RENT RELIEF IN THE OFFICE SECTOR
Written by: Dan Dunsmoor, SIOR
As Brokerage Executive Vice President, Dan Dunsmoor has been involved with over 750 commercial real estate transactions valued in excess of $800,000,000 and accounting for over 5,000,000 square feet. Dan is recognized as a market leader in the Columbus, Ohio commercial real estate market, specializing in the leasing and sales of Class A & B office space. Keep reading to get Dan’s take on how the COVID-19 pandemic is affecting the office market, specifically as it relates to rent relief for tenants. Rent relief has been a huge topic in the office sector due to coronavirus. What have you been noticing so far relating to rent relief in the Columbus market? Specific to office buildings, fortunately, we have not been hit nearly has hard as other sectors such as retail and hotels. Initially, in mid-March we started to see requests from tenants that served more of a retail function in our office buildings such as restaurants, coffee shops, etc. We then started to field requests from many smaller companies that could see that their business would directly be negatively impacted by the COVID-19, so they were proactively reaching out to express concern that they were worried that they may have an issue paying April rent.
Many of our clients were concerned for April 1st to come because they were unsure what percentage of their Tenants would be paying rent. Based on discussions with landlords with significant office property holdings, my take is that landlord’s collected rent from approximately 85-90% of their Tenants.
The percentage of office rent collections during the month of April actually would have been even higher, but on April 1, 2020 Governor DeWine issued an Executive Order pertaining to Commercial Evictions and Foreclosures, which requested that commercial landlords “suspend, for a term of at least ninety consecutive days, rent payments for small business commercial tenants.” We immediately saw a tremendous up-tick in requests for rental forgiveness. Many companies, even if it were not a necessity to endure the current economic environment, took this Executive Order as an opportunity to not pay rent for ninety days.
Is there any advice you would give to landlords on how specifically to handle rent relief for their tenants? We are working with our clients to cultivate a specific strategy depending on their specific situation. There are many variables to consider, such as the property’s current cash flow situation, debt situation, the overall investment strategy for the asset, etc. We then have been approaching each Tenant request individually and working to determine a potential solution for each request. For example, if a Tenant has two years left on their lease and made the request for ninety days of rent forgiveness, we would potentially use this as an opportunity to provide some abated rent now in exchange for three additional years of lease term. This strategy has been especially beneficial from the standpoint that the Tenant’s focus is not on tenant improvement dollars, but rather on short term rent relief. So, assuming that we are dealing with a viable company that can weather the storm, we may be able to secure additional term at below market TI costs.
If there is no opportunity to extend the lease term and the Tenant is truly in need of short term assistance, another strategy that we are implementing is providing short term rent relief, but the value of the relief is amortized and paid back to the landlord over the next 12 months. For example, we may provide two months of 50% rent relief valued at $10,000, but then the Tenant’s rent will increase by $833 per month during the 12 months following the relief period.
How long do you think rent relief will have to continue in order to help tenants make ends meet? It’s hard to even guess how long it will take for the world to get back to normal after the pandemic, but I think that we will likely be dealing with rent relief discussions for the rest of the year, and we will likely see quite a few companies go out of business altogether.
What other questions/concerns are you hearing from landlords right now? Now more than ever we are seeing the importance to understand our Tenant’s business, what industries they are exposed to and their financials. We are very disciplined when it comes to ensuring that we bring viable Tenant’s to the table for our landlord’s and make sure to assist with analyzing financial statements, and if necessary, assist with negotiating credit enhancements such as personal guaranties, letters of credit, etc. Landlord’s that have signed leases in recent history without fully understanding their Tenant’s business model and financial position are likely very nervous right now.