Tuesday, July 14, 2020

The Lease is on the Other Foot

As the number of 90-degree days in July slowly approached the double-digit mark, our cranky air conditioning system finally surrendered. While waiting for the repair crew to install a replacement unit and present me with an invoice exceeding the cost of my first new car, I decided to escape the oppressive swamp that was my home’s interior temperature and cool off at the town pool.

In between laps I struck up an interesting conversation with a fellow in the adjacent swimming lane. He was a jeweler by trade who for years maintained a business in New York City. He, like many non-essential other businesses, had been forced to close for months during COVID-19. He revealed that for years he had been at constant odds with the landlord, who insisted on an annual hike on the lease, sometimes demanding an unrealistic amount for the space. If my new swimming companion didn’t like it, he was told in no uncertain terms, there was a long line of potential renters waiting to take over. After calculating relocation and construction costs, he determined that it was probably better to remain where he was, as unpleasant as that might be.

But that was then, and this is now.

With the pandemic forcing thousands of companies to sequester much of their workforce and work remotely, one of the sectors not likely to rebound all that quickly is office real estate. For example, professional services like CPA firms, investment banking entities and even law offices, many who had previously discouraged working remotely, suddenly discovered they could be equally productive as before COVID-19 sans the bricks and mortar.

That does not portend well for those in office real estate. Already many accounting practices are mapping out strategies to reduce their space or even move out completely. One practitioner I spoke with in New York is currently functioning in a We Works space and has no plans to relocate to a more permanent base.

Even in my bucolic hamlet, I have seen signs spring up like ragweed advertising available office space in the local business park. One even stated that “rates are negotiable.”

Seeing a sign like that even five years ago was almost unthinkable. Those rental overseers who were often referred to as gluttons, now, ironically, face a glut of inventory.

Going forward that will likely be the rule rather than the exception. In a classic example of schadenfreude the jeweler said he had an appointment with his landlord this week to discuss the terms of his lease.

Remind me again what they often say about payback?


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