How nyc office tenants can leverage a COVID-19 down real estate market
How has COVID-19 changed the NYC office leasing market and what can you expect? How can NYC office tenants leverage the down real estate market?
We’ve all seen the news, heard the stories, and felt the effects of COVID-19 on our personal and professional lives. The pandemic hit business owners hard, but in true New York Spirit we fought, pivoted, and over the last several months learned to adapt to the new reality. Our city is slowly coming back to life, but the effects of the pandemic on our businesses—and the real estate market—are not going away anytime soon.
We’ve spent the last 5 months answering all kinds of questions for Tenants around their rights, rent payments, and a path forward, with two themes in common: (1) What is the best way to approach your Landlord with respect to obtaining immediate relief through this difficult time and (2) how can Tenants take advantage of market conditions now and over the next 18 months. We’re here to weigh in on this (and any other questions you may have).
HOW HAS COVID-19 CHANGED THE NYC OFFICE LEASING MARKET? WHAT CAN YOU EXPECT GOING FORWARD?
More than ever before, landlords and tenants are coming to the table together and engaging in meaningful and transparent conversations around lease restructuring. As we’ve communicated, over the last few months we’ve seen a wide variety of solutions unique to each specific landlord-tenant situation, but all designed to solve the most pressing problem stemming from the shutdown: cash flow.
In Q2 of this year, leasing activity was down 70% year over year, with 1.6 million square feet of sublease space hitting the market from tenants reevaluating their real estate footprint amid revised remote work strategies. So, what does this mean?
It means that now, more than ever before, small and medium sized tenants matter to landlords. You have more leverage than ever before to restructure your lease (or sign a new one) with terms favorable to you, and a greater range of available spaces to choose from. No landlord wants to be strapped with yet another vacancy, especially amid the uncertainty for the rental market going forward. Similarly, tenants subleasing their space are more willing now than ever before to dramatically decrease their rents and get the space off their books, creating a unique opportunity for a new tenant to take a high value, low-cost space.
Experts predict a 20% to 40% market adjustment on office leasing rents over the next 18 months, though nobody can say for sure. Asking rents have largely not come down over the last several months, but the real flexibility for tenant’s lies in negotiating substantial discounts off the asking rent. To date, for tenants renewing leases on their existing space, we’ve seen 10% to 20% discounts off asking rents. Subleases discounts trend even higher at 30% to 40% off asking rents as tenants look to get these spaces off their books as quickly as possible. Flexibility on new direct deals with the landlords varies but trends towards the lower end of the range at 10-15% below asking rents.
Bottom line: New York City is now a tenant’s market, at least for the foreseeable future. This presents an opportunity for tenants with a longer-term view to leverage market conditions and take value out of the market. Below we break down different scenarios and how you can take value out of the market in each:
I’M A TENANT WITH AN UPCOMING LEASE EXPIRATION AND WANT TO STAY IN MY SPACE. HOW CAN I TAKE VALUE OUT OF THIS MARKET?
We would recommend signing a ‘blend and extend lease, where you extend your lease at a rate that blends your current rate with the market value to immediately lower what you currently pay. In exchange for signing a longer-term lease now, you would receive:
- Favorable base rent relative to what you currently pay
- multiple months of free rent now
- a real estate tax reset to $0; (depending upon how many years you are into your lease, this can have a significant and favorable impact on your bottom line)
Example: if you have a lease expiration coming up in the next 3 years, we believe you could viably approach your Landlord with the following blend and extend scenario: you will extend your lease past its existing expiration if they agree to reduce your rent by 10%-20%, provide you with several months of free rent that you can use now, and reset your real estate taxes back to $0 with a new base year.
The best way to understand how a blend and extend scenario compares to your as-is scenario is to see a comparative analysis, which we are happy to send you.
I’M A TENANT WITH AN UPCOMING LEASE EXPIRATION AND WANT TO MOVE. HOW CAN I TAKE VALUE OUT OF THIS MARKET?
COVID-19 has dramatically impacted the New York City sublease market; last quarter alone, 1.6 million square feet of sublease space hit the market, and they now represent 25% of available space in the market vs. 15% year over year.
As tenants reevaluate their remote work strategy and real estate situations, many have put their existing space on the market and are looking to get it quickly off their books. For tenants looking for a high value, low price space, this can be an incredible opportunity. We’ve seen 30% – 40% adjustments on sublease rents in the last few months. Many of the subleases we’ve seen are newly built out with modern finishings, strong natural light and lots of windows, and furnished with nearly brand new furniture; in other words, the type of space you might have paid top dollar for pre-COVID.
More available sublease space + tenants vying to get the space off their books as quickly as possible = a unique opportunity to acquire space at a deep discount relative to pre-COVID value.
If you’re a tenant looking to move but only want to commit for the next 18 months or less, you can always look for a sublease with 1-2 years left on the term. They’re out there, and our job is to find them and send them to you.
Alternatively, you can take a short-term lease with a provider that focuses on short term leases like Breather, WeWork, or Industrious. In pre-COVID days, a traditional coworking space would likely cost around a ~32% premium all-in vs. the cost of that space on the market – think of this like a convenience charge for avoiding a long term lease and getting move-in ready, furnished space without a lengthy buildout. During and post COVID-19, you have much more flexibility to negotiate much more favorable financial terms, even for the short-term coworking leases you’d have paid a high premium for in the past.
As alternatives to traditional coworking, companies like Breather offer private space as you reconfigure your work from home strategy, whether you’re looking for temporary space for your returning employees, or just want to book a meeting room a few times a month.
I’M A TENANT WITH 3+ YEARS LEFT ON MY LEASE. HOW CAN I TAKE VALUE OUT OF THIS MARKET?
Tenants with 3+ years left on a lease can also do a blend and extend.
If you’re not open to a longer time horizon, that’s okay too. We’ve structured several rent relief options that don’t extend your term but still provide much-needed cash preservation now. Here are some of the most common solutions:
- Using your security deposit entirely or partially as rent payments now, to be replenished later
- 3-6 months of deferred rent now, to be paid back at a later date over the term of your lease.
- 3-6 months of free rent to be added to the end of your existing lease
I’M A RESTAURANT OR RETAIL TENANT. HOW CAN I TAKE VALUE OUT OF THIS MARKET?
One creative solution we’re structuring with restaurant and retail owners is a percentage lease. In lieu of rent, you pay the Landlord 10% (or a pre-determined specific %) of gross sales for the next 18 months, at which point the rent reverts back to a fixed monthly number for the rest of the term.
This solution works for restaurants and retail owners because it takes the idea of paying a fixed cost amid uncertain, changing circumstances, and allows you to pay rent only if you make money, and then only as a percentage of those sales. Landlords are more willing now than ever before to move forward in this way to avoid vacancy.
Please call Vicus Partners’ Founder Bert Rosenblatt at 917 862 8820 or email email@example.com. if you have questions or want to talk anything through. We understand what a difficult time this is for every business owner, and are here to help you navigate and ensure your business is in a position to succeed.