It comes as no surprise that the coronavirus has wreaked havoc on the New York office leasing market. But for a few exceptions, leasing activity is effectively frozen. The entire real estate industry is completely on edge. Below is a summary of what we are seeing in the market today along with a prediction for the post-pandemic future, gleaned from my dealings with landlords and tenants as well as participation in countless conference calls and webinars in the last month.
1) Landlords are trying to hold the line as much as they can. Some are putting out letters saying they are not giving rent discounts in April. Others are saying that tenants should make every effort to obtain Paycheck Protection Plan funding before considering rent reductions. This is understandable given that the failure to collect sufficient rents puts many landlords out of covenant with their lenders and threatens their ability to pay their own expenses and real estate taxes.
2) Discussions of rent relief require separating the wheat from the chaff. Some tenants are trying to opportunistically take advantage of the situation while others have experienced severe drops in revenue up to 100% and simply can’t make payment. Some are in between those two poles. Others paid rent in April but are waiting on events to see what to do in May.
3) Any discussion of rent relief needs to be supported by a showing of good cause. Tenants should be prepared to make transparent disclosure of their financial condition and provide useful comparative metrics regarding their losses and cash position supporting any request.
4) We recently completed a 9,000 rsf deeply discounted sublet transaction with a minimal security deposit. I believe that transaction is the canary in the coal mine for what we can expect to see when people start to return to work. The subtenant is leaving a WeWork and the new space does involve a 2-year commitment, but they now have their own full floor and lower rent than at WeWork.
5) When the market unfreezes, rents will reprice at by as much as 25-30% lower per square foot. There has been considerable industry debate as to whether tenants will reduce their office footprint due to the popularity of remote working and demographic changes, or whether they will need additional space due to social distancing. While it remains to be seen what configuration the new office will take, I can safely predict that tenants will demand lower prices and correspondingly reduced security deposits. If companies are not sure they have a long-term future they will prefer short term leases.
6) This will dovetail with the need for tenants to dispose of space due to reduced headcount. Accordingly, a substantial amount of sublet opportunities will come on the market as New York City reopens, most at steeply discounted prices. That will complement the demand for more flexible leasing terms than in the traditional long-term lease.
7) It also presents the WeWork paradox, as WeWork allows the flexible terms that so many tenants will demand. One issue is that some of WeWork’s present spaces are too dense to meet current safety concerns and will need to be reconfigured. Of course, there are many rumors that WeWork is in a precarious position as many of their occupants are on month-to-month leases which are easily canceled.
Let Wharton Property Advisors help you navigate the turbulent times ahead. Whether you are looking to dispose of space, reconfigure, renegotiate your lease or if your lease is coming due, we are here to help. We represent our clients with diligence, creativity, and integrity, all of which are more important than ever. We want to be helpful to our clients and friends in the NYC business community during this extraordinary time. As a special community service, we are now offering a pro bono analysis of your office lease situation so that we can suggest ways to reduce your occupancy costs going forward and answer any questions you may have. There is no charge to you.
Lastly, we want to know what our clients and friends are thinking. What do you think the future holds? We look forward to hearing from you.
Above all, be safe and well.
Counselor of Real Estate
Fellow of Royal Institution of Chartered Surveyors