Leasing Commercial Real Estate in 2020

July 6, 2020 Designer No comments exist

Neil Johnson, Geneva IL
Walt Arnold, Albuquerque NM

Neil Johnson:

Thank you. Well, good morning from Geneva, Illinois, and suburban Chicago, and welcome to the June Leasing Council Call. We’re grateful to Julian Banuelos from SVN Corporate. He’s running our backstage component. And can jump in to help us out if there’s any technical issues, the call is being recorded so you can listen later or pass it on to others in your office. Our goal is to use the SVN culture collaboration to share best practices for leasing, strengthened leasing resources within the company and improve services to our tenant and landlord clients.

Neil Johnson:

We’re hoping this call today has some good discussion, so feel free to jump in with questions or comments, if you wish, in order to make that process work, you’ll have to unmute yourself to speak if you’re doing it from your computer, there’s a little microphone button. If it’s red, you can make it green. And then afterwards mute it again when you’re done. So we don’t have distractions like dogs, babies, sirens, et cetera.

Neil Johnson:

One of the benefits, I won’t read this whole slide, but, I borrowed it from our initial website. One of the benefits of being part of a brand like SVN is to leverage the experience and relationships of advisors around the country. And for that purpose SVN created specialty product group, product councils. There are 18 of them shown here. Leasing is one of those. I encourage you to join any that are a regular part of your practice or that otherwise interests you. We have something in the neighborhood of 130 members in the leasing counsel. If you haven’t quite yet, please sign up from Mayasvn.com in the dashboard. There’s a collaboration center, gotten the leasing icon and do the same for other topics that interest you.

Neil Johnson:

This way, you can receive our leasing related communication. And if you have something you want to share with others between calls use leasing@svn.com, that’ll go out to everyone who’s signed up and automatically appears a post on the Leasing Counsel Communication hub. Feel free to contact me or Walt Arnold, we are the co-chairs if you have any leasing related questions and this is intended to be an open dialogue. So please jump in with questions or comments. We’ll all benefit by the extra participation. In fact, most of this call today is open discussion and I’m hoping that this call can be a politics free zone as much as possible. So let’s just stick to business.

Neil Johnson:

The COVID-19 pandemic left its imprint on many parts of our lives and leasing commercial real estate is certainly no exception. Quarantines from home, stores closing, etc. Here’s our agenda for today. So we’ll start out with the impact of the COVID-19 shutdowns on landlords and tenants. And Walt, what are your major impressions of the shutdown that it’s had on leasing?

Walt Arnold:

Thanks, Neil. Walt Arnold in Albuquerque, we have 12 brokers in my office and also property management. We sell, lease and manage office industrial, retail, multifamily investments. And I think one of the biggest impacts that I’ve seen, it’s interesting Neil, how it plays out because each sector of retail, especially retail, industrial and office have all had been impacted significantly, but some more than others. And obviously it’s interesting to see what’s happening on the retail side, which has really been devastated as far as mass closures. In New Mexico, malls are still closed and retailers are still only at 25% to open restaurants are now moving towards 50%.

Walt Arnold:

And hopefully by July 1st, we’ll see some changes in that, but the biggest impact has been on the retail. And even on the properties we manage, dealing with tenants, we’ve seen that a lot of the times, our tenants, they’re just paying their triple nets. Some tenants are paying what they can pay. We’ve gone out and talked to them and see what can they do to get through it. Obviously a lot of them were encouraging, have gotten the PPP, the Payroll Protection Plan and that’s assisted them [inaudible 00:05:15].

Walt Arnold:

It’s interesting as you look through the different product types, we look at industrial. Industrial remains strong, obviously industrial space are essential businesses and those businesses have remained strong and continue to pay rent and not a lot of real challenges in industrial market that we’ve seen other than, obviously they have to do the things necessary and abide by all the COVID parameters that we currently have. I think office to me is an interesting one because people basically in office buildings have gone home and are now working on very limited staffs in a lot of buildings.

Walt Arnold:

It’s interesting driving around and there’s no cars at office buildings, but our collection of rents from office tenants has been actually pretty good. And we’ve had very few office tenants that have actually come to us and said, “Hey, we need some modifications for COVID-19.” Now, I think that might continue, we might see some more in the future, but to me, the thing about COVID is interesting how each product type has been traded differently on the leasing front and retail has been impacted significantly, the industrial very little and then office in the middle, even though people are going to the office buildings, they are still paying their rent.

