How Covid-19 is changing the face of the commercial real estate market
Workers are expected to come back in force in the coming months as Covid-19 restrictions are lifted across Arizona, and many employers are configuring exactly how to get everyone back to the office – or not.
One of Arizona’s leading real estate attorneys, Jay Kramer of Fennemore Craig, told Chamber Business News what to expect along with tips for employers on how to move forward.
The first challenge will be to motivate employees to come back to the job sites, Kramer said.
“People haven’t been in the office for a while and in Phoenix you can have a round trip of 40 minutes to an hour,” said Kramer, a partner of Fennemore, headquartered in Phoenix. “If they come back to the office and just walk into a cubicle or close their office door, that might not be a reason to come back. So we need to make it more enjoyable, more a community environment that is conducive to collaboration and socialization, as well as providing quiet spaces for people to work.
Now that the Centers for Disease Control (CDC) has lifted the restrictions, Kramer predicts that employees will be back in force by the end of the year.
Kramer offered his screenings for what lies ahead and some advice:
Short and long term projections
In the near term, the commercial office market will continue to be bumpy, and Kramer advises staying flexible now.
“I think there’s going to be an initial gut reaction of ‘How do we reduce space?” “He said.” Most businesses will be in a hybrid environment and wonder why they need so much. space they have with only 50% of their employees in the office on any given day. ”
Longer term, more office space may be needed due to the need for more collaboration space, social spaces, quiet spaces, and zoomed-in conference rooms, he said.
“In fact, we might need just as much space or extra space because of all of these experiential demands that we will need to get people back to work in the office. ”
Large headquarters may become more obsolete
Expect large corporate headquarters to disappear in favor of closer regional satellite offices to provide more travel convenience for staff, Kramer said. Many offices will also need to be “redesigned” to make them more attractive to attract staff for a few days a week or more.
“Instead of having a big head office located downtown or at 24th and Camelback, maybe one approach would be to have two or three smaller offices in the valley, closer to where your employees are located so they have a place to go where they can be a sense of camaraderie and community and firm, ”said Kramer. “But at the same time, limit travel and limit exposure to large numbers of people.”
It’s time to think about flexible rental options for the future
Over the past 14 months, many large businesses have been able to keep their mortgages and leases in 2020 as they have been able to reduce other expenses associated with running an office by up to 20%.
In the future, CFOs may need to consider reducing the costs of existing leases through vehicles like subleasing. Now is the time to start thinking about how to renegotiate leases to incorporate flexibility for expansion and contraction.
“It’s very difficult to change your lease during the term of the existing lease unless you have negotiated options for contraction, expansion or early termination or something along those lines,” Kramer said. “So most of us will continue to live with our current offices.”
Subleasing glut right now
Since everyone is trying to sublet at the moment, it can be difficult to find tenants. Businesses may find that they have to renovate their offices to survive.
“The key issues are going to be flexibility and that means the ability to contract and expand your space, to have options to extend your term but also to have the ability to contract out your lease,” Kramer said.
Recognizing that government warrants or ordinances may limit the number of employees who can be in the office, more emphasis will be placed on force majeure provisions and leases and possibly conviction.
Tenants are currently in a “leverage” position
Right now the leverage is with tenants, which means landlords will be more likely to work with a flexible lease and other terms.
“So if you have a lease that’s about to expire, you could normally look at your lease 18 months before the expiration date, but you might want to start looking three years in advance now and see if you can do that. Something.”
The residential real estate boom will benefit the commercial market
With the housing market on fire in the valley, expect the commercial real estate sector to benefit as well.
“With more people, you would assume that more businesses, whether small or large, will start up here or potentially move their head office or regional headquarters to the region. “
As people move to the area, other “knowledge-based” businesses with higher wages will follow.
“The next five years in the valley are going to be good times for the real estate market. There will likely be some failures, but I think overall the trend will be very positive. “