COVID Precipitates Frank Conversations with Tenants, Landlords

HOUSTON—As Houstonians adjust daily routines due to the COVID-19 pandemic, brokerages are having a wide range of conversations with tenant clients about the economic disruption caused by the pandemic combined with the recent oil price drop into negative territory. NAI Partners is one of the firms engaging with clients in several key topics of discussion:

1. COVID-19 Impact on Houston’s Jobs

Houston is likely to see significant job losses and an extended burden on its economy from COVID-19. Given the single week of job losses based on initial claims for unemployment insurance in Texas and Houston’s share of Texas’ jobs, mid-March losses in the region were estimated at 37,945 jobs, reported Patrick Jankowski, senior vice president of research with the Greater Houston Partnership.

The Partnership conducted a recent survey of its small business members and found that 29% were unable to deliver goods or services, 59% are operating below half capacity and, most concerning, 41% can survive only one to four weeks. The three industry sectors that are most at risk during this initial period (and the massive 777,000 jobs tied to those sectors) are all non-office occupying and include a) retail establishments impacted by social distancing, b) plumbers and other home services that cannot be delivered remotely, c) the arts that aren’t considered essential and d) most small businesses that tend to operate on thin margins.

The Perryman Group developed a possible scenario for estimating the eventual effects of the coronavirus based on a variety of public and private source materials, with projected job losses in Houston-The Woodlands-Sugar Land MSA totaling nearly 256,000.

The next Bureau of Labor Statistics’ jobs report, which will include the surge of layoffs that happened during the third and fourth weeks of March, will be released in early May and will show the real impact on the job market.

2. COVID-19 Impact on Houston Office Market

While of course, no one can predict precisely how long the disruption will continue, it is possible to make some educated predictions around possible office tenant responses during and after the pandemic runs its course, says NAI Partners.

Houston’s office market already sits at 21.5% as of the most recent data. With even more space of both direct and sublease likely coming available in Houston, office tenants will arguably have more leverage than at any time in history with regard to negotiating rental rates, terms, tenant improvements and concessions. However, since the market was already soft prior to the current situation, the relative impact to occupancies and rents may not be as significant as would be expected.

As appealing as remote work appeared to be a decade ago, the current collective experience is reminding many in the workforce of the innate desire for structure, scheduling, routine, repetition and human interaction. This should spell good news for the office market as companies increasingly recognize the business value, not to mention heightened employee satisfaction, of talent collaborating in the same physical space.

On the other end of the spectrum, there was already a pushback across many businesses with regard to the open concept workplace, and there will likely be an increased number of requests for office floorplans and/or buildouts with more defined barriers and increased distance between workers, predicts NAI Partners.

3. Long-Term Effects of Oil Price War on the Houston Office Market

The drop in oil and gas prices will impact the Houston office market, however, the market was already weakened and struggling to recover from the recent oil downturn in 2014/2015. Houston has had one of the highest vacancy rates in the country since the downturn, NAI Partners points out.

It is possible that the Houston office market may experience decreasing rent growth in the next few months as the market gets a hold on the economic outcome resulting from the pandemic. Asking rents recently began to recover, although that might have been interrupted by the recent course of events. The vacancy rate has climbed to 21.5% in the first quarter of 2020, and there is no assurance that Houston office demand will pick up in the wake of COVID-19 and the current decline in oil pricing.

4. Rent Payments

Disruptions from COVID-19 will also have an impact on commercial real estate landlords and tenants as difficult decisions are made to adapt to these sudden changes. Many small tenants, particularly retail tenants, have reported revenue drops of 50% to 100% in some cases.

The CARES Act recently passed by Congress provides at least two months’ rent and wage relief for companies of 500 employees or less. NAI Partners brokers are advising tenant clients with revenue challenges seeking rent relief to immediately apply for any relief via the CARES Act. These tenants should be prepared to provide to the landlord financial information that supports a significantly short-term decline in revenue.

Landlords expect many tenants to apply for these funds in order to pay rent. Landlords are struggling with multiple rent relief requests while still having to pay property expenses and mortgage payments. Most landlords are not simply providing rent relief without either a strong financial case for relief or trading some type of lease extension or other recapture of any abated rent.

Brokers can help with landlord discussions to determine if some sort of lease restructuring is possible.

“Lease renegotiation is where we provide value. We are helping to bridge the gap with landlords due to lack of revenue,” Joe Bright, senior associate with NAI Partners, tells GlobeSt.com. “Some have the ability to negotiate a lease renewal, lower rate or a free rent package tacked onto the end of the lease. Tenants are definitely taking a deep look at leases for force majeure and other solutions. We are providing guidance where we can for options so they can help stop some of the bleeding. If there is ever a time to work together, this is it.”

Bright says all new transactions are on hold for the most part as firms are not making any commitments at this point.