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Experts say changes are on the horizon to the decades-old language in retail and restaurant leases as a result of the Covid-19 pandemic.

New leases are being written with substantial changes, particularly in regard to provisions that provide relief for tenants that are unable to fulfill their contract obligations because of circumstances out of their control, such as a natural disaster or pandemic.

Steven Silverman, a shareholder at Miami-based Kluger, Kaplan, Silverman, Katzen & Levine PL, who deals in lease negotiations, said the language in these provisions is often broad, and landlords did not interpret them to apply to shutdowns caused by a pandemic.

“As a result, many new leases signed over the last few months include more specific language,” Jaime Sturgis of Fort Lauderdale-based Native Realty said. “Moving forward, there’s going to be a little more clarity. The provision is broad by design, so I think moving forward more clarity and more specific language addressing these types of situations. landlords and tenants have mostly settled on common ground on what those new clauses may include.”

Most new leases he’s seen include language that states that should there be any government-mandated business closures – whether by city, county, state or federal agencies – the tenant would be protected with partial rent abatement.

“That also protects the landlord, as these agreements often add that the tenant would need to pay a minimum rent to cover costs like property taxes and maintenance,” Sturgis said. “For the most part, everybody’s on the same page about it. People are looking to share the burden.”

Silverman said that while the two sides have found common ground, it was rare for landlords to give any ground on lease negotiations, but the pandemic caused a power swing rare in the industry.

“I believe that bargaining strength is going to change because I think there will be a glut of space on the market,” Silverman said. “When landlords are faced with that reality, they become more relaxed in how they’re going to sell their product.”

Signs of that power swing were apparent almost immediately.

Jenny Gefen, a broker for retailers at Colliers International South Florida’s Miami office, said Bolay was close to signing its lease 2,700 square feet at 810 Brickell Ave. in Miami, but after the pandemic came to South Florida, restaurant representatives requested a review of the language in the lease to protect themselves in case of future government-ordered restrictions or shutdowns.

“Bolay eventually signed the lease after representatives felt they would be covered for pandemic-like situations in the future,” Gefen said. “Many retailers signing new leases are requesting percentage rents for the first couple of years as their businesses recover from the pandemic.”

“Provisions that protect tenants from disasters or pandemics aren’t the only aspects changing in leases because of Covid-19,” said Eric Hochman, chief development officer at Boca Raton-based PEBB Enterprises.

Hochman said his company is working with prospective tenants to include clauses that outline what spaces are available for extra seating, fulfilling curbside and/or delivery orders should government restrictions be enacted again.

 

Source:  SFBJ

Neon - Vacancy 2354

The pandemic is expected to drastically reshape commercial real estate, leaving thousands of vacant and underused spaces nationwide. But some developers and investors are keen to seize the chance to convert those properties into other uses.

Lord & Taylor’s flagship department store in Manhattan, for example, will soon house office workers for Amazon, and a tourist destination in the heart of Hollywood is getting a $100 million face-lift that includes converting underused retail spaces into offices.

“Nobody ever lets a crisis get in the way of creating opportunity,” said Sheila Botting of Avison Young, a commercial real estate services firm in Toronto, where she is president of the professional services practice for the Americas.

Conversion waves in the past were often localized. For instance, more than 13.8 million square feet in lower Manhattan changed over after the Sept. 11 terrorist attacks in 2001, according to the Alliance for Downtown New York. But those shifts were nothing on the scale that is expected in the next 18 to 24 months, experts say.

In retail alone, at least 7,700 stores totaling 115 million square feet were expected to close this year as of early August, according to data provided by CoStar Advisory Services. Most of these closures will be in malls, which were struggling long before the pandemic pushed department stores like JCPenney and Neiman Marcus into bankruptcy.

At the same time, 172.7 million square feet of Class A office space, typically the highest quality, is expected to come online this year and next. Only 59% of it has been leased, below the average of 74%, according to the CoStar data. And nearly 1 in 4 hotels nationwide faces possible foreclosure as owners fall behind at least a month on loans, the American Hotels & Lodging Association said. Simply put, a lot more space is going to be available out there.

“If there was a sudden drop in demand for Cheerios, General Mills would just pull the Cheerios,” said Victor Calanog, head of commercial real estate economics at Moody’s Analytics. “Then there’s going to be less, and prices won’t have to fall as much. But once you’ve built an office building, you can’t exactly take it off the market.”

Some of the causes of the national oversupply in commercial real estate predate the pandemic. For example, the shift to e-commerce has hastened many stores to the grave in recent years — more than 10,200 stores closed in 2019, according to CoStar.

Also, businesses that use offices have been pulling back on space amid rising digitization and other efficiencies as well as demographic shifts — younger generations in general are comfortable with less office space. The commercial real estate industry’s rule of thumb in the 1980s was 200 to 300 square feet per employee, according to Moody’s Analytics. By 2019, the average had fallen to 126.5.

And industries as diverse as real estate, media, technology and banking have been flirting with more telecommuting for decades. Moreover, a sizable chunk of leased space goes largely unused during the workday anyway — estimates place it at 30% to 40% — as people are out of the office for various reasons. But the crisis has created a chance for some developers to reassess their strategy.

