COVID-19 Impacts on Real Estate

These are unprecedented times, as the impacts of COVID-19 continue to evolve at a rapid pace. Our Metro DC Avison Young team is committed to you and remain available for discussions and advice as your partners. We hope you find these latest insights, our fifth analysis in this series, valuable.

In our previous note, we looked at current activity and touring in conjunction with how the regional office market fared and recovered in the last downturn. However, the current state is unlike any other in modern history – it is a health crisis that is creating an economic one. Necessary and mandated societal closures have disrupted economic and market activity, igniting financial hardship for many businesses and soon-to-be public jurisdictions. In this note, we examine how tenants and landlords, along with the public sector, are negotiating rent obligations during these times.

25% of Office Clients Have Inquired around Rent Relief

Unable to conduct business normally, office tenants are beginning to have, or at least anticipate, difficulty paying their rent on time. Seventy percent of Avison Young brokers reported that at least some of their clients have inquired about negotiating rent relief with their existing landlords, although most said less than 25% of clients have requested this measure a few weeks into the crisis.

That said, different portions of the market have generated different outreach from tenants. The majority of inquiries have stemmed from tenants in secondary buildings (Class B and C) and/or secondary locations (largely unwalkable, off-Metro suburban locations).

When following up on those inquiries, brokers found that the vast majority of landlords – 84% – are open to working with tenants to create some short-term relief.

Landlords have devised a variety of structures to assist tenants in overcoming short-term financial challenges, while protecting their long-term interests. Some landlords are

• Offering free or reduced rent in exchange for additional term at the end of the lease. The terms we’ve observed have been roughly one month of abatement per 12 months of extended term, with extensions up to three years
• Granting short-term rental abatement that will be amortized over the rest of the year or the remainder of the lease term
• Giving rental abatement in exchange for landlord-favorable adjustments to the lease terms, such as the removal of termination options or the addition of rent bumps post-crisis.

Retailers’ Ask is More Constant

Across the commercial real estate realm, retailers are obviously most impacted by this economic unraveling. The vast majority of retail tenants (79%) in Metro DC fall into sectors heavily impacted by mandated business closures. Even among those allowed to remain open, sales are uncertain and will certainly fluctuate given residents of all three regional jurisdictions are required to stay home except for absolute essentials related to food and healthcare.

According to data obtained from OpenTable, daily dine-in meals at restaurants across the U.S. began to drop by about 5% daily in the first week of March, had declined 48% by March 15, and plummeted a full 100% by March 21. Bars and restaurants, which account for 36% of retail businesses across Metro DC, are open for pick-up and delivery only, allowing them to earn a fraction of the revenue they’d otherwise anticipate in a normal spring season.

The disproportionate toll taken on retail tenants has made negotiations with them a priority for landlords. Large regional owners have proposed abatement periods of two to three months for some tenants, while others have considered concessions beyond that, often requested by larger, creditworthy, but severely impacted retailers.

At this time, the plan is to amortize that rent over the post-crisis period. However, it’s still unclear when post-crisis will be, or whether retailers who lose their financial footing will be able to shoulder the burden of increased rent when they attempt to reopen. Owners of retail-heavy spaces or properties such as food halls may not be able to afford to grant several months’ relief to their entire rent rolls, and many of those retailers may never reopen as a result.

With Mass Layoffs, Unemployment Claims Grew 14x in Recent Weeks

Sudden and simultaneous closures of businesses regionally have left companies without work for their staff and without clarity as to how long they’ll need to survive with little or no revenue. Mass layoffs have resulted nationally and regionally, at a rate far exceeding that of any past economic crisis. The week of March 21 saw more than 103,000 new unemployment claims across Washington, DC, Maryland and Virginia, compared to weekly highs in the low- to mid-30,000 range during the last recession, dot-com bubble burst and Savings and Loan Crisis.

The vast majority of the claims stated and visualized above were related to the retail and leisure and hospitality sectors. Due to those job cuts, the DC Council passed emergency legislation Tuesday evening that gives impacted workers immediate access to unemployment funds. It also waives the requirement that recipients be actively searching for work, given that work is in short supply.

Outside of the above, Metro DC has a durable employment base compared to peer markets, anchored by the presence of the federal government and its substantial contractor base, which together comprise approximately 45% of the regional economy. As a result of that composition, the region saw just a 3.3% decline in employment in the wake of the 2008 financial crisis, compared to 6.3% nationally. While the tens of thousands of furloughed or laid-off retail employees will find no comfort in this fact, a shallower-than-average dip in the regional economy will allow more of those retailers to reopen and thrive when they are finally allowed to do so.

 

For more on the virus’ potential #CRE impacts, read the latest briefings on our

Avison Young Resource Center