From: New Orleans CityBusiness By: Andrew Valenti, Reporter October 8, 2020
The COVID-19 pandemic has altered the commercial real estate industry for the foreseeable future.
While multifamily and industrial properties look to be holding their own, the retail and restaurant sectors are expected to struggle moving forward. It also remains to be seen how the office market will be impacted in the long term.
Local real estate experts say the terms and length of new and existing leases are changing as tenants look for more flexibility. SVN | Urban Properties director Eugene Schmitt said tenants are asking for shorter leases at one or two years, and many landlords have been willing to do this. A typical commercial lease before the pandemic would last between five to 10 years.
Schmitt said this change helps both parties. Many tenants don’t want to make a long-term commitment due to the uncertain future of the economy, and with a decreased demand for retail space some landlords have lowered rental rates but are only willing to take the financial hit for one or two years.
One way landlords can attempt to recoup some of their losses, Schmitt said, is to ask for a percentage of the tenant’s sales revenue. For example, if the market rate for a retail space is $33 per square foot, and the landlord was willing to offer it for $20 per square foot, they also could ask for 10% of the sales for the first two years of the deal to help make up the difference of the discounted rent.
“A lot of the foot traffic for retail just isn’t there anymore,” he said. “The landlord is at least able to get some kind of income during all this, and the operator would be willing to pay a little more in rent if the business ends up doing well.”
Corporate Realty sales and leasing associate Scott Graf said he has seen a sharp decline in new leases for office space because many companies are hesitant to make a decision until the uncertainty of the pandemic abates. Meanwhile existing tenants are asking for shorter terms on renewals and extensions. He believes a lot of these firms are just looking to make it through this year and then reassess what their office occupancy looks like in the first quarter of 2021.
These leases range from one to three years and suggest that employers are trying to figure out the amount of space they will need following layoffs and determining how effective their workers are splitting their time between the office and at home, Graf said.
Another issue is force majeure, or act of God, a common clause in contracts and leases where a party is excused for not performing a contractual obligation if its performance is prevented, caused or hindered by an event, condition or other circumstance that is beyond the party’s control. This could include natural disasters, wars and riots.
Graf, who handles leasing at the Energy Centre on Poydras Street, said pandemics are now being added to this list. He believes that most landlords won’t push back on it too much. Unlike retail where many businesses were legally not allowed to open during the lockdown and have had some success in the fight for rent abatement, Graf said he is not aware of any office buildings that locked their doors.
“What this really does is it protects the tenant from being placed in default by abandoning their space for a few months, he said. “But they still have to pay rent.”
Graf said he has heard of some companies leaving the downtown office environment in favor of smaller buildings with less traffic and touch points in the suburbs and other areas of the city.
“The Stables” is a project by local developer Inhab Group to test the appetite for smaller, low-rise offices in New Orleans. Located in the Lower Garden District, it will be spread throughout four buildings and offer around 3,000 square feet of rentable office space in each structure. There is also a retail component, with plans for a wood-fired pizza concept and a beer and wine tap house.
Inhab Group founder and owner Mike Bertel said in August that space will be offered to tenants who need as little as 750 square feet to as much as 3,000 square feet.
“We weren’t really planning for this paradigm shift in tenants’ needs when we first started this project,” Bertel said. “This project is set up perfectly for what people want now.”
Brian Rourke, who specializes in office leasing for Latter & Blum, said the pendulum could start to swing back in the other direction in terms of longer terms leases and more employees returning to offices. He said efficiency models will start showing that some workers are not as productive working from home as they are in an office environment, and employees don’t have the same type of collaboration and camaraderie over a video conference call that they do in person.
He believes that office design and configurations will change moving forward, though. Spaces that incorporated more of an open floor plan could revert back to private offices. Plexiglass, staggering workers’ shifts in the office and spacing people out would be other options to take advantage of these open spaces, Rourke said.
“From a collaboration, mentoring and company culture standpoint, that gets diluted when you’re not in an office environment,” he said.
