The industry is all too aware that many tenants in retail, office and other CRE categories have been asking landlords for rent relief as the pandemic shut down the US economy.
What has been missing from the industry conversation is who exactly is asking for rent relief and in what form. Certainly there have been anecdotal reports of so-called bad actors and well-capitalized national tenants that have been informing landlords that they want to renegotiate terms.
But a new report by JLL sheds some light on who these tenants are with a systematic review by its office property management team of its portfolio, which includes 620 properties and 8,500 plus tenants. It used data from across the US between the beginning of the COVID-19 pandemic through May 12, 2020.
Some basic stats from its findings include the mean average size of the tenant requesting rent relief—which is 4,616 square feet—and a broad breakdown of tenants requesting rent relief across various asset classes. It found that 47.1% of rent relief requests came from retail and non-office space users and 34.3% came from office tenants
It also noted that rent relief has fallen into several categories. "At the most basic level, tenants are opening the conversation with landlords as to how to manage these costs best given demand declines they have seen in their industries," it said.
Rent relief requests and general inquiries account for 28% of the activity, it said. More significantly, 34% of tenants have asked for direct rent abatement, while another 28.5% have sought seeing a deferment from paying until conditions normalize. The retail and non-office sectors have, not surprisingly, been the hardest hit in the rapid decline of the economy, with 68% of this category asking for immediate abatement or deferment. (By definition rent relief excludes requests for abatement or deferment).
JLL found that landlords are generally opting to provide abatement only when part of broader 'blend and extend' lease restructuring. This approach provides the tenant with financial relief, while keeping the landlord's occupancy and income stream whole until market stability returns, it said. "At the same time, these negotiations may be re-priced to include some rent discounts and/or additional concessions," it also noted.
Trophy Tenants Ask for More Help
One interesting finding in this analysis is that requests for relief from tenants of trophy/Class A properties accounted for more than 36% of the responses. In contrast, Class B came in at 30.7%, with Class C at 26.8% of the responses. There are probably numerous reasons for tenant rent relief requests in trophy buildings, but the main one JLL identified was capitalization and affordability. While trophy/Class A properties likely have larger, better capitalized tenants, they also are likely to be under higher financial pressure.
These businesses chose high-quality space, high-cost space to compete and retain and recruit staff, JLL pointed out. "They have also seen a rapid rise in office rents during this cycle, possibly making any revenue decline more acute and—requiring rent relief," it said. In contrast, companies in Class B and C space are already in affordable locations and, for the most part, with more modest drains on their resources.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
