Will landlords continue to offer deferrals, as cities and states reopen?

This article originally appeared July 1, 2020 on Globest.com.

It is finally happening—well sort of. Cities and states across the country have started to reopen; although a surge in outbreaks this week has stalled or even reversed reopening plans. Still, as the country moves toward reopening, both owners and tenants are wondering how it will impact rent deferral agreements. Depending on the terms of the deferral agreements negotiated at the beginning of the pandemic, reopening could indicate that businesses will need to begin paying rent once they open. However, many businesses are still experiencing hardship, especially as government stimulus is drying up.

“The logistics of reactivation of all real estate product types continues to be a hot topic, and many architectural and consulting firms seek to assist in creative ways to use space,” Mark Leverette of BPM LLP, tells GlobeSt.com. “The space requirement calculations used have been in fluctuation over the last three months for many businesses. Some businesses may temporarily need more space per person, at the same time as projecting both temporary and permanent increased levels of those working remotely.”

So far, smaller landlords have been more flexible in providing rent deferral and lease modifications for tenants, but the requests for relief are likely to continue beyond the reopening. “Anecdotally, to date, institutional landlords have been less willing to provide modifications while small business landlords have been more flexible,” says Leverette. “All landlords should expect that these tenant requests will continue for an extended period of time, and continued and creative negotiation will be required.”

Requests for rent relief will certainly increase as government stimulus expires later this month. “Government stimulus funds have propped up some business spending in the short term, but when these funds are no longer available, there will be renewed concern,” says Leverette. “In addition, the Paycheck Protection Program (PPP) loans provided for short-term relief to businesses allowed for payments of rent to be used for loan forgiveness; however, new confusion has arisen as new laws changed the calculations for forgiveness and extended the period for use of funds. These types of uncertainties will likely shift payment preferences to different areas of the business.”

The pressure on tenants has also driven an increase in sublease space. In the long term, this supply could impact pricing and occupancy.  “We continue to see significant sublease space in many markets, likely to produce more of a tenant market,” says Leverette. “Additionally, this sublease space can come furnished and therefore provide rapidly available downsize space. Customers of retail establishments continue to seek alternative access to food, products, and services while being more frugal in the process.  Most real estate product types will require temporary and permanent tenant improvements to activate the space effectively, and those costs may need to be added to the negotiation.”