He Covid-19 pandemic it has changed the nature of commercial real estate negotiations, shifting some of the leverage from landlords to tenants as U.S. cities undergo a remodeling of the place where business activities take place. It has also created opportunities for some small businesses to reach brick and mortar properties, while other smaller stores that have long depended on the daily business crowds have suffered.
The virus gave rise to remote work, with corporations around the world closing their offices and sending workers home. Some employers have maintained their corporate leases, although hybrid work arrangements make employees spend less time in the office, while others have reduced their real estate footprint or ceded their spaces for complete.
In general in the US, leasing activity has declined in conjunction with employees and employers rethinking traditional five-day work weeks with every day spent in the office.
In New York City, for example, the rate of availability of Midtown Manhattan offices, a measure of commercial space that is empty or about to become vacant, is almost 18%, more than 10% before of the pandemic, according to CBRE, a global commercial. real estate company.
In other central business districts in the United States that have been destroyed before, there is more office space than usual. The office availability rate for the fourth quarter of 2021 was 22%, up from 18% before the pandemic, CBRE found.
“Tenant’s Market”
These higher availability rates are part of what is driving the shift in power dynamics that govern commercial real estate negotiations especially from 10,000-square-foot offices to restaurant sites and commercial spaces that in the past would serve large companies and their thousands of workers.
“Everyone knows that central business districts are much lower traffic areas than they used to be, and we believe that even with the slow-moving office occupancy, it will take a long time, if not for always, until there are five days. office occupancy, “said Peter Braus, co-founder of New York City real estate company Lee & Associates. “I think in terms of whether it’s a tenant or landlord market, it’s clear we’re still in a strong tenant market for most of the office industry.”
So how do companies take advantage of new leasing opportunities in this favorable environment?
On the one hand, they can have deep discounts on work and commercial spaces, with the exception of premium office spaces that attract the interest of employers looking to give workers a reason to leave home and return to work. physical.
“People say that if they want to keep paying for office space, they want amenities in the building, such as a gym or a fancy restaurant. They really want the best if they pay for it by the nose,” Braus said.
Offers are still plentiful in the rest of the market.
“We are coming out of a period during the pandemic when the office market was very restricted in terms of how occupants could use their space, which led many of them to vacate space and put more space in the sublease market, “said Julie Whelan. an expert on the future of work at CBRE. “What we see now is that it is recovering, but a recovery is not happening overnight, which means that yes, there are still generally favorable conditions for tenants to negotiate leases. “
Concessions and more concessions
Here are some of the new tenants that tenants consider most important:
- Flexibility clauses
- More free rent
- Tenant improvement bonuses
- Space in sustainable buildings
Flexibility is at the top of tenants ’wish lists when signing leases, according to brokers.
Clauses that protect tenants from future business disruptions due to COVID-19, as another potential construction moratorium, are becoming more common these days and give occupants a chance to extend their leases. if things go well or sublet their spaces to other tenants if they do. do not do it. Flexibility is key right now as the U.S. prepares for another wave of COVID-19 driven by most contagious BA.2 Omicron Subvariant – and is being woven into written agreements.
And while concessions such as free rent and a tenant improvement bonus that helps new occupants improve their spaces were part of most retail offerings before COVID, companies are getting deeper discounts and more bonuses. of improvement than before.
Before the pandemic, commercial tenants who sign new leases could typically expect discounts of up to 10%, according to Mike Watson, a New York City broker who represents both tenants and landlords.
These days, tenants can do even better.
“Right now, a 20% discount is pretty achievable,” Watson said. “Depending on the market, the city and the tenant’s credit, you can probably even get a 25% discount.”
This is lower than the extreme discounts that homeowners accepted during peak periods of COVID-19.
Watson remembers his client About Coffee, a three-location mom and pop coffee business in New York City who got a 40% discount at a shopping mall that took over the Manhattan clothing district during the pandemic.
“You may have missed the absolute summit, but if you know where to look and you can take advantage of the good market space, you can still come in and get a deal,” Watson said.
Tenants had much less “movement space” before the pandemic, he added. “Then it was more of a homeowners market.”
Supply chain thicknesses
Another concern that is at the forefront of lease negotiations is free rent for tenants whose plans to open restaurants, retail stores and other businesses are affected by ongoing supply chain blockages, according to Matt Chmielecki. Manhattan retail specialist at CBRE.
Submissions of basic business items, such as kitchen equipment for a restaurant, and heating, ventilation, and air conditioning units are backed up, which may cause some start-ups to delay opening.
“Tenants have a real concern about that and I’ve seen it increase in recent weeks,” Chmielecki said.
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