“I think for the real estate community, this represents a moment in time to think about current assets, how they’re being used and what future options might be,” Botting said.

The starkest example yet of this approach might be Amazon’s possible plans to convert JCPenney and Sears stores in shopping centers owned by mall operator Simon Property Group into distribution warehouses, which was reported earlier by The Wall Street Journal. The e-commerce giant is also behind the overhaul of the shuttered Lord & Taylor store on Fifth Avenue, turning 676,000 square feet into office space for about 2,000 employees by 2023. Amazon declined to comment for this article.

Last month, DJM Capital Partners, a real estate services firm, and private equity firm Gaw Capital Partners revealed plans to overhaul the Hollywood & Highland, a Hollywood entertainment complex on the same block as the Dolby Theater, which hosts the Academy Awards. Those plans call for carving nearly 100,000 square feet of creative office space out of existing retail.

“When the firms bought the complex last year, they had a low opinion of the future of traditional brick-and-mortar retail,” said Stenn Parton, chief retail officer of DJM. “Then the coronavirus shut down thousands of businesses across the country. If anything, I think it’s solidified our business plan as we’ve seen the record store closures as a result of the pandemic.”

Most conversions won’t be as grand; instead, they’ll involve smaller and less heralded properties. Still, a wide variety of conversion projects is expected.

“Developers see an opportunity in converting hotels into continuing care retirement communities,” said David Reis, chief executive of Senior Care Development in Harrison, New York. “It’s less expensive to convert a property than build from the ground up, especially in expensive markets such as New York. If you can buy space for the equivalent of 50 cents on the dollar less than new construction, then clearly you’re going to be fine when you do a conversion.”

Nationally, new residential construction generally average $225 to $350 a square foot, compared with $150 to $200 for an office-to-residential conversion, according to a report provided by project management firm Cumming. For industrial construction, the average new project costs $125 to $250 a square foot, but that can fall to $75 to $175 for a retail-to-industrial switch.

Despite the potential for lower costs and the emerging universe of options, commercial real estate conversions do pose challenges. Zoning and technical design can stymie some changeovers. And it can be more difficult to draw financing for conversions during the pandemic, when lenders are more averse to risk.

“Core and stabilized assets are drawing financing opportunities,” said Eric Rosenthal, a co-founder of Machine Investment Group, a real estate investment firm. “Transition stories, or when there’s an element of execution beyond just buying it and managing the property, the environment to finance those assets is very challenging.”

Traditionally, the best conversions have increasingly been obsolete properties.

“Typically, if they’re older and they’ve gone beyond their useful life — reduced occupancy, reduced cash flow — they are ripe for transformation,” Botting of Avison Young said.

In an undated image from Related Companies, a rendering of what an office conversion could look like in the Neiman Marcus space at Hudson Yards in New York. (IMAGE CREDIT: Related Companies via The New York Times)

But even newer properties are on the table. Neiman Marcus opened a 188,000-square-foot flagship store at Manhattan’s Hudson Yards just last year as the anchor retail tenant in the nation’s largest private real estate development. Now the Related Cos., owner of Hudson Yards, is pivoting. Philippe Visser, president of Related Office Development, said by email that the store would become “the most exciting office opportunity in New York City.”

The move harks to previous crises that forced a metamorphosis in commercial real estate. In the 1990s, lower Manhattan was racked by high office vacancies and population drain, and William C. Rudin, president of New York landlord Rudin Management, helped lead efforts to rejuvenate the area. More than 4.6 million square feet was converted from 1995 to 2001 — including glassy office buildings no one thought would make decent apartments.

“When things get bad enough,” Rudin said, “it forces people to come together and come up with ideas.”

 

Source: SFBJ

silver lining

The COVID-19 outbreak and widespread response to slow its spread has thrown cold water on what had been a healthy U.S. economy. Nearly all sectors, including real estate, has seen immediate impacts.

Even so, those in the Milwaukee-area commercial real estate industry see a number of opportunities coming as a result of the pandemic. Opportunities will come in the form of buying opportunities, a healthy industrial sector through growth in e-commerce and repatriation of supply chains, remote-work related investments and more lease and expansion opportunities due to newly vacated space.

These musings from local real-estate professionals were compiled in a recent survey conducted by six area industry groups: Marquette University Center for Real Estate, NAIOP Wisconsin, the Commercial Association of Realtors Wisconsin, Wisconsin CREW, Building Owners & Managers Association of Wisconsin and IREM Milwaukee. The survey asked respondents what impacts they were seeing from the outbreak and what strategies they were using to address them. It generated nearly 350 responses. The full results were released last week.

One of the most commonly mentioned things is the rise of buying opportunities, due to variables including low interest rates, distressed assets, foreclosures, increasing supply and lower property values.

As one respondent noted, opportunity could lie in “potential distressed sellers looking to recapitalize or sell at a discount to replacement cost and prior value.”

Respondents also noted two opportunities in the realm of industrial real estate. Some predicted accelerated growth in the e-commerce sector as more people become comfortable with using home-delivery services. Others noted that supply chains could be re-focused domestically, as the outbreak caused global disruptions. The thought is that the industry would be better equipped to handle a similar pandemic in the future if more operations were located in the U.S.

