It's been over 2 weeks since the majority of NYC was placed on lock-down and the effects on the Midtown office leasing market have been felt far and wide. Below are some of the latest perspectives on the current situation:
Brokerages
At this point, the majority of the office leasing transactions that we had been negotiating pre-COVID have either been finalized or have continued moving forward uninterrupted. It’s worth noting, however, that the clients we’ve represented in these deals have either a Fall 2020 possession date or are anticipating that they will be back in their offices by June 1st.
On the front-end of the leasing pipeline, movement has remained frozen as tenants in the market for a near-term relocation (generally under 10,000 square feet) have remained idle due to the general uncertainty of when New York City will reopen for business and more importantly, to get a sense of what their business will look like once it does.
Landlords
On a good day, it’s tough being an office Landlord in New York City for a myriad of reasons; add the current crisis into the mix and these challenges are magnified tenfold. Running an office building is capital intensive and for newly acquired buildings, profit-margins are tight. Couple those inherent challenges with tenant rosters unable to withstand a downturn and you’re left with some seriously desperate Landlords.
Prior to the current economic downturn, Midtown office properties traded at cap rates of 4-5% - meaning that ~2 weeks of lost rental income basically eliminates any profit margin. Additionally, a sustained loss of income can also trigger adverse covenants in the Landlord’s mortgage, a chain reaction they are very-much looking to avoid.
With virtually zero new space tours and a mostly frozen leasing pipeline, Landlords have shown a great deal of urgency and are working hard to stabilize their rent rolls by proactively seeking early office lease renewals and vigilantly tracking embers of any prospective tenant interest.
Tenants
You’d be hard-pressed to find a tenant who is NOT thinking about their firm's office space situation; specifically with regard to rental payments and the different types of relief they can, should, or may want to request from their Landlord. The circumstances are varied for each Tenant and Landlord, differences that make any special payment arrangements or concessions a real case-by-case situation.
In light of the precarious situation that Landlords find themselves in at the moment, Tenants with upcoming lease expirations possess tremendous leverage and should be prepared to take advantage of their current situation - both with their current landlord and with credible alternatives as well. Businesses who have a) the conviction and determination to survive the current crisis, and b) a good sense of their minimum space needs post-crisis, should keep one thing in mind:
EVERY OFFER IS WORTH SUBMITTING RIGHT NOW!
It’s also worth noting that the key ingredient to realizing the advantages and opportunities of the current market is Tenant Credit. In a down market, “Credit is King” as Landlord’s appetite for risk severely diminishes and tenant’s in a strong financial position are in high-demand.