At Vicus Partners and Spacesmith, we’ve spent 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 how to redesign their existing spaces amid social distancing and flexible work strategies to optimize reopening. Originally Posted on the Cerini Blog, 08/20/20
We’re here to answer the below questions (and any others you have):What is the best way to approach your Landlord for immediate relief and a path forwardHow can NYC office leasing tenants take advantage of market conditions now and over the next 18 months?How can businesses redesign their spaces to allow for flexible work?
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 always: 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 for 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 the landlords varies but trends 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: Favorable base rent relative to what you currently payMultiple months of free rent now 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) 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 most common solutions:Using your security deposit entirely or partially as rent payments now, to be replenished later3-6 months of deferred rent now, to be paid back at a later date over the term of your lease3-6 months of free rent to be added to the end of your existing leaseI’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 predetermined 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.
Philanthropic groups work to create more effective workspaces and mission-critical facilities to optimize their funding and better serve causes and constituencies. 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 philanthropic groups 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: That facilities should buttress long-term success strategies. Savvy not-for-profit leaders believe that modern, well-planned workplaces boost productivity, wellbeing and employee retention – all ultimately benefiting their mission and constituencies.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 case-worker 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.SCO Family of Services
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Back at the provider’s main facility, the survey results called for a desk-sharing solution and more of the better, 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.
2. The second step for nonprofits today is to develop a more flexible layout to ensure greater adaptability from day to day and week to week, as well as to ensure more stability and continuity of operations when scope and funding do change. This is where nonprofit innovation meets design innovation.Even where organizations are dealing with limited funds, better facility designs can furnish workplaces on a budget while still boosting operations, enhancing morale, and creating a branded dimension to a group’s mission, vision and cause. As in the for-profit sector, the workplace should boost recruiting an
