Lately, each day has brought more signs that pandemic restrictions are being loosened and the opportunity for a “return to normal” is growing. But for commercial real estate landlords and tenants, will there be a new normal? The lessons of this pandemic will likely bring both short-term and permanent changes to the commercial leasing landscape.
First and foremost, landlords want to get people back into their properties. This is particularly true for retail, but it also applies to office and mixed-use settings. Almost without exception, more people around means more business for tenants and fewer defaults and vacancies for landlords. So in the short term, we should probably expect a tenant-friendly market, as landlords offer incentives to fill vacant space and to encourage existing tenants to return to full use of their space as soon as possible.
Longer term, the experiences of the pandemic will probably result in some shifts in focus when negotiating commercial leases. Force majeure clauses, once relegated to the “miscellaneous” section of a lease and usually given little if any thought, now likely have a permanent home near the top of most leasing checklists. Tenants and landlords alike will want to establish concrete rules about how a future pandemic or government shutdown affects the parties’ rights under the lease.
We can also expect an increased interest from tenants in triple-net leases. Tenants on full-service leases during the shutdown accrued a lot of rent for services that they couldn’t use, while triple-net tenants likely saw their triple-net charges drop significantly. Similarly, expect tenants to want to have more control over utilities and other service costs so that they don’t end up paying for something they aren’t using.
Landlords should also expect tenants to show an increased interest in health-related amenities, particularly related to indoor air quality. High-end air filtration and touchless features like automatic doors and soap dispensers will likely become selling points. If these features need to be added, then landlords may incur a slew of one-time charges that will trigger a need to evaluate how base year expenses are calculated and how capital improvement costs are passed through to tenants.
The pandemic will also have lasting effects on how space is designed and marketed. Large open bullpens for office workers are likely a relic of the past. Workspaces will instead be designed with social distancing in mind. Also, now that most of us have at least a year of forced experience with online shopping, virtual meetings, and electronic documents, tenants will want less space for the same number of workers. Tenants may also want workers who telecommute part-time to share space in the office with other workers. This will, in turn, decrease the need for numbers-driven amenities like parking, fitness centers, and on-site retail.
Lastly, a defining feature of the pandemic was the nationwide effort to provide eviction protection to tenants unable to pay the rent. While protection for residential renters received the most press, many states (including Oregon) passed laws handcuffing commercial landlords from proceeding against delinquent tenants for a considerable period of time. In the next wave of leases, we can probably expect landlords to try to find ways to avoid or minimize the impact of similar moratoria in the future. Whether these efforts will pass legal muster remains to be seen, but as they say, necessity is the mother of invention. So expect landlords to get creative and to propose novel new language in an effort to reduce their future exposure.