Guest blog by Sophie Pierce. Sophie is an interior decorating nut who loves to share her knowledge to anyone who's willing to give her a shot. On her free time, Sophie often contributes articles for various online publications and blogs based on her experience on the field.
The coronavirus pandemic, which is still in full force in the US and across the globe, has profoundly affected the financial viability and the very existence of many industries and businesses. Among the affected sectors is the leasing market, particularly commercial real estate. Such is the scale of the crisis that tenets are now looking to protect themselves legally, with The National Law Review outlining how many will turn to force majeure clauses in their commercial leases. With the crisis showing no signs of ending this article will cover the main ways the pandemic is impacting the leasing market.
The Price of the Pandemic
As the US economy is just starting to reopen, businesses are still scrambling with recouping losses and making profits. Most states enacted lockdowns in late March, ordering non-essential services to shut down until further notice. These include retail stores, bars and restaurants, movie theaters, and fitness centers. Losing four months’ worth of profitability is a huge hit, especially when an enterprise still has to pay overhead expenses like rent.
This situation has been a nightmare for both tenants and their landlords — regardless of size or scale. For instance, the Simon Property Group, the commercial real estate giant and largest mall operator in the US, sued the clothing label Gap in June. The New York Times reported that the fashion label owes nearly $66 million to Simon Property Group in unpaid rent for the months of April, May, and June alone. And while the magnitude of this case won’t be the same for all businesses, it won’t be an isolated one. MSMEs, who will have more difficulty raising funds, are at a greater risk of being unable to pay their dues.
It’s clear that lockdown measures have severely affected the economy. In fact, Marcus notes that the US officially entered a recession in February, which signifies the decline in real GDP for two consecutive quarters. Pausing business operations means reduced profits, and is usually followed by mass lay-offs — and that is precisely what happened earlier this year. Reduced personal incomes impact individuals’ ability to purchase products and services. This makes it difficult for businesses to justify opening their brick-and-mortar locations because many people are still working on building up earnings or paying off debt.
This is a major concern for the leasing market because the inability of consumers to patronize businesses leads to the inability of commercial tenants to pay their landlords. Tenants are requesting for rent abatement, or are even considering non-renewal or early termination of their leases to prevent further loss. However, this can be considered as a breach of contract, which can lead to a lawsuit such as in the case of Gap and Simon Property Group. For tenants, read our article ‘Practical Steps for CRE Tenants During the Pandemic’ to arrive at a better compromise with your landlord.
Adapting to Uncertainty
That said, businesses have had to adapt quickly to the looming uncertainty of the coronavirus pandemic. CNBC put together a list of retailers that have closed their stores temporarily to prioritize the safety of their workers and customers. This list includes brands like Nike, Sephora, and GameStop. With physical stores closed, they’ve turned their attention to their e-commerce platforms instead. Online shopping has significantly increased over the last few months, even for essential items like food.
Similarly, companies like Shopify and Groupe PSA have announced increasing remote work operations even after the pandemic is over. Groupe PSA, the multinational French automobile manufacture, stated that they will be reducing their ‘real estate footprint’ by rolling out permanent work-from-home plans for their employees.
If these trends continue, the commercial real estate market may be in for a beating, as more and more companies see the value of telecommuting. Not all businesses can make the shift to digital, however, like restaurants and gyms. But while the economy is still in the early stages of recovery and tenants are still unable to pay rent, it will be a while before the leasing market finds its footing once more.
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