Lorena Sandoval is one of our Tenant Advisors in Los Angeles, CA. She is known for her positive energy, unrelenting work ethic, and ability to listen to her clients’ needs to add value to the leasing process in meaningful ways. Below, she answers some of the most common questions she has received from tenants over the past few months.
Q: Are you seeing companies bringing their employees back to work in person, or still keeping them remote?
A: Everyone is adjusting to the “new normal” and circumstances differ over the country, as businesses must follow the rules and regulations of their state and local governments. However, I have seen more and more businesses open their offices and resume in-person work while keeping employees’ safety top of mind. Whether or not a business brings employees back to work in person partially depends on the type of space. For example, many businesses in industrial locations have had fewer issues bringing employees back to work when compared to office-based companies, as industrial spaces are much larger and allow for greater distance between workers.
Q: How has demand for office space shifted coming out of COVID?
A: In general, companies are taking one of two approaches to office space:
Downsizing square footage -- Some businesses have discovered that a portion of their employees can work from home productively, or recognize that their employees are not ready to return to the office amidst the pandemic. Businesses that have switched to an indefinite remote work arrangement (for some or all employees) have an opportunity to save money on rent by downsizing.
Expanding square footage -- Other businesses that want employees back at the office in person are seeking larger spaces to accommodate the generally-accepted “six feet of separation” guideline and provide a safe and comfortable working environment.
Q: I’m looking for industrial space. How much negotiation leverage do I have as a tenant in the current market?
A: There is a current misconception that all types of commercial real estate are in distress due to COVID and economic conditions, leading tenants to believe they have greater leverage than they actually do. While this sentiment is true to some degree for office and retail sectors, industrial space has not been affected in the same way. The industrial market is highly competitive at this time, particularly for small to mid-size spaces. When pursuing an industrial space, a tenant must work with their Advisor to move quickly when submitting a Letter of Intent and financial information, or else they may miss out on an opportunity.
Q: What concessions are commonly being offered for office space?
A: Unlike industrial landlords, office landlords have demonstrated a willingness to negotiate on certain terms. While they are hesitant to budge on rates, there are a few items they have been willing to negotiate on, listed below.
Term -- Landlords are accepting shorter term leases than they accepted pre-COVID. In pre-COVID times, the standard minimum lease term was 3 years. Office landlords now understand that businesses are currently facing high levels of uncertainty and that a longer lease term may be a dealbreaker for a potential tenant. Additionally, given the uncertainty that many businesses are experiencing, a longer lease term could be risky to a landlord if they accept a tenant that ultimately ends up struggling to pay rent. Under the current circumstances, shorter term leases have been more common than they were previously.
Rent Abatement -- While landlords have been holding firm on rental rates, there may be more negotiating room for rent abatement. An extra month or two of rent abatement decreases a tenant’s net effective rate and the total rent paid over the term of the lease.
Commencement Date Extensions -- Pre-COVID, landlords often had multiple potential tenants to choose from for any given space and did not have to say yes to a tenant who would not be ready to occupy and pay rent for a few months. With office space demand down due to the pandemic, some landlords are more willing to sign leases with commencement dates that are a few months out.
Q: Can a lease include language that provides flexibility with rent payments or even lease termination if we go into another government-mandated lockdown?
A: Unfortunately, landlords have proven to be completely unwilling to include termination clauses or other similar language.
Q: Are there more subleases available now than pre-COVID?
A: Yes, there has been an increase in spaces available for sublease across the country. Sadly, tenants unable to weather the COVID storm have been forced to close, file for bankruptcy, and/or downsize, among many other outcomes. As a result, those tenants are motivated to sublet their space and recoup as much of that capital as possible. However, as discussed in previous answers, demand for office space has decreased, so there are fewer potential tenants looking to sublease space than in pre-COVID times. For startups or other young, small businesses, now is a good time to search for a sublease if you desire to do so. The primary benefit to a sublease versus a traditional office lease is that a sublease will often offer a lower rate than would be offered in a direct lease with a building’s landlord.
Q: Could the upcoming election impact commercial real estate decisions for businesses?
A: Yes! Each state may have amendments or provisions proposed that would impact commercial real estate. For example, Proposition 15 in California would alter the way commercial real estate is assessed and greatly impact commercial property taxes, which are often passed through to tenants. Every business owner should educate himself or herself about the different amendments and provisions that will be on his or her particular municipality’s ballot.