Social distancing requirements, government-mandated closures, remote work — these developments changed how we interacted with commercial real estate. Adapting to the COVID-19 pandemic took a lot of energy and focus. So much so that there hasn’t been that much time to take stock of how businesses’ relationships with the spaces they lease have changed.
In order to make the most of your leased space in the post-pandemic world and to be prepared for the future, understanding the new nature of commercial real estate is key.
An asymmetric impact across industries
Every business and industry felt the effects of customers’ and employees’ changed behavior — yet these effects weren’t the same across the board. For the most part, the demand for real estate dropped, but the opposite was true for industrial sites, warehouses and distribution centers. These types of real estate became more valuable as businesses sought to relocate elements of their supply chain closer to home and to establish warehouses and distribution centers to cope with the increased reliance on online shopping that has be wrought by the pandemic.
In contrast, demand for retail and office space plummeted. While this was clearly a short-term response to social distancing requirements, it also busted a few myths that will impact behavior in the long term. Specifically: People don’t need an office to be productive, and people don’t need stores to get the products they need.
For office space, businesses have the opportunity to optimize their portfolios by securing only the physical spaces they need for team-based activities, conferences, face-to-face meetings, special events and overflow working space. In the meantime, employees can work remotely or adopt a hybrid model.
Retailers can apply much of the same practices for their own offices, but they can also meet consumer demands by de-urbanizing their physical retail outlets. Malls and other urban shopping spaces were already on a downward trajectory. With fewer people choosing to live and work in urban spaces, retailers will likely benefit more from investing in their digital channels and strategically opening up local stores in the communities where their customers live.
A renewed focus on lean practices and cash management
Having gone through one crisis, many organizations have been reminded of the importance of healthy cash management, reducing spend and applying lean principles. For businesses with a large real estate portfolio, there’s no better place to start than their leases.
Businesses leasing retail or office space will need to think strategically about what property they do utilize, how they utilize it and what data they can source to direct their decisions in this regard. The same can be said for properties that may see higher use post-pandemic, like warehouses and distribution centers; lessors will need the flexibility to expand or contract their footprint to meet the shifting demands that may be posed by the post-pandemic world.
Lease negotiation and management: More important than ever
For all their attempts at risk mitigation, lease agreements quickly proved to be ill-equipped for a crisis like the pandemic. Many businesses and their landlords didn’t have a clear path forward in the face of state and federally mandated shutdowns, massive shifts in consumer behavior, the need for building infrastructure upgrades and increased maintenance, unclear insurance concerns — the list goes on.
In part, these failures arise because lease counterparties traditionally don’t focus on risk mitigation, per se; rather, risk allocation has been the focus of negotiations. But the trouble with pushing risk to one party or the other is that it fails to address the underlying mechanisms that trigger risk — not to mention it sours the relationship between landlord and tenant and raises the likelihood of disputes.
Going forward, leases may need to incorporate novel language that more realistically accounts for the volatility of the real world. As an example, some new leases crafted during the pandemic protect tenants with a partial rent abatement should there be a government-mandated closure. In exchange, the landlord is guaranteed a minimum rent payment that covers tax and maintenance needs. Being flexible and creative in lease negotiations will be key to long-term survivability and long-term partnerships.
Data analytics is a must-have
In order to successfully navigate and make the most from these post-pandemic developments, businesses will need to take a smart, digital approach. Flexibly determining your business’s ideal property mix, ensuring that costs are as lean as they can be, negotiating for strategic language in a new or renewing lease — these things require data and analysis if they’re to be done well.
Businesses that are proactive in turning their lease agreements and other contracts into a source of insight will have a head start when it comes to making these kinds of decisions. Leases contain data on square footage, price points, incentives like concessions or abatements, non-standard language, key dates and more.
Assessing these data points results in real outcomes — Exigent, for example, was able to reduce the costs associated with Hub International’s 450 offices by 10%. If businesses are to survive the next crisis, becoming data-aware and strategic about their leases will be a must.