COVID-19 Market Review: Commercial Leasing

04.29.2020

The COVID-19 pandemic has had a tremendous impact on commercial landlords and tenants due to widespread retail and office closures. For the most part, landlords and tenants are working together, and landlords’ lenders are being flexible with their borrowers on mortgage payments. The great challenge of the pandemic is no one knows how long it will last or what the long-term impact may be.

The specific repercussions of the shutdown depend on the particular tenant. On the retail side, national retailers with stronger balance sheets seem to be weathering the loss of sales from closing stores. Smaller, mom-and-pop operations are having a harder time, and service-based retailers like hair salons and fitness centers have been largely decimated. On the office side, many in the business services industry continue to collect revenue and pay rent through work-from-home strategies. Likewise, medical office tenants, still serving patients through telemedicine and strict social distancing measures, are staying current on rent obligations. In contrast, office tenants who support businesses that have been closed may soon have difficulty making rent payments.

Though tenancy should be assessed on a case-by-case basis, a few consistent approaches have emerged for landlords of multi-tenant commercial properties.

Essential v. Non-essential Businesses

Some landlords are making a distinction between business tenants who are essential or non-essential. Essential businesses (permitted to stay open, but with social distancing requirements) are being given partial or full base rent deferral to be repaid over a several month period commencing a few months from now. Non-essential businesses (required to close for business) are receiving a “rent holiday” or abatement period of both base rent and CAM, with an equivalent number of months added to end of the lease term.

One Month at a Time

Uncertain of how long the shutdown will last, some landlords are taking it a month at a time for the time being because of the continuing situation and uncertainty of how long it will last. Others are agreeing to amended terms for a three-month period—most commonly, April, May and June. No interest, penalties or late fees are being charged on the rent amounts deferred.

Other Trends

Most requests for rent relief are for the short term, but some aggressive tenants with multiple locations are asking landlords for longer-term relief. On the other hand, tenants experiencing a boom as a result of the pandemic (like grocery stores) have not asked for rent relief at all. Landlords will want to see revenue reports and other financial information on tenants in order to assess hardship. They also will require evidence that tenants are applying for all available economic assistance. Some landlords are sending out rental assessment applications and proactively gathering information necessary to assess their tenants’ business losses and anticipated re-opening schedule, so that appropriate terms can be negotiated.

Retail landlords are waiving defaults related to breaches of continuous operation requirements in leases for non-essential businesses as well as minimum hours of operation. Similarly, anchor tenants with co-tenancy requirements are not enforcing their remedies against landlords for defaults related to closures of non-essential businesses.

Stay Tuned

Landlords and tenants are entering into temporary lease modifications acknowledging that they may have to revisit the terms as the situation unfolds. Parties interested in maintaining a long-term relationship are working together in good faith to devise reasonable solutions through communication and collaboration. 

Want to discuss your strategy with experienced counsel? Contact a member of the Hirschler real estate team.