CoreNet Plugged In: Leasing and Building Operations Issues during COVID-19 Lockdown
Moderator: Brian Schwagerl, NYU Schack Institute of Real Estate
Speakers:
- Marcus Rayner, Vice Chairman NY Region, Colliers International
- Jason Aster, Managing Director, Growth, KBA/Visual Lease
As New York City remains shutdown to practice social distancing and flatten the COVID curve, CoreNet officially kicked off a new series of virtual events to keep members informed with real estate news and provide a platform to exchange ideas. The first weekly CoreNet: Plugged In took place on Wednesday, March 25th, hosted by Brian Schwagerl, and featuring Marcus Rayner and Jason Aster. These three speakers covered topics around rent and leasing operations during the pandemic, and what renters can expect from landlords in the coming months.
“As we speak, Congress is about to vote on a $2 trillion relief package,” says Rayner, pointing out that there are still many unknowns as the government continues to work on solutions. He also referenced the proposed New York State Senate Bill S8125A to delay rent for 90 days, which is still being considered at this time. “This gives you an idea of where discussions at Government level are heading.”
So, what should renters be prepared for, and what protections might landlords invoke during this unprecedented time of economic uncertainty? Only time will tell. However, read on to see what advice and predictions these experts shared with the group.
Review Your Leases in Detail
The first piece of advice from our panelists is to go back and review your lease in detail, especially with a group of qualified advisors to help navigate the complexities or vague language.
Rayner and Aster both noted a number of fundamentals to consider while ensuring business and operational continuity and trying to navigate the protections allotted for this of situation. For instance, make sure you know what exactly is considered Force Majeure within your clause, such as acts of god or strikes. A Force Majeure clause is written into leases to protect responsible parties from unforeseeable circumstances that prevent someone from fulfilling a contract. Be mindful that these clauses vary in negotiations from site to site, and the terms typically leave room for interpretation.
Aster points out that a lot of companies are most likely not familiar with every circumstance covered in a Force Majeure clause, as they are rarely utilized and can include a very long list of possibilities. He urges everyone to review Force Majeure clauses and engage your legal teams now, and to make sure to record all interactions between tenants and landlords and other key stakeholders.
Additionally, while a Force Majeure clause may consist of a list of broad and specific items, capped off by a “catch-all” phrase, courts often construe Force Majeure clauses narrowly. It is common for the courts to rule the catch-all phrasing to be ineffectual if there are enough specifics listed in the contract. Tenants aren’t often familiar with the specifics of the contract, and that could lead to an uphill battle. Everyone involved needs to understand completely what the leases state.
One final point to note about Force Majeure clauses is that the party invoking the clause must make everyone else aware of their situation. Record all pertinent information and outcomes. Aster provided a hypothetical situation to explain: if a tornado strikes a business in Oklahoma, a stakeholder in another part of the country may be unaware of the damages and therefore will be less likely to deem Force Majeure necessary. In other words, be prepared to make a case and back it up with evidence.
Business Interruption Insurance
Many people are also asking whether insurance could include provisions that could be applied to a pandemic. However, without specific reference to such events, typical Business Interruption Insurance policies tend to focus on property coverage, protecting only against interruptions in business activities resulting from physical damage to property.
The panelists all agreed that you should absolutely consult with your insurance broker. Many landlords and tenants may be looking to the government in the coming weeks to determine if this pandemic is considered business interruption, but you should develop a plan of action with your broker and understand what your options are.
Approaching Your Landlord
COVID-19 poses issues for tenants and landlords alike, so it is important to find common ground and negotiate. The panelists all agree that, in general, “deferment is better than abatement to a landlord,” so consider approaching a conversation with this advice in mind. Tenants may want to look for creative ways to create rent relief as well, like offsetting rent liability with remaining security deposit or TI allowance amounts.
Construction Site Issues
As all CoreNet members are affected by construction in some way, the future of ongoing and upcoming projects is at the forefront of everyone’s minds. The panelists were able to share their thoughts on what government regulations may be enforced and how it could impact the industry in a variety of ways.
According to our panelists, it is essential to plan for how construction operations will be affected, if your site is even still active currently. For instance, certain sites won’t allow more than one-person to ride in the freight car. Materials being imported from affected countries may take longer to arrive or even need to be replaced with locally sourced items. Trades and sub-contractors may have their own operational requirements or have decreased their number of staff, so they may be unable to perform as efficiently as anticipated. These challenges impact the speed of project completion; deadlines and milestones will need to be updated. Be realistic about how project timelines will be affected.
Also, safety is always of paramount importance, and the guidelines are now stricter than ever. It is difficult to achieve social distancing on many construction sites. Meanwhile, some supplies that keep spaces clean and workers protected are in very low supply. These items include disinfectant, hand sanitizer and face masks needed to run the sites in compliance with new protocols. Additionally, a topic of discussion is whether COVID-19 lives longer on steel or copper material, which could drive changes in future material specifications and also affect costs and schedules.
