Welcome to Pullman & Comley's Real Estate Newsletter, Groundbreaking News. Written by our team of attorneys, you'll find articles that highlight hot topics and developments spanning the fields of real estate, land use and property valuation.
In this Spring 2021 Issue:
One Year On, How Has Commercial Office Space Changed?
Repurposing Connecticut's Commercial Real Estate Market in the Wake of COVID-19
The Use of Electronic Signatures in Real Estate Documents
One Year On, How Has Commercial Office Space Changed?
Last spring, the commercial real estate world was awash in predictions about the future of commercial real estate. How offices would change in the long-term was of particular interest for landlords and companies alike. Now more than a year since COVID-19 sent most office workers home, some predictions from last spring have come to pass, while others have surprised experts. As employees come back to the office, the situation is continuing to evolve.
The New York Times recently quoted Pullman real estate attorney Geoffrey Fay, saying that “landlords realize we are on the precipice of change.” Here are some more detailed thoughts from Geoff on current developments in the world of commercial office space.
In the past, office tenants typically incurred extra fees if they wished to run the HVAC system outside of normal 9-5 working hours. In order to social distance, more office workers are coming in early or coming in and staying late. When the HVAC system isn't running, air stagnates. What used to be a little stuffy or cool is now a COVID-19 hazard. As a result, many leases at top properties now stipulate extended HVAC hours.
Leases now specify on a granular level what is sanitized and how often. A lot hinges on if a lease uses the term "sanitized" or "cleaned" because only the former refers to the use of products that kill coronavirus particles. Tenants are also demanding ionization of lobbies and bathrooms and savvy landlords are responding.
COOL FACTOR STILL IMPORTANT
A focus on safety and infection control has not eclipsed the trend of "experiential" amenities. Demand for a “cool” office environment persists. Employers still want to offer an environment appealing to millennials, and landlords are willing to spend significant sums and sacrifice rentable space to meet these demands. COVID-19 has not changed the fact that tenants like poured concrete floors and a cool cafeteria with cashless touch screens and open seating. (But, please call it anything other than a “cafeteria.”) High-end fitness centers are a must. These are long-term plays for landlords and tenants alike who are betting that employees will feel safe in an office gym or communal eating area relatively soon even if the pandemic is not completely over.
COMPANIES DID NOT LEAVE NYC IN LARGE NUMBERS, BUT DID LEASE SUBURBAN SPACE
Though many residents have moved in the past year from NYC to surrounding suburbs, the mass exodus of companies from Manhattan to suburban offices predicted a year ago has not materialized. While few headquarters moved, small financial service firms have snapped up long vacant space in Greenwich and Westport, Connecticut – the tony towns where traders live. COVID-19 also greatly accelerated the trend toward “hub-and-spoke” office operations, where companies maintain a large central office adjacent to clients but lease smaller “spoke” offices in less expensive suburban markets close to employees’ homes. The fact that more suburban schools have in-person learning has driven demand for suburban offices. Offices within walking distance to a train station are ideal.
GOING SMALL FOR HYBRID TEAMS
Prior to COVID 19, there was already a trend toward smaller office spaces. The pandemic accelerated this shift and also led to spaces with smaller conference rooms that are more equipped for video chats. Much has been said about how surprisingly effective remote work has been for professional service industries. But one year into this pandemic and we see that remote work may be beneficial for senior personnel but not so much for new hires. Learning a new job remotely is difficult and millennials yearn for socialization. Professional service industries are realizing that, eventually, employees will have to work together in person, but that the setting may look different than it did before the pandemic. Since remote meetings will continue to some extent indefinitely, tenants also want assurances built into the lease that the landlord will make every improvement necessary to enable high speed internet connections.
FLEXIBLE LEASE LENGTHS
As the Times has reported, what used to be rigid 10-year commercial leases are now seeing one or two-year extensions. In addition, tenants want early termination options. One reason office leases tend to be so long is because landlords incur costs updating a space for a tenant to occupy it. Those costs are amortized over time. Leases can be structured so that if tenants want to leave early, they can pay off the remainder of those costs. In addition, tenants are looking for a right to expand built into the lease. If they suddenly need to put more space between workers in a future pandemic, they'd like the ability to occupy more square footage in order to do so.
To access the complete New York Times article, visit The New York Times website.
If you have any questions related to this article, please contact Geoff Fay.
