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DOES COVID-19 SAFETY PROTOCOLS BURDEN THE TENANTS WITH INCREASED CAM CHARGES?

Leasing conditions during the pandemic environment is rapidly evolving, and the future of residential and commercial leasing is unravelling as we sail through the repercussions of Covid-19. Passing on the Common Area Maintenance (CAM) charges to the tenant is often considered the most favourable lease agreement for the landlord, and there is no universal agreement on what exactly CAM charges should include. These maintenance costs can relate to any cost of managing and maintaining the property. Typically, CAM charges includes parking lot maintenance, lawn care and landscaping, hallways, elevators, sidewalks, bathrooms, utilities, snow removal and other operating expenses. In a triple net lease agreement, the tenant pays the CAM and other charges on a pro rata basis, and due to the stability of net cash flow, investors and real estate investment trusts (REIT) usually prefer to purchase properties with triple net (NNN) leases. According to the National Association of Realtors, the most common way CAM charges are calculated is by determining each tenant’s pro rata share of square footage in the property. This may be a viable option if we look at it at a macro, one-size-fits-all level. But the reality is that every business, depending on its nature of work, is going to be different in terms of what its post-COVID plan is. With office buildings and shopping complex reopening post the lockdown, building maintenance and administration activities were repositioned to meet tenant demands for the new normal, incorporating COVID-19-conscious features and prioritizing health and safety standards in the workplace through building design and restructuring of building space. The following basic norms are being ensured, especially in commercial buildings across geographies: • Conducting hazard assessment of the workplace • Sanitizing the building and getting safety certified from concerned local authorities before reopening • Conducting daily health checks at the security gates • Encouraging employees to wear face masks • Installation of hand sanitizers, sanitization tunnels and thermal scanners • Improving the building ventilation system • Engineering and administrative controls • Social distancing and use of personal protective equipment (PPE) • Installation of glass dividers or plexiglass These norms, in addition to the travel and individual safety guidelines recommended by local authorities, are sure to add to the CAM charges. There will be increase in janitorial costs as well, given the need to ensure a sanitized environment on a daily basis, more than ever. According to a survey conducted by the National Association of Realtors in Q2 2020, about 33% respondents have reported an increase in CAM fees in office buildings and retail strip centres. 71% respondents have reported an increase in investments by offices to keep the workplace safe. 42% respondents have also reported more short-term leases to manage the rising expenses in view of ensuring safety. When it comes to health-conscious items and building systems, more buildings will incorporate touch less entries to buildings and elevators. The spacing out of employees has been cut in half over the last decade when it comes to the amount of square footage allocated per employee. There is going to be a reversion of that trend where the cubicles are going to get bigger, not smaller, and there will be more breakout rooms. Space requirements per employee will really vary from company to company as they figure out if they need more or less space than before. Older buildings could improve their indoor air quality with better filtration, higher-quality filters, and by pumping in fresh outdoor air, which will be an important building amenity going forward. All these factors play a decisive role in repurposing real estate properties in accordance to the new normal, and determining CAM charges for the property under consideration. In commercial real estate, there's a difference between usable square footage and rentable square footage. Usable square footage is the space meant to be used exclusively by your staff. Whereas rentable square footage includes common areas that your landlord will permit you to use, including lobbies, reception areas, elevators, and stairs in addition to your exclusive office space. The loss factor is calculated by finding the percent difference between the usable square footage and the rentable square footage. Negotiating the loss factor with the landlord can help keep the CAM charges in check. From what tenants will be looking for from their workspaces during and after the pandemic to how building owners can stay competitive during uncertain times, changes in lease rents and clauses in the lease agreement are sure to reflect these needs and expectations. This increase in costs will also have a reflection on the price of goods sold. But the trend is expected to normalize down the line as we move towards shaping a covid-free environment. By Raghu Ramachandran Raghu is the President for Sybrant Real Estate, a leading private real estate / property management services firm based out of Chennai, India that has global customers. Raghu has decades of hardcore experience in Real Estate and Property Development business. In this place he will share his thoughts on real estate as a business, technology, entrepreneurship, and anything else that piques my interest.

