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Office Sector ‘Workout Mode’ to Persist for Two Years or More, Advises A&G Executive

December 15, 2020, 07:30 AM
Filed Under: Real Estate

Office tenants will be in tough negotiations with landlords for the next two years or more—and that means they need to be strategic about securing concessions that lower their occupancy costs, writes Andy Graiser of A&G Real Estate Partners (A&G) in a column for Commercial Property Executive.
Fortunately, both landlords and their lenders are starting to show more flexibility in negotiations, writes Graiser, who has decades of experience in real estate lease restructurings, dispositions, valuations and acquisitions. “Office landlords around the country are confronting a stark choice—either shift into ‘workout mode’ or risk losing important tenants for good.”
In the column, the executive gives office tenants four tips for lowering their occupancy costs.
The first is to be transparent. In the COVID-19 era, the executive notes, landlords need to confirm for themselves that their tenants truly need a break.
“In restructuring a lease, be able to provide that landlord with highly detailed financials,” he advises. “Office tenants should make a compelling case for how restructuring the lease will support their business strategy and allow them to keep leasing space from that landlord.”
The second is to be cautious about accepting offers of deferred rental payments. Writes Graiser: “…office tenants need to carefully consider the risk to their businesses of being forced to pay back that rent sometime next year.” That’s especially important given that many office users will be facing additional expenses associated with building sanitization, HVAC upgrades, safety-barrier installation and the like, he adds.
Thirdly, Graiser urges office tenants to think carefully about factors that contribute to their leverage. “For example, if the landlord has a loan coming due, it could be impossible [for the landlord] to refinance if your company were to vacate the property,” he writes. “A wide array of factors—from your creditworthiness, to your company’s esteem and recognition in the community—are part of the picture here; make sure you don’t neglect your own value.”
And lastly, Graiser encourages office tenants to consider the property in full context. In particular, they should examine how the pandemic may have changed the areas surrounding their office leaseholds. “Your company may have located its HQ in a central business district because of the vibrancy of nearby retail shops and restaurants,” he explains. “If that CBD is now a ghost town, this should be a factor in the lease-restructuring discussion.”
Given what’s happening today, Graiser concludes, the odds are good that the office sector will continue to be in “workout mode” for the next two years or more, but landlords are increasingly willing to play ball. A&G, for example, recently saved a Manhattan office user $60 million just by winning an early exit from a single lease.
“Properly undertaken, portfolio-optimization can better position companies for the challenges of the future—whatever surprises they may hold,” he writes.
The full column is available here.

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