Repurposing Connecticut's Commercial Real Estate Market in the Wake of COVID-19
The myriad of public and private responses to the COVID-19 pandemic, including inter alia, full or partial stay-at-home orders, occupancy limits, spatial requirements and the like, have had a profound impact on the demand for commercial real properties in Connecticut. While there have been positive trends in the demand for industrial and warehouse properties, other sectors, including office and retail, have shown a significant decline in value over the past year.
The state’s large retail malls and retail centers, in particular, have been hit especially hard, experiencing unprecedented vacancies and foreclosures in the wake of the pandemic. As detailed below, however, these properties present unique opportunities for repurposing and adaptive reuse efforts, which will be imperative for their long-term viability and survival going forward.
THE ACCELERATED RISE OF E-COMMERCE TAKES ITS TOLL
While the so-called “Retail Apocalypse” has been happening since 2010, the pandemic has irrefutably accelerated this trend and has contributed to the rise of e-commerce. Last year saw the closure of more than 11,000 retail stores nationwide, many of such closures occurring in mall properties. The retail consultancy group, Site Works, predicts up to a third of malls will be vacant due to the economic fallout from the pandemic.
Of particular significance, a number of national department store chains that traditionally have served as the so-called “anchor tenants” in malls have been struggling financially and forced into bankruptcy. Neiman Marcus filed for Chapter 11 bankruptcy on May 7, 2020; shortly thereafter, JCPenney filed on May 15, followed by Lord & Taylor, the nation’s oldest department store, in August 2020. Mall cornerstone Macy’s also just announced that two of its Connecticut stores, the Brass Mill Center and Crystal Mall locations, have been designated for closure in 2021. And this appears to be just the beginning. According to recent estimates by the commercial property research firm Green Street Advisors, more than half of all mall-based department stores will close by the end of 2021. Considering that, as of January 2021, department stores accounted for nearly one out of every three-square feet in malls, such closures will have a devastating impact on this sector.
Indeed, Connecticut’s shopping malls are already feeling the effects of the retail bankruptcies and store closings arising from increased consumer preference for internet purchases, which has only been hastened by the rise of COVID-19; the majority of the same have experienced significant decreases in revenues and cash flows as a result thereof. The Connecticut Post Mall, for example, reported growing vacancy rates and store closures, a 20 percent decrease in visitors over the past five years, and a decline in taxable assessed value of more than $27 million from 2010 to 2019. Crystal Mall in Waterford is similarly struggling. The owner of the mall, Simon Property Group, announced last November that it was in the process of transferring title to its interest in the mall to its lenders, essentially turning over the keys. The announcement came following news that the value of its real property interest at the mall decreased by 87 percent to just $18.7 million. In 2012, Simon’s real property interest was appraised at $153 million. At that time, the Crystal Mall was a thriving retail center, anchored by Sears, Macy’s, JCPenney and Filene’s; unfortunately, however, Sears and Filene’s are now gone, JCPenney is in bankruptcy and Macy’s will be closing this year.
The Enfield Square Mall offers another example of the dramatic decline in value of mall real estate. In 2016, J.P. Morgan Chase foreclosed on the Enfield mall after its ownership defaulted on a loan. In December 2018, Long Island-based Namdar Realty Group bought it at auction for $10.85 million. Only 12 years earlier, the property had sold for $85 million. Since acquiring the property, Namdar has subdivided the mall property and has marketed the subdivided sections of the real property to tenants. Recently, Namdar sold one of the mall’s anchor properties, a 136,000 sq. ft. store leased to Target, to 90 Enfield Square Holdings, a New York entity.
CREATIVE REPURPOSING OFFERS NEW OPPORTUNITIES
The changing paradigm in consumer purchasing preferences, and the resulting financial impact on retail tenants, have caused owners of malls and retail centers to repurpose many of these failing properties into other uses, such as warehouses and distribution centers, higher education centers, retail/entertainment venues, housing projects, and any combination thereof.
Confronted with the challenges of replacing failed anchor tenants and an over-retailed environment, a number of owners are converting their underperforming malls and retail centers into warehouses and distribution centers to meet the demand for last-mile deliveries from e-commerce and surviving brick-and-mortar retailers. According to January 2019 CBRE research, there were at least 23 retail-to-industrial projects that had commenced between 2016 and the end of 2018. Collectively, these projects are converting approximately seven million square feet of aging retail space into ten million square feet of new warehouse/industrial space, either by repurposing the existing structures or by demolishing and replacing them with new buildings. CBRE expects that this retail-to-warehouse/industrial conversion trend will only continue to grow, “as the balance between brick-and-mortar retail and e-commerce shifts to necessitate more logistics space and less physical retail space.”
