How tenants can turn in their favor this crisis period

In case they have a flexible approach to their real estate strategy, and they are open to new solutions, we can help them come up with the right tactics when negotiating with the landlords – summarized the office, retail and logistic tenants’ current opportunities VLK Cresa, in their May study.

Main observations and predictions:

• Currently 15 to 20 percent of office tenants are asking for rent reduction
• In certain cases, office lease term might be reduced from five to three years
• Tenants with relatively large office space (ex. 2.000 m²) might sublease part of their premise
• Office space size might even increase due to new health safety measures
• The very workplace (eg. table and close surrounding) will enjoy more focus compared to social and entertainment areas

Employees working from home because of the coronavirus resulted in emptying bigger part of the office buildings and partly the shopping centers, and only the grocery stores remained open with opening time restrictions.

This wave of forced closures led to serious liquidity problems and retailers in great numbers turned to landlords and to the state for help – recalled VLK Cresa real estate advisor in their May assessment study.

“The study outlined however, that corporations using office space cannot use this reference base as most properties have been open since the beginning of the pandemic. On the contrary, retailers (restaurants, coffee shops, fitness centers and others) in the office building are justified to ask for ease of leasing terms as their business model is based on guests coming mainly from the building itself. With much of the office tenants at home, these retail units remained empty. But even so, office tenants can find options to get out from this distressed situation” – confirmed Valter Kalaus, managing director at VLK Cresa.

He expects that negotiations not necessarily will turn tougher, instead a more adaptive attitude will be needed. “Even before the pandemic our aim always was to get to a compromise solution, this is unchanged. As tenant only representatives we always try to get the best possible deal for our clients, without turning the negotiation process into a battlefield.

Landlords and tenants have one thing in common: to provide business continuity, and to achieve this even more flexibility is a must. Tenants are under a lot of pressure to reevaluate their current and future office space need. They will also need relevant and proper information on the current market trends, discount possibilities etc. These kinds of information’s can only be provided by independent real estate experts. Tenants should focus on their own business and are not expected to have deep knowledge on the real estate issues to make valid and safe decision.” – said the executive.

Two examples to show how tenants can navigate:

First case: Three years to end a five-year lease contract

Renegotiation would be very difficult, as in the remaining time even more difficulties may occur in the tenant’s business, and this will result in more modifications. Immediate, or short-term termination can cause more financial and legal troubles, and in the meantime another cheaper space will be needed. The later will require lots of time, money and energy to find.

Valter Kalaus has not yet experienced enormous amount of office tenants asking for financial help from landlords. As he phrased it: only aproximately15 to 20 percent of the tenants have approached the landlords. Delayed rent payment can help tenants’ cashflow but is not decisive. Instead rethinking how office space is being used can be expedient.

Another solution is to give back certain part of the space and stay for a discounted package – outlined the authors of the study.

“To sublease a smaller part of the office can be also a way out, which means cost reduction to the tenants. I believe this will be a common approach actually in the coming months especially for organizations renting a couple of thousand square meters.
Tenants who need smaller areas like this option as this is more cost-effective solution compared to commit to be the main tenant. Thus, they will need to accept that the landlord (main tenant) will not spend on the office fit-out but will hand over the space as it is.” – outlined the situation Valter Kalaus.

Second case: One year to end a five-year lease contract

The situation somewhat easier as the tenant is more prepared to move or renegotiate the lease. To stay is justified, if the current landlord offers another five-year contract with substantial discount. Note that this is actually a 1+5 years contract.
To move is the right choice if no further discount is provided by the actual landlord and other buildings offer lower rent, or higher fit-out contribution for a more modern, better located space.

In either case the tenant will benefit the most if the contract terms remain as flexible as possible. For example, from the common five-year lease contract reduce the lease term to three years. Experts at VLK Cresa are confident that in the next couple of years we will see this in many cases.

Obviously, the whole work strategy will need to be reconsidered, including setting up the right balance between working from home and in the office.

They believe that over the past years too much focus fell on social areas with spending a lot of money on these spaces compared to actual working areas which should be of prime concern in the future.

In reference to this Valter Kalaus said: “It’s possible that working from home will free 5 to 10 percent or even 15 percent of the office, but due to new health safety measures we might end up needing more kitchens or bigger working areas, to keep the right social distance. Modern ventilation solutions will be also reevaluated, and paravanes and closed offices structures might come back, to break up the one big open office space. At the end of the day we might see that in some cases tenants will end up needing more office space, than before the pandemic. With those challenging decisions it will be crucial to have an external real estate professional help.”

Source: Cresa LLC