Marriage is Forever. COVID is Not.

By Dan Mihalovich

“Marriage is forever.” Isn’t that what the rabbi or priest told us when we got married? The stats prove otherwise, in spite of our good intentions. COVID-19, however, is not forever. Thousands of soothsayers are trying to predict what post-COVID life will look like. As in prior downturns, though, no one really knows what’s coming—and don’t expect our CRE industry to accurately predict jack; they’ve never been reliable before.

We know that the office market landscape will be completely rewritten. The Depression is upon us. 40 million unemployed and countless business failures tell us so. Rental rates in virtually every major city will likely plummet. Major companies across the board are keeping employees working from home—a large percentage of which will do so permanently. Meanwhile, is it really safe to go back to work in any elevatored high-rise building? We think not. Here are a couple of articles written by medical professionals explaining why the elevator is essentially dead—and from statistical research to illustrate how COVID spreads, including in an office environment. And from a few dozen brain boxes, how COVID will likely change the world forever. Tenants beware.

Tenants beware

Tenants (the only clients we serve): You’re unlikely to find protection in your office lease to offset your losses. Search your force majeure clause, business interruption, failure of the landlord to provide access…The legal case, if any, should be scrutinized by your real estate counsel. The practical approach, however, is our focus: Tenants will not torpedo their own businesses just to pay the rent stipulated in their leases.

Closely examine your client-demand. What revenue can you expect during the next 3-6-9-12 months? If you devote not greater than 8-10 percent of that revenue toward rent payments, how much can you afford to pay, regardless of what your lease calls for?

Examine your receivables. Will you collect 100 percent? Will your clients require payments on a phased basis?

In order to renegotiate your lease, you’ll need to create a financial presentation for the landlord’s review. If your landlord isn’t receptive, you’ll have to resort to other tactics.

Tenants will shed millions of square feet of excess space in every major market. Landlords typically do not want to compete with you, with respect to the direct space the landlord is already marketing. Perhaps you’ll want to maintain the right to expand back into that space one day; or, if your business is in a downturn, you may prefer to terminate the lease as to that portion of space.

Renegotiating deals is strenuous. You need to do your homework, clearly understand your options and use a team of professionals to help you and your decision-makers come to a consensus before knocking on the landlord’s door.

Here are the latest market stats for the San Francisco marketplace to help you understand better where things are:

  • 14.8MM square feet available (direct + sublease).
  • 12 percent total inventory is available
  • 3.5MM square feet under construction (will add 4 percent to total inventory).
  • Total Net Absorption, 1Q 2020: <Negative 714,000 square feet.>
  • As of 6/1/20: <Negative 1MM square feet.>
  • Total 2019 Net Absorption: 1.9MM square feet.
  • Market Size: 2,265 buildings; 123MM square feet.
  • Leasing activity / # of transactions lowest in more than 11 years.
  • During the last 30 days, over 900,000 sure feet of additional space came on the market.

Dan Mihalovich is the founder & CEO of THE SPACE PLACE, a San Francisco-based tenant representation commercial real estate brokerage services firm.

Articles published in our Contributor section do not necessarily represent the views of The Registry or Mighty Dot Media, Inc. They represent a selection of topics chosen for the value of their editorial perspective. We welcome feedback and alternative positions on topics, and we will consider publishing those, as well.

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