Contact Us August 05, 2020
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:
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.