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How office leasing market will change post Covid-19?

In the light of the events and impacts across the world due to the Covid pandemic, the way of working of businesses is not the same as it used to be. The market for office leasing is evolving rapidly post the Pandemic outbreak. Until 2019, over 80% of office leasing in Asia Pacific was due to new and expansionary demand. In the US, the share of major leasing activity through the first three quarters of 2019 doubled (5%) compared to 2018, as per a report. But in the aftermath of the Covid outbreak, in Q2 2020, global office leasing activity was 59% lower than a year ago while vacancy rates have started to creep up across the regions. Work from home policies served as the perfect solution to ensure business continuity. The new normal has proven many businesses that company-wide remote working is feasible. According to IBM report, 54% of U.S adults want to primarily work remotely. Up to 60% office spaces is unused in the new normal, according to another report. Employees demand seamless integration of remote work and office work, and companies have reacted. Net leasing of office space plunged 73.4 per cent in the April-June period across 8 major cities in India due to sharp fall in demand because of the Covid-19 pandemic, according to Cushman & Wakefield. Also, cities like Delhi NCR and Bengaluru in India saw negative absorption, which also pushed the overall net absorption downwards, it added. Net absorption of office space stood at 3.75 million SFT during April-June 2020 as against 13.98 million SFT in the year ago period as corporates and co-working players deferred their expansion plans. What does this mean for offices? With the market shrinking and the competitive landscape consolidating, office providers will face fierce competition, and only the best offers will survive. The office of the future must be both highly attractive and cost efficient. The Future of Offices Lie in Flexibility Office space still has a pivotal role to play in facilitating essential face-to-face activities that are not easily replicated online. Additionally, there is now an abundance of survey evidence that shows employees are keen to return to the office for at least part of their working week. In the coming months and years, it will make great sense for many businesses to shift their existing offices to smart offices. Businesses across the world will abandon their commercial real estate in favour of more agile and less expensive smart offices. A smart office has everything a business needs, including workstations, conference rooms, IT infrastructure, recreation rooms, and more. Smart offices enable flexible adaptation to rapidly changing requirements. In the post-COVID-19 era, every significant business will need to move some if not all their employees to smart offices. The infrastructure needs to be flexible and responsive to the needs of the people and the situation locally. Smart offices have other advantages. They already have COVID-19 compliant premises. In addition, they provide intelligent space management, which means businesses that lease space in smart offices share costs. According to JLL report, Co-working spaces have paved the way here, and it is expected that by 2030, a full 30% of office space will be consumed in ready-to-use fashion. Thus, smart offices ensure user centricity, flexibility and sustainability. Flexible Office-as-a-Service (OaaS) Offering for Facility Managers Real estate as an asset class is here to stay; however, it is inevitable to reinvent, to stay relevant in this new paradigm. For corporate real estate players, the challenge lies in maintaining the relevance of their offices. Negotiating times on leases have also increased. Flexibility is the tool that helps office real estate players respond effectively to these threats. To adjust to overcapacity in the new normal and to protect valuable assets, real estate players need to proactively embrace flexibility: Use-based pricing models, office-as-a-service and quick reaction to changing needs are required in order to provide attractive and cost-efficient offers. Flexibility is enabled by a data-driven building model, in which real-time data is collected and turned into insights. Conclusion Office demand will remain robust in the medium to long-term. It is indisputable that the pandemic induced disruption is changing the rules of the game. The industry will need to reconsider pre-crisis priorities and accelerate new strategic initiatives to adapt to the “next normal”, according to a report by JLL. A de-densification trajectory is emerging as an interim and a permanent state, calling for portfolio rightsizing and workplace redesign. But the office market fundamentals are strong – with low vacancy, stable rental growth and limited upcoming supply. It is expected to recover the fastest once the outbreak is under control.

By Raghu Ramachandran Raghu is the President for Sybrant Real Estate, a leading private real estate / property management services firm based out of Chennai, India that has global customers. Raghu has decades of hardcore experience in Real Estate and Property Development business. In this place he will share his thoughts on real estate as a business, technology, entrepreneurship, and anything else that piques my interest.