Walt Arnold:

And what we are seeing is, a lot of things with tenants I think the opportunity for us as brokers is to contact the tenants, whatever mix you’re in, retail, office or industrial and see, this is a great time to be an advisor and to really help people move forward on their lease. And also maybe there’s a chance to gain some free rent, to have some minimize or reduced rent, and then maybe extend the lease on the back end or renegotiate the lease for the tenants that you’re working with.

Walt Arnold:

On the landlord side, we are still showing spaces. Obviously we’re showing spaces a little differently, but it is interesting to me that there are tenants still out in the market. Tenants are still looking for space and we’re dealing with them. I do think it has slowed down a little bit, but I think we’re still moving forward and people are still continuing to look at spaces. Some people have been put on hold a little bit, but overall, things are still moving forward, this in Albuquerque.

Walt Arnold:

So that’s my take on it right now, but I think it is very interesting. The difference and especially retail, industrial and office, and obviously the components that surround them and how they’ve been affected differently by the coronavirus.

Neil Johnson:

Thanks Walt. Anyone else want to share, comment about impact that the shutdown has had on leasing? Unmute yourself.

Walt Arnold:

Neil, one more thing I would like to add. If you go to my [inaudible 00:08:12].com, a lot of the product councils that have created their own COVID-19 impact statements. And they’re all available for everybody to go through. It gives a really good synopsis. Ryan Emory did one, Dan Zimmerman for retail. Tommy Joe did one, Lynch in Reno did one for industrial and then Al Lindemann and Jeff Alby did one for office and just succinctly lay out each product type. So that’s a good resource and there’s many other resources on that for COVID-19, the impact of that in different real estate sectors.

Neil Johnson:

Thank you. Well, let’s take a look at the status and trends, by actually city, state or region. Illinois is in stage three of a five stage recovery of opening. Illinois is one of the more conservative, in terms of that or to say we’re opening slowly. Now having outdoor dining. It’s really been fun to see how creative the restaurants in our area have been putting up tents and even bars outside. Well, where’s New Mexico in the recovery cycle?

Walt Arnold:

We’re in right now in the stage two. Like I said, malls are not open. Bars are not open. Any large events are not allowed. Outdoor seating at restaurants is now at 50%. And indoor seating has just opened up for restaurants, it’s also at 50%. Churches are beginning to open but we’ve had an impact pretty strongly in parts of our state, Albuquerque less than the rest of the Northwest part of the state has been impacted significantly.

Walt Arnold:

But Albuquerque in general, we’ve had a lot of cases but we have been pretty slow to open. We have been a much slower than our neighboring States of Arizona or Texas or even Colorado. But we are slowly moving to more capacity, even offices now at 50% capacity for office use. So things are improving. And, I will say though, it does seem like the activity last week has jumped up significantly and people seem to be getting back to work.

Neil Johnson:

Yeah, we’re seeing traffic. I got used to having no cars on the road. We could move around so much easier, but it’s good for everybody to have their cars, people out and about. So there’s over 30 of us on the call. I’m sure we’re spread out around the country. Who would like to jump on and talk about [crosstalk 00:11:23]

David Dunn:

Neil, it’s David Dunn, can you hear me?

Neil Johnson:

Loud and clear David.

David Dunn:

Okay, good. Well, it’s an interesting world we’re living in today, that’s for sure. The Dallas-Fort Worth Area, we’re opening back up, but we’ve got the highest number of cases per day. It’s just growing higher, which is scary if you think about it. Mostly office buildings are fairly vacant. The industrial market has been, again, just like Albuquerque in New Mexico. It’s really pretty much thriving and doing extremely well. I’ve had some of my tenants, I work with asking for rent forgiveness, and I’ve been basically, the Payroll Protection Plan, I gave them all the links, put it off all together form, what do you need to do you do? And send it out to all of them.

David Dunn:

And a lot of them have gotten the money from that, which really helps a lot through this, but I’m wondering where we’re going with this and how long the office sector is going to be vacant. And even with Texas opening up, our restaurants are open, our gyms are open and I believe they just opened up the malls. But it’s really difficult to maneuver. But what’s really strange, and I don’t know understand is that, I’ve done like five leases in the last two weeks on properties that have been sitting for a while. I can’t really put my finger on it, but these are leases and properties that I actually own.

David Dunn:

I’m doing some other industrial leases too, so people are moving forward and not just held up in their house. I think they’re tired of it. And so I think they’re getting out there in our market. They seem to be getting out there and working on, trying to open back up, trying to do things. And Dallas-Fort Worth third party logistic providers, national retailers and consumer packaged good firms are looking real hard because we’re a critical hub for distribution networks. And in the past 12 months, we’ve had a lot of large leases signed, that are 500,000 square foot or greater.

