COVID-19 Related Discounts in the NYC Office Market
COVID-19 Discounts In The NYC Office Market
These days, it’s a widely known secret that the NYC market is down – you’ve heard the anecdotes, you’ve seen the news, and the point is – the NYC office market is down, nobody knows when it will end, and now is the time to take advantage of the market. We’re here to share the lesser-known secrets: what are the COVID-19 related discounts in the NYC office market? And how are NYC tenants using them to their advantage?
No matter the landlord’s size, you, as the tenant, are in the driver’s seat to leverage this down market in NYC. Our job is to give you the roadmap for doing this as quickly and effectively as possible. The two most crucial data pieces are that Manhattan vacancy rates are at a 24 year high and that the 16 million square feet of sublease space on the Manhattan market are at a ten year high. Both are indicators that Landlords and Sub-Landlords are more willing than ever to make a deal.
We’ve spent the last eight months listening to NYC tenants’ specific real estate scenarios and delivering tailored solutions. Here’s what we’ve seen and negotiated in the last 30 days as a direct result of COVID-19:
Terminating your lease (for a fraction of your remaining lease obligation):
Before COVID-19, if you asked your Landlord to release you from an existing lease, he or she would probably chuckle and send you on your way. Now, as much as there are opportunities for tenants to drive better deals, in some cases you need to simply exit your lease. We get it and have helped tenants open dialogue with their Landlords around this and exit their respective leases in different scenarios during the pandemic.
Here are two examples of lease exits we’ve negotiated over the past two months:
- Our client paid three months in back rent and gave up their security deposit in full. Together, only 20% of their total remaining lease obligation was paid to exit the lease successfully.
- Our client had a $4 million lease commitment remaining on their lease and successfully exited the lease for less than 25% of that (including their security deposit, so the actual cash impact of this was even lower)
As a tenant, you do have the option to notify your Landlord that you’re leaving and walk away. If you have a good guy guarantee in your lease and are planning to collapse the entity on the lease, you should be safe (though we aren’t lawyers, we can refer you to one free of charge that will evaluate your specific situation and give you their legal opinion). If you don’t want to collapse your entity, walking away means taking your chances of being sued down the road. Throughout the pandemic, we’ve emphasized communicating with your Landlord and coming to a resolution that’s palatable to both parties instead of taking your chances with a potential lawsuit.
Rent reduction in your existing lease (and reducing your lease term)
Before COVID-19, if you asked your Landlord to reduce your rent in your existing lease, they would likely chuckle and send you on your merry way. Now, for the first time in over 20 years of representing tenants, we’re seeing Landlords willing to reduce existing rent by up to 50% for 1-2 years, with no deferment or payback involved (there are also significant discounts for more extended periods if you sign a longer lease – see Significant Discounts on New Leases (Especially Subleases) below).
Here are four examples of rent reductions in existing leases we’ve negotiated over the past two months:
- Rent reduced by 30% until January of 2022; our client pays 70% of their pre-COVID-19 rent until January 2022, at which time they revert to their original rent schedule.
- Rent reduced by 15% on a month to month basis. Rather than defining a set end date for the rent reduction, this Landlord was willing to keep the timeline open-ended and reevaluate based on our client’s continued hardship and the market situation.
- Rent reduced by 50% through the end of 2021, and outstanding rent owed during the pandemic reduced by 50%; this is almost two full years of half rent.
- Signing a new two-year lease at half rent vs. their existing lease, which has six years remaining. In this case, the Landlord agreed to essentially rip up the old lease in favor of this new lease, and the tenant agreed to allow the Landlord to show the space with a right of the first offer. If the landlord gets an offer from a tenant for more than the amount paid, our tenant has a one-time right to match this rent or vacate within 90 days.
Signing a longer-term lease in your existing space for immediate savings
All of the above examples are rent reductions in existing leases obtained without giving anything in return. If you’re willing to sign a longer-term lease in your existing space, Landlords will go out of their way to provide you with favorable deal terms in exchange for this longevity.
Several of our clients have elected to do this because it gives them anywhere from thousands to hundreds of thousands of dollars in immediate relief. Between lower base rent, several months of free rent now, and real estate taxes reset to zero. These clients have saved anywhere from 15% – 40% over the term of their new lease, with the most impactful savings in 2021 when they need it most.
Here are two examples of long term leases in an existing space we’ve negotiated over the last two months:
- Our client with one year left on their lease is signing a new seven-year lease in their existing space in exchange for base rent reduced by 17%, several months of free rent given in 2021 (in addition to forgiven deferred rent from earlier in the pandemic), and a reset of their real estate taxes to a new base year. Overall, they’re saving 30% in this new lease, with over $300k of savings immediately in 2021.
- Another client with two years left on their lease is signing an extension for three additional years, and with the new terms, it will save 22% immediately vs. what they would have paid for the next two years in their existing lease.
Significant discounts on new leases (especially subleases)
If your existing lease is expiring and you’re looking to either sign a longer lease in your current space or take a new space in 2021, now is the time to take advantage of the COVID-19 market. As someone said to us, “New York City won’t ever be Kansas City pricing, but it’s coming down.” Every building and every landlord is different. On average, as we noted above, we’ve seen a 10-35% decrease in taking rents vs. pre-COVID-19 days, with direct spaces trending towards the middle of that range and sublease spaces trending towards the higher end.
Here are two examples of significant discounts in new leases we’ve negotiated over the past two months:
- Our client pursuing a sizable space will save 33% with the latest agreed to deal terms vs. terms agreed to before the pandemic — for the same space.
- Another client pursuing a different space will save 24% at the latest terms vs. what the Landlord was proposing before the pandemic — for the same space.
Subleases are the best value on the market right now for tenants looking for new space. They’re often new or nearly new spaces where the existing tenant has invested significantly in the build-out, furniture and aesthetic, and wants to get the space off their books as quickly as possible at a significantly discounted price. Here is an example of a gorgeous, newly built space for sublease in Midtown – the asking rent now during COVID-19 is discounted more than 30% vs. the pre-COVID 19 asking rent, and it comes with almost a million dollars of furniture. For a savvy decision-maker looking to leverage the market, these types of subleases represent an excellent opportunity to secure COVID-19 discounts for the next 5+ years.
As we noted above, you as the tenant are in the driver’s seat during this COVID-19 down NYC office market. With the Manhattan vacancy rate recently climbing to a 24 year high, Landlords increasingly realize that making a deal with a potential tenant at a reasonable discount is always better than taking their chances in the market. You can leverage the market to favorably impact your business and your bottom line for years to come. We’re committed to sharing as much information as we can and exploring traditional and creative paths forward to deliver a solution that works for you. Contact us if we can help.