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How retail leasing market will change post Covid-19?

Retail and hospitality sectors continue to be the most directly hit, reflecting reduced consumer spending and dwindling profits. Before the Covid outbreak, until 2019, there was drop in move-outs by businesses in retail leasing in the US, and landlords were also focusing on adding services and experience to shopping centres. Service retailers for the first time overtook retailers selling products and restaurants, as counts grew by 30.9 percent from 2002 to 2017, as per JLL report. Post Covid outbreak, most tenants are looking for some way to cope with the financial burden and loss of income. In such a scenario, revaluating your leasing agreements is important to control your operating costs. Real estate leases form a major part of your operating costs and involves many risks.

Lease agreement clauses can make or break your finances, especially during tough times. Several provisions will need to be changed and added, to account for the possibility of a pandemic and the mandated shutting of businesses. This includes adjustments to force majeure and insurance provisions as well as use of common areas, caps on the usage, alterations, rules and regulations, all of which should be adjusted to reflect the new market. Some of the smaller details can either make up for a higher base rent than you wanted, or you can use them as tools to lower that base rent. As in all leasing agreements, the devil is in the details. Hence it is vital to understand and negotiate the terms. The key parameters that will influence the retail leasing sector in the post-Covid era are discussed below.

Deciding the Must-Haves and the Nice-to-Haves

For instance, you probably want to be able to sublease should things go uncertain (particularly if you’re brand new), but you may be able to forego free parking. Those nice-to-haves will end up being your negotiating chips. A sublease clause is good to have added, either in addition to or instead of lower termination fees. Should you need to switch your location, subleasing will allow you to recoup losses. Hence deciding the parameters that are essential and that are value added and choosing the right blend of both is imperative in today’s scenario.

 Negotiating with Expert Guidance

Before jumping in headfirst, you may wish to get an agent or a lawyer to negotiate your lease for you if it’s within your budget. Agents, after all, are experts. They’ll be able to get your deals and clauses that you may never have noticed. Most often in commercial retail leasing, force majeure provisions only come into play in the initial build-out of the leased premises, or with respect to a casualty.  The mandatory governmental closures due to the Covid pandemic brought a different aspect of what is or should be considered a force majeure event.

·         Should the definition of force majeure include or exclude pandemics? 

·         If so, how do you define a pandemic? 

·         Or, should the definition instead forgo a reference to pandemics all together and address a potential scenario only with respect to a mandatory governmental closure? 

Thus, in the context of re-examining and potentially re-defining “force majeure”, especially considering mandatory governmental closures for many businesses in the retail sector, it begs the question: should there be an automatic rental abatement under these circumstances? Seeking expert guidance for these areas will save you a lot of time and become a life saver for ensuring business continuity.

Shoppers Preference and Shopping Center Dynamics

It is inevitable that there will be retained fears around social gatherings, crowds and social interaction among others, after months of isolation and crave engagements. Logistical challenges could fuel a significant increase in demand for locally sourced products, a step back from the big chains. It goes without saying that a greater degree of touch-less amenities in retail spaces will become the norm with hygiene becoming overtly central. Re-planning will have a central part to play in the re-allocation of space within malls and centres, we will see a significant increase in temporary pop-up providers to service our swiftly bored demographic with their ever-shifting fancies and expectations.

Conclusion

Going forward, landlords will strongly consider the impact of another (or different) wave of mandatory governmental closures and what flexibility they have when permitting certain limited operations for their tenants when negotiating future retail leases. These modifications will likely put landlords in a better position to respond and react to the new normal that will exist until a vaccine is developed and widely distributed, says Dan Villalpando, a partner at Cox, Castle & Nicholson. These tough times enables to relook at the way business was handled before and to factor in the right provisions to handle contingency situations to sustain your business.

By Raghu Ramachandran

Raghu is the President for Sybrant Real Estate, a leading private real estate / property management services firm based out of Chennai, India that has global customers. Raghu has decades of hardcore experience in Real Estate and Property Development business. In this place he will share his thoughts on real estate as a business, technology, entrepreneurship, and anything else that piques my interest.