David Dunn:

And we have the most construction going on right now in the nation. And I just heard from a Bank of America, friend of mine that does lending, he said that they have stopped, completely stopped funding any construction loans, which is interesting. So we had ZUME, Z-U-M-E inc. They leased a 1,044,000 square feet. We have Callaway Golf leased 810,900 square feet, in Alliance, which is our North airport, we’re freight airport. And then Amazon leased a million square feet at the DFW Commerce Center. it’s the South side of DFW International Airport.

David Dunn:

And then also in May, Amazon opened their first new fulfillment center in Texas since the coronavirus outbreak and launched a hiring spree of 1500 full time employees. That’s interesting. And the 855 square foot facility is in Oak Cliff, which is South Dallas and it was developed by Hillwood. So there’s big leases going on. There’s small leases going on. We’ve got a bunch of vacant spaces, but all in all, I think that we are moving towards recovery and we need to get a vaccine or something because I think a lot of people, I think Dallas County now requires a mask that it’s mandatory, Fort Worth is not, most grocery stores like Costco, you have to wear a mask and they will not let you in without one. So that’s where we are in Dallas Fort-Worth. That’s my market updates guys.

Neil Johnson:

David, where are those offices that are yours that you lease? Are those suburban or in the city?

David Dunn:

There are right in the middle of the city. If you had crosshairs on a scope and you’re looking at Dallas Fort-Worth, right in the center of the crosshairs is where Arlington is, it’s right in between Dallas and Fort-Worth. So, it’s definitely right in the middle of the metroplex.

Neil Johnson:

Got it. Alright, thank you. That’s interesting. Anyone else want to jump on?

Courtney Dunn:

Yeah, this is Courtney Dunn. So, also with David, I actually had an interesting experience where I went on a trip recently to New Mexico to scope out some situation. I’m getting married next summer in Santa Fe. So I wanted to check it out and I saw a drastic difference between the way that things are handled in Dallas versus the way that things are being handled in Santa Fe. And it just really, to me, seemed like people in Dallas have become a lot more lax with the requirements, which is why I’m thinking that the kids are going up here. Whereas in New Mexico, if we went into a restaurant, we had to wear our mask until you sat down on the table and then you could remove it. So that’s been interesting just to see the differences on how different areas of the country are handling this. Having been just in the Dallas Fort-Worth Area and going there.

Courtney Dunn:

And then in addition to that, I wanted to share an article that I thought was very interesting. It came from the Bisnow, and the title of the article, came out on June 10th, it’s, ‘Hub-And-Spoke’ Office Model Gains Traction With CRE Investors. And it basically talks about the future of office space based on what we’re seeing with COVID and how people are not really wanting to work remotely necessarily, but they also don’t want to work in the office full time.

Courtney Dunn:

So what they’re predicting is that most businesses are going to operate at a reduced occupancy. And they’re going to do this ‘Hub-And-Spoke’ model or a hybrid model where they would be more of a suburban satellite office to offer office workers a shorter commute time and more of a flexible workspace. That’s not like their typical environment at home, but at the same time, they wouldn’t be there full time. So we’re actually looking at this as a possibility for our own office and doing some remodeling work to adapt to the environment that we’re in.

Neil Johnson:

Thank you, Courtney.

Steve Kawulok:

Hi, Neil. Steve Kawulok here in Denver.

Neil Johnson:

Hi, Steve. Good to hear you.

Steve Kawulok:

Yeah, thank you. I think Denver is somewhere in the middle in terms of controls, but we’ve been getting pretty good press about it nationally. We still have to wear the masks inside. So that is one of our mid range requirements, I guess you could say. What I’m hearing is, office rents are probably down 10% in retail [inaudible 00:19:54] asking rents or effective strike rents are probably down 20%. Now the research companies, CoStar, et cetera, haven’t quite caught up with recent deals. So some of that is just heard on the street, but, definitely in the short run deals are being cut and some free rent is being thrown in to get people through the COVID sequestering period and into the new period. So you’re starting to see deals that give maybe free rent until September, for example.

