From Rent Relief to Re-Entry, Where Are Our Offices Headed?
Now is the time to have a direct and open line of communication with tenants to help soften potential changes in the future.
As we progress into summer we are getting a clearer picture of the impacts to the real estate markets surrounding the unprecedented events of COVID-19. I previously wrote that property managers need to be prepared with re-entry plans as states begin loosening restrictions and prepare for the next normal. But it’s worth looking at what transpired over the past two months to ensure that we can maximize the learnings from COVID-19 should we find ourselves in a similar situation in the future.
According to new data from JLL Property Management, swaths of tenants from varying sectors are actively looking for ways to manage their real estate expenditures. Data show that such requests peaked the week of April 3 as the pandemic unfolded, and have tapered off through the beginning of May. The report looks at data from across the U.S. from the early stages of the COVID-19 pandemic through May 11, 2020. The review covered a subset of JLL’s office and non-office property management portfolio including 620 properties and more than 8,500 tenants. It’s clear that while some sectors were hit harder, no one has been immune from the impacts of this incredibly fast paced market shift. The volume of rent relief and abatement requests show how state- mandated closures and stay-at-home orders have put increased pressure on how companies across the spectrum view their real estate costs.
Rent relief requests – a request for rent reduction in various forms that were not abatement or deferment – and general inquiries accounted for about 28 percent of the activity. More importantly, the rapid shift in economic conditions has resulted in 34 percent of tenants asking for direct rent abatement, with another 28.5 percent seeking a deferment from paying until conditions normalize.
Retail accounted for 42.6 percent of rent relief requests, while professional and businesses services accounted for the second largest volume at 10.4 percent.
In the office sector, requests for relief from tenants of Trophy/Class A properties accounted for more than 36 percent of the responses. In contrast, Class B came in at 30.7 percent, with Class C at 26.8 percent of the responses. This could be because stalwarts of Class A office space, including professional services and law firms, who typically spend heavily on space to recruit and retain talent are facing headwinds in the market.
Meanwhile, tech firms, early adopters of dense spaces and large occupiers of trophy space, have announced that some of their employees will begin to work from home permanently, reducing the density of their offices. However, as the country begins to reopen, we anticipate many businesses will also require more space than they did before to adhere to social distancing requirements. Overall, we expect the demand for space to stabilize as we move towards the “next normal.”
That said, it’s still unclear when many occupiers will return to work.
JLL’s recent report, Global findings on workplace re-entry during COVID-19, which includes insights from more than 80 organizations in 13 industries across the globe about work-from-home sentiments and re-entry strategies, reveals that while more organizations are planning their re-entry strategies in mid-May than in mid-April, more than 50 percent still don’t have a set target re-entry date.
As of mid-May, the JLL occupancy planning team has developed social distancing plans for approximately 149 million square feet of our clients’ real estate portfolios. Among clients for whom we have developed social distancing plans, 49 percent are reporting that they are losing 50 percent capacity or more on their floors.
So, what does this all mean? Landlords, and by extension property managers, need to understand that no sector has been immune from the swift changes brought on by COVID-19. The “next normal” will include less dense offices and new needs and protocols to keep tenants safe.
Decreased workplace density would reverse a decade-old trend. Between 2018 and last year alone, average rentable square foot per employee in North America fell 14.3%, from 228.2 to 195.6, according to JLL’s annual Occupancy Benchmarking Report. Rent relief also shows that there needs to be awareness of tenant difficulties and a mechanism in place to collaborate directly with tenants as the economy remains on fragile footing.
While our experience shows landlords are taking these rent relief discussions very seriously, and are contemplating the future of office density and the impacts on the workplace, now is the time to have a direct and open line of communication with tenants to help soften potential changes in the future.