In Connecticut, these conversions are gaining momentum. In Manchester, for example, the new owner of the former Sam’s Club (69 Pavilions Drive), Amber Properties LLC, is seeking to redevelop the property into a multitenant warehouse/distribution/light manufacturing facility, which would require a special exception or regulation amendment. Peter M. Levine, the owner and principal of Amber Properties LLC, informed the Manchester planning and zoning commission that the proposed redevelopment plan for the property is similar to one that he had done at another Sam’s Club location two years ago in Seabrook, New Hampshire. In that case, the property was rezoned from retail to industrial and is presently leased by two separate warehouse/distribution tenants.
Powerhouse Amazon is reportedly eyeing several locations in the eastern and western regions of the state for potential distribution sites. Last year, the Seattle-based company launched several distribution sites in Connecticut, currently occupying more than three million square feet in Windsor, North Haven, Cromwell, Stratford, Wallingford, Bristol, Enfield, Trumbull, Orange, and at Bradley International Airport in Windsor Locks. Amazon expressed its intention to occupy another one-plus million square feet at facilities in Windsor, Wallingford and Danbury, respectively, in the next year.
Malls also represent attractive repurposing opportunities for schools. For example, several years ago, Austin Community College purchased Texas’s 1.2 million square-foot Highland Mall and converted it into an education facility — featuring a regional workforce training center; a science, technology, engineering and mathematics (STEM) simulator lab and digital media center; and a culinary and hospitality center.
Recently, Brookfield Properties has set its sights on repurposing a 70,000-square-foot former Sears (Idaho Falls) location into a charter school. A portion of that mall's parking lot will also be converted to an outdoor play area for students. With more than forty colleges and universities in Connecticut, there are a number of potential and able buyers.
With respect to retail/entertainment venue conversions, there is a global shift in the way consumers shop and what they are looking for in a physical retail environment. Consumers no longer want to visit malls for the sole purpose of shopping; rather, they desire a personal and dynamic experience that combines shopping, dining, and entertainment. In recognition of this trend, several of the Connecticut’s mall owners have already begun transforming their “retail-only” shopping centers into a mix of development that focuses on customer convenience and experiences. In 2019, SeaQuest Trumbull, a petting zoo aquarium, opened in Westfield’s Trumbull Mall. Despite initial negative publicity surrounding the aquarium, Westfield officials report the reuse has been a success.
As mall properties tend to be centrally located and well-connected to transit, with large numbers of parking spaces, they also represent attractive spaces for potential housing developments, including affordable housing projects. This is especially true, as the popularity of “live/work/play” continues to grow among the U.S. population, particularly within the millennial and “empty nester” demographics. In Trumbull, the city’s planning and zoning commission gave its approval last October on the plan to build 260 apartments at the Trumbull Mall, after having voted in favor of regulations in 2018 that paved the way for the project.
Centennial Real Estate, the owner of the Connecticut Post Mall, has not had as much success with its plans to construct a 300-unit apartment building on a four-acre portion of its property. In October of 2020, the Milford Planning and Zoning Board rejected Centennial’s proposed change(s) to the zoning regulations, which would have allowed the 300-unit apartment building at the mall.
MUNICIPALITIES CAN HELP CHART THE WAY FORWARD
Unfortunately, we suspect that Centennial will not be the last mall owner denied of the local land use approvals necessary to convert its retail property to a more financially sustainable reuse. Current planning and zoning regulations in many Connecticut municipalities are incredibly restrictive, offering little flexibility with respect to the types of uses allowed in a particular zone. This, in turn, has posed a time-consuming and expensive challenge to owners of malls and large retail centers, who are attempting to avoid financial ruin by repurposing and readapting their respective properties into more beneficial uses.
It is incumbent upon local land use agencies and boards to be more cognizant of the dramatic changes that are presently occurring in the retail industry and create workable standards and expedited approval processes that will allow for the necessary repurposing, rehabilitation, and/or construction of these properties. Indeed, the municipalities that house these failing malls and retail centers should have a strong interest in ensuring their viability, as without such properties, the municipalities lose valuable sources of tax revenues and jobs.
