From Groundhog Day To A Murky Crystal Ball: Commercial Leasing During The Pandemic
In late February 2020, Baum Realty Managing Director of National Real Estate Services Matt Fetter had 10 leases near completion, representing months of work with the retail clients he specialized in, such as Duluth Trading Co. and Aurelio's Pizza. In just weeks, as the reality of the coronavirus pandemic set in, all of them fell apart. Soon, as the Chicago-based real estate agent learned as he began re-engaging with clients, the old playbook didn’t matter anymore.
“We had to shift a lot of what we were working on, and become more of a partner in real estate as opposed to a broker,” he said. “It started with combing through hundreds of leases and finding language on how to delay rent payments and work on rent forgiveness. Then as issues with labor, supply chains and staying open became more serious, everything got expensive. Finally, by the time there was some limited reopening in the Chicago area last summer, building out a new store was low on the totem pole.”
As fears of the delta variant spook the stock market, and even in the case of Los Angeles County, cause officials to reimpose mask mandates, those in commercial real estate who have worked through the last year and a half are reminded of the constantly shifting business landscape, and the need to continually adapt strategies. From keeping clients engaged through shutdowns to figuring out how to adapt to new office needs in a fluid and hybrid work environment, brokers and sales teams have had to constantly change incentives, sales pitches and even the type of real estate they were offering, according to four professionals in Miami and Chicago.
“When Covid first started, there was really no hiding, nothing that people could do the first six or seven months,” said TSG Sales and Marketing adviser Phil Gutman, who recently co-developed Ofizzina, an office condo project in Miami. “It sent everything into a new direction, a new process of thinking around office space.”
For office brokers, whose flexibility and patience were tested by extreme circumstances, the need to have up-to-date proficiency in workplace trends, technology applications and the suite of tools people were using to communicate and manage a remote workforce became more and more crucial, and life has moved back to a new normal during 2021. Individual market dynamics played a huge role as well; Chicago, like New York, saw a big dip and gradual return to more active business, while Miami suffered a less severe slowdown in activity.
“In general, the sales and the transaction process was much more of a straight line in the past,” Chicago-based Cresa Managing Principal Allan Rogoway said. “Now it’s more of an evolving process, where you’re working with clients to understand marketing dynamics, HR, and talking about things that weren’t as topical. For the last 10 years, office was all about keeping up with the Joneses, and everyone had the same architectural features and layout. Not anymore.”
In the retail space, the focus was on protective lease language and trying to engage and hold onto clients as the best-laid plans became completely derailed.
“Pre-pandemic was more pro forma for us, and that’s pretty significantly changed post-pandemic, we’re seeing so much more activity on the office and retail front, for people who want to be in Class-A type buildings,” said Integra principal Victor Ballestas, who oversees the Miami-based private equity and development company. “We’re seeing a move towards quality, and it’s much less price-sensitive than we’re used to seeing in office and retail."
During the darker moments of 2020, when any type of leasing activity was pretty much frozen, brokers and others took to extreme measures, offering significant concessions and terms that would be ludicrous today. Baum’s Fetter said that at a certain point, it reminded him of Groundhog Day, having the same exact conversation multiple times, just with kids screaming in the background of a video call.
For Ballestas, the leasing strategy late last year especially was whatever it took.
“I can tell you we signed one or two tenants where we took a beating on price and gave back tenant improvements that we wouldn’t even consider,” he said. “During the pandemic, we were offering insane incentives, and we had people coming in and asking for a year’s rent, asking us to build out the entire space for them; national tenants asked to go from a guaranteed rental rate to a 6% of income lease where we don’t guarantee anything if we’re not doing well. We were offering free rent, more time for build-out, rental rates less than two-thirds of what we’re offering today. Now, the shift towards new tenants and tech tenants, we’re seeing demand and the market shifting, and we’re getting a lot more choosy.”
By the second quarter of this year, as the vaccine rollout started hitting its stride, markets underwent a type of reset, Rogoway said. Especially in office markets, there is still plenty of hesitancy that requires a different approach with potential clients.
“We’ve been talking to a lot of people and a big trend we’re seeing is people thinking about holding off on repositioning space until they see how people come back to the office,” he said. “So many more are willing to pay a premium to minimize their term, and more landlords are willing to talk about unconventional terms under five years, or subleases with the option to cut early. Most of our clients value flexibility more than anything. Everyone’s crystal balls weren’t great before, now they’re even murkier.”
The retail world, on the other hand, has become less consistent and more bifurcated, Baum said, without the expected flood of business failures and vacancies or significant drop in rental rates. It has also become less about expansion than restructuring existing portfolios for long-term gain. Grocery chains, for instance, are having their best years ever, while so many other clients are in their own mode.
“You need to dissect what’s happening with particular retailers, and try and feed off whatever success other realtors have had,” Baum said. “It’s rapidly evolving, with different services and customer traffic.”
Gutman said in Miami post-vaccine, he started to see office spaces cut up, and companies adjusting their desires. The 2K SF market became a lot more desirable, which worked well for Ofizzina, a 56-unit development with smaller spaces; many clients had pivoted toward more hub-and-spoke models of work or wanted to downsize from larger offices. The talk of companies and talent relocating to Miami buoyed Gutman’s leasing prospects, he said. Much like other Sun Belt markets, such as Houston or Dallas, commercial real estate activity didn’t dip as much as it did in cities like New York.
“Instead of marketing 5K or 10K [SF] floor plates, we just stopped, we were spinning our wheels and nobody was buying,” Gutman said.
Ballestas said he’s actually seeing things much brighter in Miami Beach, calling it a “seller’s market,” where they’re waiting to lease out space because they don’t want to lose potential profit. He remembers a client who pushed them into signing a percentage lease is now regretting it, because they’re doing enough business to push their rent 20% over what they would have paid with a more traditional format.
It’s these types of significant market shifts that suggest the best leasing and retail strategy right now is constant recalibration and adjustment; Groundhog Day appears to be over.