There is no doubt, COVID-19 has had a colossal impact on how and where we do business. Now, as we usher in the new year with a massive rollout of vaccines, Americans are optimistic about an end to our “new normal,” healing for an exhausted healthcare industry and recovery for an ailing economy. However, economists and business owners predict the pandemic’s after-effects will linger on. Some of those impacts may affect lawyers, accountants, insurance agents, realtors, stockbrokers and other businesspeople who will be renewing an existing lease or renting a new office space as they move out of the home office they’ve been occupying during the pandemic.
Bo Sederstrom, senior vice president with Citywide Commercial Real Estate and an Arizona broker for 30 years, offers suggestions for how commercial tenants can protect themselves in the new year.
Pay Attention to the BOMA Standard
In recent years, the Building Owners and Managers Association (BOMA) has changed its guidelines for how office space is measured, which may cause rents to rise for some tenants. “BOMA contends that private balconies, covered galleries and rooftop terraces can now be calculated as usable space,” said Sederstrom. “Tenants should look at the space measurement section of their lease and pay attention to the BOMA standard. Most people won’t know what that means. If the lease was written with a BOMA 2010 standard, that was before the new measurement was adopted. You don’t want that to change with a lease renewal.”
Previously, those features were considered amenities to the space. Sederstrom says the trend to charge for the extra square footage is catching on in California and elsewhere, but tenants don’t have to accept this new measurement method and should discuss it with their current or prospective landlords.
What are Your Operating Expenses?
Janitorial costs, landscaping maintenance and utilities are expenses associated with keeping the office running and usually can be managed, projected and controlled. But a new roof, paving a parking lot, or a remodel of bathrooms are not operating expenses. “Tenants should always be on the lookout for unforeseen expenses, but particularly in tough economic times. Less scrupulous landlords, who need to make more money on rents, may be looking for costs they can pass on to their building’s occupants,” said Sederstrom. “For true operating expenses, it’s important that the lease addresses some kind of cap on those, such as a 5% ceiling.”
Develop a Foreclosure Awareness
Landlords across the country are facing financial challenges as some businesses are closing under the strain of shutdowns and stay-at-home orders and vacating their office spaces. For tenants who are in a building that is becoming noticeably ghost-town quiet, Sederstrom recommends they get to know who the lender is that is financing the building. “In difficult markets, you want to develop a relationship with that lender and let him or her know you are current on your rent payments and you want to stay in that building – which you probably do because your clients know where to find you and it’s expensive to move and advertise your new location,” said Sederstrom. “If something bad happens, like the building is going to be foreclosed on because there aren’t enough renters to cover the landlord’s mortgage, you want to be ahead of the game. Having an early dialogue with the lender may gain you valuable information, help you remain in your office or buy you some time to help you plan for a smooth transition to another location.”
Do You Have a Non Disturbance Agreement?
A Non Disturbance Agreement (NDA) is a provision in a lease that ensures the arrangement between the tenant and the landlord will continue under any circumstance. For example, an NDA can ensure that a tenant will not be evicted if the building faces foreclosure.
“Unfortunately, if the lease doesn’t contain an NDA that is acknowledged by the lender, tenants can find themselves in a sticky situation. This is another reason to have a good relationship with the lender,” said Sederstrom. “If your location has a lot to do with your visibility and profitability, or key staff members or clients live nearby, or it has psychological value like access to your favorite restaurants or the area is aesthetically pleasing, maintaining your office is important to you. It has a value beyond just being a place to do your work. You may be willing to pay a little more to secure your right to stay. So, whether you are currently renting your space or actively looking for office space, you’ll want to have a discussion about a Non Disturbance Agreement so you can eliminate future problems.”
As the economy regains its footing, Sederstrom maintains there will be fallout. “Some businesses won’t survive and some workers will continue working from home. We can expect there will be a number of foreclosures on commercial office buildings. But, I believe, as social animals, people won’t want to stay in their houses forever and will miss the business environment. That said, I predict we’ll experience office space stagnation until spring 2021. Substantial recovery may not be until 2022 or 2023.”
However, Sederstrom says, if you like your building, it’s a good time to renew a lease because you may be able to reduce your rent. “The lease rate commonly increases every year. But, in times when the market shifts, you may want to consider giving your landlord a proposal to renew early for the same or a discounted rate. This will save the landlord money that he’d have to spend to find a new tenant and prevent the space from being vacant for a period of time.”
Without a crystal ball, Sederstrom suggests tenants move forward optimistically and cautiously, aware of the sustainability of their office environment, with a firm understanding of their lease agreements, relationships and opportunities. QCBN
By Bonnie Stevens, QCBN
Bo Sederstrom is senior vice president at Citywide Commercial Real Estate and a 30-year commercial real estate professional who has been involved in transactions ranging from 1,000 to 200,000 square feet, most recently including negotiations for an almost $50 million life science lease. He believes that to properly represent a tenant or landlord, you need to understand what motivates both. Sederstrom is past chair of the Recovery Empowerment Network board of directors and a member of CORE real estate network. He can be reached at email@example.com or 602-330-1917.