Identifying trends and forging ahead: The pandemic’s impact on the commercial real estate industry

This article originally appeared here in Forbes.

In 2020, many companies were forced to make tough decisions regarding their leased commercial spaces. From office closures to consolidations and deferrals, many of these decisions will have long-term impacts beyond the pandemic. To survive and thrive in today’s new norm, these same companies now need to evaluate how these decisions will continue to affect the leasing landscape, and what that means for their future finances and operations.  

Lease Market Considerations for 2021

Covid-19 had a devastating effect on the real estate market in 2020. As organizations continue to adapt to remote work environments, the trickle-down effects will likely play out over the next few years. Unlike the economic downturn in 2008, the commercial real estate market was in a strong position at the start of 2020 — in fact, it was predicted to grow. However, as tenants struggled to meet their rent obligations, and tenant-landlord tensions and lawsuits ensued, the market quickly took a downward spiral. 

Despite this negative trend, several bright spots signal recovery within commercial real estate. We surveyed several hundred companies across retail, manufacturing, health care, financial services and more to gain critical insight into how the leasing market has changed since the start of the pandemic and to help organizations to make better-informed business decisions for the year ahead.  

Revenue Impact of the Pandemic

By the end of 2020, nearly three in five respondents to our survey reported a 59% loss of revenue in their business since the start of the Covid-19 outbreak in March 2020. Of those that saw a negative impact on revenue, 80%, fortunately, expect that impact to be short-term. As a result, many organizations are more likely to seek and prioritize opportunities to save money — and leases provide a way for companies to do just that. 

Over the past year, many organizations made changes to space and equipment leases. However, most still need to get creative and find other ways for monetary gain. PPP loans, insurance policies and lawsuits were some ways that businesses across all sectors chose to subsidize their company’s overhead in the short-term, but these options are now carrying over into 2021. 

The Future of Office Space

To cut additional costs, many have turned to their commercial office leases to identify savings. With the pandemic, there has been a monumental shift in the traditional office space, but most companies are not resolved on what that looks like for their businesses in the future. This year, the industry will need to consider several changes to the office market as they make broader business plans: 

• Remote work: The acceleration of remote work has shifted the office environment, resulting in widespread downsizing and a decreased demand in the market. Despite this change in behavior, there are now new opportunities for organizations looking to retain office space in major cities, such as opting for smaller regional offices or expanding office space to allow for social distancing.
• Coworking: Coworking spaces and other short-term rental options may see a rise in popularity as companies continue to explore ways to stay out of the traditional long-term lease options but still provide a home base to employees.
• Subleasing: In addition to coworking, the sublease market has become larger than it was during the dot-com bubble, providing another flexible lease situation for companies to consider.

Important Lease Clauses In 2021

Lease clauses offer necessary legal protections for both tenants and landlords. However, the onset of the coronavirus pandemic presented unique challenges, which left attorneys scrambling to identify protections for their clients. Many explored force majeure clauses to save costs, only to find that these clauses do not typically extend to pandemics or other public health crises. 

To date, the biggest impact that Covid-19 has had in the market is that it’s suspended progress on new transactions, and by the end of 2020, global CRE deal volume declined 36% YoY. Tenants have been reluctant to sign new leases and because of this, landlords do not have visibility into the future of their buildings. To add to the lack of certainty, where leases are expiring, others could potentially not be renewed until there is more clarity on their business needs, leading to reduction through attrition in the short-term. As such, new leases should include updated clauses to make new and existing tenants feel comfortable with signing their agreements. Our survey identified the most important lease clauses to consider in today’s environment as flexible termination (34%), specific pandemic force majeure clauses (32%) and shorter lease windows (16%). 

To effectively navigate today’s commercial real estate landscape, it’s important to recognize that some changes brought on by the pandemic — such as remote work environments and reimagined workspaces — are likely here to stay. Companies will need full visibility into lease terms and options for negotiation and payment to better manage their businesses in this new climate. Flexibility ultimately creates a win-win scenario for tenants and landlords alike in 2021 and beyond.