At the time of this panel discussion, there continues to be a lack of clarity on what sites need to be shut down and what counts as essential. For example, the executive order from Governor Cuomo did not delineate between interiors construction and bridge and tunnel type work when he halted indoor construction.
Update: Since this panel, Governor Cuomo has halted all non-essential construction. Essential construction includes utilities, healthcare facilities, homeless shelters, and affordable housing, while all other projects must be approved by the Department of Buildings.
The Long-term Effects
Now that the ability to work from home has been proven to be possible, the question of whether or not companies will maintain their current office footprint is another concern for the Corporate Real Estate world. Panelists discussed whether the pandemic will impact the industry in general going forward. They all agreed that the mandated working from home is not a true industry test.
Ultimately, it’s not being offered as a benefit for employees; it’s mandatory through a government executive order. People are working from home as best as they can, while also dealing with a global health emergency and caring for children in many cases. It’s difficult to ascertain how this will impact the future of leases, co-working and open office plans.
In comparison, a better study of the advantages of working from home would be if everyone were in a business as usual situation and got to work from home on their own terms instead of a mandatory sentence. As Aster says, “the mandated nature of this is not a true test.” In that case, you could gauge productivity, employee satisfaction, and the effects on collaboration.
Some progressive companies were already working in this way and have their metrics to determine productivity. However, working from home has to make sense for the type of work. While some jobs require heads-down focus work, other jobs require collaboration. The panelists emphasized that that physical collaboration and socialization among employees is an essential part of working and company culture.
Questions from the Audience
While the panel experts covered a lot of important topics, the CoreNet audience was able to address concerns that impact corporate office space specifically. The panelists can only speculate on what will happen in the future as they answered several questions from the group.
When asked if the panelists imagine the open office plan changing as a result of this fast-spreading virus,
Rayner disclosed that there are already discussions happening about this topic. One example of a new design trend being considered is that workstations may be laid out with larger personal spaces between employees and even facing the same direction, so no one coughs into each other.
Another question from the audience was about what the banks are willing to do in this environment in terms of real estate lending. Rayner points out that banks will be forced to continue lending, although they may be concerned by the run on their credit. It could be worrisome to lend like business-as-usual at such an unusual time for the economy. Aster reminded the audience that banks “historically [balk] when government forces them to lend, but that’s the direction we may be heading in right now.” While hyper-inflation could also potentially be a risk with over-lending, it is better than the alternative as business of all kinds come to a complete standstill. Moderator Brian Schwagerl even pointed out that the current proposed economic plan is “a stop-bleeding package, not a stimulus package; we aren’t there yet.”
In terms of where the money will go, either to individuals or corporations, Rayner urged the audience to “remember that individuals can’t generate businesses. The businesses themselves have to survive to support employees and generate profits.” Aster pointed out the importance of stimulating small businesses; he estimates that around 85% of all businesses only have one office.
As real estate professionals, the CoreNet audience understands that several tenants in New York City are faced with upcoming lease expirations and, therefore, must either renew or relocate in the near future. However, the panelists explained that many will consider extending their leases on a short-term basis. Every lease has a holdover provision, and tenants will be in active discussions with landlords to ensure they don’t trigger that provision because the holdover rent is typically a multiple of the existing rent. Others will look to take advantage of the leverage they have with Landlords.
As to the likely success of individual rent relief negotiations Rayner said it will invariably be dealt with on a case-by-case basis. “It’s too early to draw general conclusions. Landlords are inundated with requests. The negotiations will depend on the size of the landlord, how leveraged with debt the owner or asset is, and the perceived credit and stability of the tenant – which makes approaching the landlord with a well-conceived plan even more advisable .” said Rayner.
In terms of the future of co-working, panelists agree that this is one of the sectors, along with retail, that has been hardest hit by the crisis.” Many have closed or reduced operations and the demand from tenants will be different after the crisis. Despite the challenges to many of the Serviced Office operating models, Rayner still believes “it is not going away. The concept is here to stay, but it will evolve.”
The panelists wrapped up the session with a note on city-living. Schwagerl asked the group, “will there be a reversal in the urbanization trend? People have been flooding to cities; will this change?”
Rayner pointed out that he expects cities to maintain their attraction but also sees companies consider diversifying locations and establishing sites in the suburbs, closer to employees’ home locations as a risk mitigation strategy. Aster also doesn’t think that urbanization will be impacted significantly, although the experience of working from home will become a more natural choice for employees.
Overall, the first CoreNet: Plugged In series generated a positive response, and close to 40 participants joined this first conversation. The content was relevant, and the panelists gave thoughtful and informative responses to Schwagerl’s questions. As information changes daily, CoreNet will continue to provide an in-depth look into the issues that matter the most to this community. Tune in to our weekly CoreNet: Plugged In series taking place every Wednesday.
CoreNet Plugged In events are discussion based, virtual events to provide CoreNet NYC membership with avenues for engagement during this critical time. These open discussions and information shared are not forward-facing statements, recommendations or advice endorsed by CoreNet NYC.