Marriage is Forever. Covid is Not.

“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 highrise 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 (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% 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%? Will your clients require payments on a phased basis?
• In order to renegotiate your lease (we may assist you), you’ll need to create a financial presentation for the landlord’s review. If your landlord isn’t receptive, we have other tactics to share with you.
• 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. We should discuss.
• 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. We’re available to help you.

Here are the latest market stats for the San Francisco marketplace:

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

After reading through this Market Editorial, please see our collection of educational articles we’ve written for our tenant community.

Vacancy Rates: Are your options SOARING?

Tenants should watch carefully to detect how and to what extent your field of options changes. Which size blocks of space are getting leased? Tenants ask, “How many choices do I have?” Yes, your options are soaring as a result of the Covid economic downturn. Review the chart and let’s discuss.

These brokerage firms control over 61% of all listings and are beholden to more than 440 local landlords, paid to drive up rental rates and drive down concessions for tenants.

Since their allegiance is committed to so many landlords, how can they possibly represent YOUR interests—the tenant’s interests—objectively and aggressively?

Thank You to Our Clients & Friends

We believe that representing tenants – and only tenants – is a noble cause, our specialty for over thirty years. We greatly appreciate our clients’ confidence and kind words about us, our level of advocacy and enthusiasm to negotiate aggressively ….. and mind the details while guiding the leasing process. Thank you!