“Manufacturing growth in U.S. as more companies repatriate their supply chains,” wrote one respondent.

They also noted several opportunities in the retail sector. More space will be made available due to businesses closing, which will create opportunities for tenants to relocate or expand. Landlords will also settle for lower rental rates as they look to make deals with replacement tenants.

This all could be viewed as a silver lining, since retail has been hit particularly hard due to state and local shutdown orders.

” … I believe some businesses will not be able to reopen or will fail, that more retail space will become available, and that asking rents will come down as landlords look to do deals with good replacement tenants,” said a respondent.

Builders noted opportunities to do more renovation work on buildings that are now vacant or have limited occupancy. They also predicted more demand coming from the health care sector, with users looking to upgrade facilities. On the other hand, a number of respondents suggested the rise in virtual health care could also harm their business due to less need for services at brick-and-mortar locations.

Many respondents pointed out that many companies have had to quickly adapt to remote work. This would have long-term impacts on the way people work, they said.

Things traditionally done in-person that are now being done virtually include team meetings, property showings and remote notarization.

Several even suggested this would lead to changes in the office market, such as the reduction of needed office space.

This particular point caught the attention of Andrew Hunt, director of the Marquette University Center for Real Estate, one of the groups involved in the survey.

He said respondents were surprised how easily and quickly their firms adjusted to remote-work tools such as Zoom and Microsoft Teams. Many of them wondered how this would change the way people work, both inside and away from the office, even after the outbreak subsides.

“I think what they’re trying to say is, ‘We know that there’s a way people work, we think it is probably likely to change from this,’” Hunt said in a recent interview.

He later added, “How that impacts office space in the future, how that impacts just the way people do work and maybe even how efficient they are in doing work, is something that we all need to continue to watch. But a lot of people think that is going to have an impact.”

Other takeaways from the survey include:

 

Source:  BizTimes

uncharted waters

It is reasonable to presume that no South Florida business will emerge entirely unaffected by the pandemic and subsequent economic downturn.

As companies figure out how to get back on their feet, commercial real estate brokers and property managers are helping them adapt to the possibility of staff reductions and structural changes to their businesses. The big picture will be a mixed bag of positives and negatives for owners, investors and tenants.

On the positive side for owners, low-interest rates will mean an attractive environment for refinancing quality loans. For domestic and international investors who still consider America the world’s safest place to invest, the time will be right to return to the market in search of new buying opportunities. Tenants who are hit hard by months of interruption and serious revenue shortfalls will scrap plans to expand.

The commercial real estate sector as a whole is navigating this evolving crisis through uncharted waters. Tenants have reached out to us to report the early impact of the coronavirus, or COVID-19, on their businesses. We are sympathetic to the economic uncertainty they are facing and are pointing them toward the various federal, state and local programs being deployed to help businesses recover.

Facing immediate fiscal challenges, landlords are not in a position to extend financial relief. Some are offering hope that when the crisis ends a comprehensive review of tenants’ circumstances can be performed and a response provided in due course.

We also are urging tenants to examine their own resources, including the terms of their insurance policies. For example, if coronavirus losses are sufficient to trigger business interruption coverage according to the terms of their policy, some tenants may be covered for income losses resulting from disruption of their operations.

No one knows the timeline for recovery, so until the pandemic is under control and the economy recalibrates, my staff and I are focusing on the things we can control. We moved rapidly to transition our firm to remote mode and are proactively taking the following steps to keep our team engaged and our customers reassured:

  • As the pandemic became imminent, we fast-tracked the companywide installation, training and roll-out of stay-at-home technologies. It was a substantial investment, but well worth the long-term benefits it will deliver to our business. We also made sure everyone had a laptop and video conferencing capabilities, and adapted our phone system for the seamless offsite handling of calls.
  • We hold mandatory virtual staff meetings every day to talk shop, share news, observations and suggestions. We challenge everyone to present fresh ideas to benefit our company, our clients and our community. In addition, for as long as the health authorities permit, two people per day go to the office to support the stay-at-home team by forwarding mail and other documents, as needed.
  • Each of us stays in touch with clients to share updates and assure them that we are taking care of everything in our power on their behalf. We visit their properties to make sure they are being properly maintained, and although we no longer can go inside tenant spaces, we make sure everything is being maintained as planned on the outside.
  • Working from home can offer quiet periods during the day to sit and think about what we can be doing differently. We are encouraging our brokers, property managers and administrative staff to carve out time every day to think about challenges and opportunities for moving our business forward and ultimately making it more successful than ever before.
  • Several members of our staff are using this time to hone their skills with online training
  • Most of us have that folder full of miscellaneous notes that might be useful someday but never make it out of the pile. With some extra time temporarily on our hands, most of us are getting more organized, filing all those business cards we’ve collected or reading those industry articles we’ve meant to read for months. It’s time well spent.

Instead of wasting precious time worrying about how and when the commercial real estate market is going to recover from the impact of COVID-19, we are preparing to hit the ground running when it does.

 

Source: SunSentinel