching your landlord before your lease term is up for renewal.
Let the landlord know you are aware of realty market conditions and that you are proactively managing your affairs. Landlords will be looking for long-term commitment and strong covenant(personal guarantees) in exchange for other concessions because their bank financing will depend on it.
Navigating the relationship with your landlord to get the most out of your lease will not be easy. It will take a keen sense of the market and the changes within it, as well as understanding that the landlord still needs to make a small profit.However, the days of just accepting the rental rate given by the landlord might be close to an end for quite some time.
With new opportunities for leasable space coming open, and the changing way in which tenants operate within their premises sets a whole new standard for the industry. New tenants will have a chance to make a deal that will set precedents for a few years. Existing tenants will have a chance to decide if they want to “stay or go” from their current premises. That kind of leverage can save you money no matter the choice you make.
For tenants new or existing, the opportunities to get a lease that works very well for you will be at an all-time high, so take advantage of the opportunity.