NYC landlords have taken several constructive steps toward redesigning the workplace to provide for health measures and social distancing which is desperately needed to deal with the coronavirus crisis. However, it is an open question as to whether they truly grasp the new reality of today’s economy in which they need to be partners with their tenants rather than mere rent-seekers. In my view, the half-measures taken by the landlord community fall short of the substantial changes which are needed.
The economy has changed dramatically in the last seven months. In the office sector, tenants now have the option of remote working. This will take hybrid forms and will evolve as employers refine their business models. That said, if office prices are too high, the remote business model becomes more attractive. Landlords must therefore learn to compete in this new environment.
What does this mean? It is not complicated. With all the Sturm und Drang, New York City landlords have been reluctant to lower their prices. They understandably prefer to keep their heads in the sand hoping for a better day which is not coming.
Non-landlord sublessors seeking to reduce their operating costs have been much quicker off the mark, discounting their spaces by up to 50% or more.
To be competitive, landlords must offer deep discounts on rent as well. But even that is not enough, as tenants are demanding
(1) shorter leases;
(2) the right to cancel leases:
(3) percentage rent based on revenues/sales; and
(4) pandemic protection from paying rent in the event of a future calamity.
In the retail sector, some major landlords have actually recognized the depth of the crisis. Brookfield Properties and Simon Property group have teamed up to purchase JC Penney and Forever 21 out of bankruptcy. Brookfield has also developed a fund to invest in other retailers. This makes obvious sense because empty malls and strip centers will destroy their businesses.
However, it is not just major retailers who need help. Except in certain specific sectors like supermarkets and pharmacies, retail has been decimated and its demise was merely hastened by the coronavirus. While we do not expect landlords to bail out dying businesses, many viable ones that were decimated by the virus need a helping hand. If one is not coming from the government via direct aid or tax policy, it is in the self-interest of landlords to allow for reduced and percentage rent so those businesses can get back on their feet before it is too late and they have to close permanently. They can’t just sit back and wait for tenants to return at pre-Covid rents and terms.
Without real structural change, landlords are just rearranging the deck chairs on the Titanic. It is not enough to just spiff up the trophy buildings with new ventilation systems and clever signage, sanitizers, and no-touch gadgets. Rather, landlords desperately need to wake up and realize we are in a new world in which over a century of landlord hegemony is over. They need to start thinking like entrepreneurs who must hustle for business rather than comfortably waiting for tenants to walk in the door. That requires real sacrifice, creativity, and partnership with tenants who are no longer just an unlimited stream of cash.
In contrast, office tenants are the lifeblood of the economy, and for the first time ever they have a meaningful alternative to high rents. Those tenants know they can achieve substantial savings by reducing their office footprint. Further, while working from home is imperfect and may reduce productivity, tenants also know that expensive rents fall directly to the bottom line. As a result, that tradeoff may remain attractive in a post-Covid world even after returning to the office is safe. If tenants are not treated fairly many will vote with their feet and literally stay home, perhaps permanently. Landlords need to wake up to that new reality and act accordingly.
Counselor of Real Estate
Fellow of Royal Institution of Chartered Surveyors