We’ve spent the last 5 months answering questions for New York City tenants on how to: navigate rent payment solutions and lease restructuring for existing leases, leverage the COVID-19 NYC real estate market for new or renewed leases, and redesign existing spaces amid social distancing and flexible work strategies to optimize reopening. Here are some of the more frequently asked questions we have had to grapple with:
How Has COVID-19 Changed the Office Leasing Market? What Can We Expect Going Forward?
More than ever before, landlords and tenants are engaging in meaningful and transparent conversations around lease restructuring. We’ve seen a variety of solutions unique to each specific situation, but the key takeaway is that small and medium sized tenants matter more than ever to landlords. No landlord wants to be strapped with yet another vacancy, especially amid the uncertainty of the rental market going forward, so you have more leverage to restructure your lease (or sign a new one) with favorable terms. Similarly, tenants subleasing their space are more willing now to dramatically decrease their rents and get the space off their books, creating a unique opportunity to take a high value, low cost space.
Experts predict a 20%-30% market adjustment on office leasing rents over the next 18 months, though nobody can say for sure. Since asking rents haven’t substantially decreased yet, the real flexibility lies in negotiating substantial discounts off the asking rent; for tenants renewing leases on their existing space, we’ve seen 10% to 20% discounts, with subleases trending around 30%-40% off asking rents as tenants look to get these spaces off their books immediately. Flexibility on new direct deals with landlords varies but has been trending towards the lower end of the range at 10-15% below asking rents.
I’m a Tenant with an Upcoming Lease Expiration and Want to Stay in My Space. How Can I Take Value Out of This Market?
We would recommend doing a blend and extend, where you extend your lease beyond its current expiration date using a blended rate of what you currently pay vs. market value of your space; this is especially relevant following events like COVID-19 that hurt market values. In exchange for signing a longer-term lease now, you receive:
a.) Favorable base rent relative to what you currently pay
b.) Multiple months of free rent now
c.) Real estate tax reset to $0; (depending on when you signed your lease and your building, this can have a significant favorable impact on your bottom line)
I’m a Tenant With An Upcoming Lease Expiration and Want to Move. How Can I Take Value Out of This Market?
As tenants reevaluate their remote work strategy and real estate, many have put their existing space on the market and are looking to get it quickly off their books. For tenants looking for a high value, low price space, this can be a rare opportunity; we’ve seen 30% – 40% adjustments on sublease rents in the last few months, many being for newly built out space with modern finishings, strong natural light and lots of windows, and furnished with nearly new furniture; in other words, the type of space you might have paid top dollar for pre-COVID.
Even if you only want a short-term commitment, you can look for a sublease with 1-2 years left on the term. They’re out there.
I’m a Tenant With 3+ Years Left on My Lease. How Can I Take Value Out of This Market?
If you’re not open to a longer time horizon with a blend and extend, that’s okay too. We’ve structured several rent relief options that don’t extend your term, but still provide much needed cash preservation now. Here are some of the more common solutions:
a.) using your security deposit entirely or partially as rent payments now, to be replenished later
b.) 3-6 months of deferred rent now, to be paid back at a later date over the term of your lease
c.) 3-6 months of free rent to be added to the end of your existing lease
I’m A Restaurant or Retail Tenant. How Can I Take Value Out of This Market?
We recommend a percentage lease, a model that’s gained traction during COVID-19. In lieu of rent you pay the Landlord 10% (or a pre-determined specific %) of gross sales for the next 18 months, at which point the rent reverts back to a fixed monthly number for the rest of the term.
This solution works for restaurants and retail owners because it takes the idea of paying a fixed cost amid uncertain, changing circumstances, and allows you to pay rent only if you make money. Landlords are more willing now to move forward in this way to avoid vacancy.
How Can Businesses Best Evaluate the Effectiveness of their Facilities and Workspaces Amid Social Distancing and Remote Work Strategies?
With rapid shifts in the workplace caused by the pandemic and shifts in delivery of services and mission, many businesses are regrouping to study how they use space and how their buildings support their most essential functions.
1. The first step in this effort is to evaluate space needs starting with a simple premise: Facilities should support long-term success strategies. Savvy business leaders believe that modern, well-planned workplaces boost productivity, wellbeing, and employee retention – all ultimately benefiting their mission and customers.
Starting with a survey of all employees and, if helpful, clients and partner providers, develop a wish list of ideal settings for the work underway and insights into what’s working well – and what isn’t. These findings then become useful roadmaps for, as an example, what functions need to be closer together, or more open to others visually and acoustically. It also will help inform decisions about relative space allocation and needs for specific kinds of furnishings or resources such as utilities, work tools, and even daylight and outdoor views.
As an example, Spacesmith helped revamp the headquarters of a major regional human-services provider to optimize limited office area and a constrained operational footprint. The new interior architecture supports the charity’s recently implemented “mobile workforce” program, freeing many of its 300 employees to spend more than 50% of their time outside the office — boosting caseworker and therapist productivity — and equipping staff with key tools and technologies for on-the-road services. These steps also help set the stage for a successful mobile operation during the Covid-19 pandemic.
Back at the provider’s main facility, the survey results called for a desk-sharing solution, more flexible training rooms, and visiting suites needed for clients. The staff said they needed easier access to stored books, toys, strollers, and diapers, with more ample family visiting areas and a full medical clinic to round out their support mission. Adding to this, Spacesmith created a plan for adding “phone booths” and revamped storage zones so that, in the end, the nonprofit group could deliver the resources they promised while using only a lean, 90-square-feet allotment per employee. At the same time, the new offices create an inspiring and attractive home base for client intake, therapy meetings, case files, and the training of foster parents. While this was a nonprofit solution, similar strategies can be done with a companies sales force, consultants, or anyone else that spends significant time out of the office servicing clients/customers.
2. The second step is to develop a more flexible layout to ensure greater adaptability on a day to day and week to week basis, as well as to ensure more stability and continuity of operations when scope and funding do change. This is where business innovation meets design innovation. Even where companies are dealing with reduced revenue, better facility designs can furnish workplaces on a budget while still boosting operations, enhancing morale, and creating a branded dimension to an organization’s mission, vision, and operations. No matter what industry you’re in, the workplace should boost recruiting and retention of employees and provide an open collaborative opportunity for staff and clients alike.
In fact, efficiency gains and cost reductions often come with new buildings that serve as platforms for long-term success. An example is the 15,000-square-foot home for am organization in the Bronx, N.Y. With highly resilient finishes, furnishings that fold, stack and roll, as well as more open, flexible interior layouts, the facility has become a cornerstone of community life. Inside, its modern, welcoming expression enhances such new facilities as a full-service kitchen and dining area, food pantry, counseling offices, a clothing exchange, showers, a barber shop, and full medical and dental suites.
In another example, Spacesmith created a flexibly furnished multipurpose room for a company, which supports group training and quickly resets as a conference room or presentation and event space. Adding this valuable asset came as part of a consolidation of the company’s space needs, proving that good design – even with less space – could boost effectiveness.