Lockdown and Social Distancing have become the buzzwords due to the ongoing pandemic. Disruption is being faced across businesses due to this black swan event, creating ripple effects, falling demand for goods and services, job losses, thereby forcing businesses to take additional precautions for surviving “The New Normal”. One of the most severely hit sector due to this, is the retail business.
While it is essential for most commercial real estate firms to work from home during the pandemic, being away from the office makes it difficult to stay on top of lease administration services. Working remotely is a challenge for many real estate professionals to manage day-to-day property accounting tasks in a timely manner. For many companies, this difficulty has resulted in a transaction backlog that needs to be effectively handled.
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.
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.
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.
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