Malls and other large retail centers have been important contributors to the communities in which they are located. Historically, they have represented a source of millions of dollars of annual tax revenue, have employed hundreds of area-residents over the years, and have drawn consumer spending from beyond their immediate geographical areas. Importantly, they have also enhanced the quality of life for local residents in numerous ways: a convenient place to shop or dine; a venue for teenagers to meet on a Friday night; a perfect spot for retirees to walk, especially during the winter. These assets, however, without some creative intervention, are destined to become the brownfields of the early 21st Century: abandoned relics of a once thriving business sector that helped fuel the respective economies of the communities they have served. It is therefore essential that municipalities be proactive in ensuring that these failing malls and retail centers can be repurposed and readapted into more beneficial uses before their owners simply hand over the keys to lenders and walk away.
In so doing, municipal leaders need to make individualized, comprehensive assessments of each struggling property, with careful consideration given to: (1) its future viability as a retail center with the inclusion of additional amenities; (2) the owner’s level of commitment with respect to making further investments in the property; (3) appropriate reuses for the property given its location, accessibility to highways, traffic and safety concerns, and the type and/or configuration of the building(s) located thereon; (4) any specific, unserved community need(s) for the property’s use; and (5) market feasibility.
Once such assessment is complete, the municipality must put its plan into action. For instance, if the municipality has determined that the highest and best use for a certain mall or retail center is a mixed-use development equipped with housing, office, entertainment and retail, but such use is not presently allowed under its land use regulations, the municipality will need to amend its regulations so to facilitate and accommodate the proposed conversion. Necessarily, this will involve community outreach to build consensus among local residents as to the desired use and minimize potential opposition. It will also entail extensive collaboration with the current owner of the property, its lenders, and perhaps, other developers that have the vision, experience and financial capabilities to effect such repurposing efforts.
Municipalities will also likely need to consider ways to incentivize such redevelopment, including but not limited to, offering initial tax reduction agreements and fee waivers to the property’s owner(s) and/or potential developer(s). In short, all of the components of a traditional municipal development plan, and more, will be required.
While the highest and best use of a struggling retail center or mall—and correspondingly, the most appropriate plan of implementation—will vary by property and municipality, there is consensus that time is running out. Municipalities that have malls and/or other large retail centers within their borders must be proactive and ensure that these properties can evolve commensurate with consumer preferences before decisions regarding these properties’ fates are being made by out-of-state lenders and discount purchasers – decisions that, needless to say, may not result in the most advantageous outcomes for those impacted municipalities.
If you have any questions related to this article, please contact Gary O'Connor or Amanda G. Gurren.
The Use of Electronic Signatures in Real Estate Documents
Many legal documents have been signed by e-signatures long before the COVID-19 pandemic. The “new normal” has enhanced demand for the use of e-signatures on legal documents. Utilizing e-signatures can cut down costs, processing times, document errors, and increase productivity. E-signatures are not only more convenient for all parties involved, they are also an effective way to ensure that business continues without unnecessary delays.
In the real estate context, there is a big push to digitalize real estate transactions. Currently, electronic signatures are not permitted for any notice of default, acceleration, repossession, foreclosure or eviction, or the right to cure, under a credit agreement secured by, or a rental agreement for, a primary residence of an individual. Trends, however, seem to indicate a bifurcated approach in obtaining signatures on documents prior to closing. For example, there is a push for preliminary contracts, addendums, and disclosures to be signed electronically at the beginning of a transaction. At closing, however, many lenders continue to require original executed promissory notes to ensure there is only one negotiable instrument. This is also because even if electronic signatures for recordable instruments are allowed under state law, local recording offices may still further restrict the use of electronic signatures.
As a result, many lenders still require original wet signatures on promissory notes and recordable instruments, both of which are normally signed at closing. Despite the preferred bifurcated approach, First American Title Insurance Company is leading the transformation on “eClosing” and “eSignings” in an effort to make real estate transactions a better experience for all parties involved, especially as a result of the COVID-19 pandemic. Thus, the future of electronic signatures on recordable instruments and real property documents is still evolving and we will continue to see changes in this area in the near future.
Read more in the full article Electronic Signatures: The New Normal Amidst Remote Work.
If you have any questions related to this article, please contact Joshua S. Cole or Potoula Tournas