Steve Kawulok:

The other thing we’re watching closely is sublet space. That’s starting to be making more than just a blip on the map. We now have over a million square feet of sublet downtown and some of that had to do with the energy industry, also with the price of oil down. And I think probably the silver lining for Denver was that we were in really good shape to start with. Employment was basically nil and now we’re hearing conversely, some companies that wanted to come into Denver that were waiting because they didn’t think they could hire their workforce, but ironically might now be considering coming in because there might be some workforce available or workforce that might be willing to switch over to them after this time that has does been in flux. So who knows there could be some silver lining to all of it in our case.

Neil Johnson:

Thanks. Any other areas of the country Northwest, Northeast, Southeast.

Amy Hawley:

This is Amy Hawley. I’m in the Allentown Bethlehem, Eastern Pennsylvania market.

Neil Johnson:

Good morning.

Amy Hawley:

Good morning. Almost afternoon. We still have a tight market for industrial space and we’ve had a significant uptake in the demand for short term space from last mile delivery services, fulfillment services and logistics. And we continue to have new construction occurring for industrial space.

Neil Johnson:

Interesting.

Amy Hawley:

Our retail vacancy is approaching 35%, so that’s been pretty decimated with the closures of the national chains like Jason [inaudible 00:22:37], Kmart and others. Office market is about 18% vacancy rate in our market. I recently wrote an article about last mile delivery services and logistics and the change for consumer spending going online. And I will be sure to publish it on the leasing website.

Neil Johnson:

Thank you. All right. Last call for regional issues, I’ll move onto the product types. So we’ve been touching on some of these, I know for myself during March through May, office leasing was about the only type we’re doing. We do office retail and industrial, and some of the spaces that I’d had similar to what David said sitting for a long time vacant. We’re getting picked up different sizes. We’re in a suburban market, an hour West of downtown Chicago. So it’s a little different. One of the things I had heard early on was everybody who was expecting real change when people got used to working from home and liking it, that the demand for office space would be less.

Neil Johnson:

I think the trend that was identified where it would be a mix, people would have more freedom to work from home, but still have the demand for office [inaudible 00:24:31]. One of the upticks was the suburban one story offices were becoming more appealing to people so that they, A, didn’t have to commute on a train and B, ride elevators with other people. That might shift as we get fixes for some of the virus issues, but I think the suburbs are going to benefit by some of the terms here. The other thing was rather than needing less space, one webinar I sat on probably back in April, was talking about the central downtown high rise and some of the really large tenants, multi floor, high rise type office tenants were actually adding floors so that they could spread their people out.

Neil Johnson:

They weren’t going to be laying people off. So they needed more space to be able to spread people out after what has been years of consolidating people into very close quarters in an office. Did run across, something from CoStar. And I have to give a disclaimer, I’m not a big fan of CoStar in general, but this was a good chart. This is the whole Chicago region and leasing and each of the bars is showing an individual month from January of 2017 to the spring.

Neil Johnson:

And you can see what happened there March, April, and May. The volume is just way down, really proceeding or it’s worse than going back into the recession back in 08, 09. So I thought that was interesting. Who else would like to come comment on office leasing, including any specific case study stories you have that illustrate the trends, your own experiences with tenants or landlords?

Walt Arnold:

Neil, this is Walt. One of the things that I’ve run into is the architectural firms, there’s been a lot of tenants that are going back to architects and ask them how to, like a space audit and how can we effectively, like you said, spread out our space and looking at their interior layout and trying to make decisions on how to better protect themselves from each other. But it’s interesting that I had a conversation with an architect of the day and they’ve been getting numerous requests for space audits and how to reconfigure the space from the impact of COVID-19.

Neil Johnson:

I think that highlights one of the things that a big change in our life like this benefits some industries and businesses more than others, for some it’s devastating, for others it creates a new opportunity. Like just think if you are a plexiglass supplier, I’m just trying to make ends meet for year in, year out. And now all of a sudden you’re the most popular person in town. The same with signage and banners and those sorts of things. People who do the stickers from grocery stores to office spaces, which aisle you can walk down, I guess, in some of the very large office spaces that are using a similar approach so that people aren’t crossing in the aisles and corridors as much as you have to walk one way.

Neil Johnson:

So very interesting. Stickers on the elevators so people are spread out. Okay, well, we can move on to retail. I sat in on a quantum listing webinar, they’ve been doing a lot of really good webinars. And one was yesterday, it was titled data-driven CRE for retail recovery. And the presenter had a data gathering from that tracks, retail shopper data from anonymously, but from all mobile devices. So they could see where the traffic was, how long people stayed in different stores and it illustrates again how some businesses have benefited much more than others by the pandemic. One of the examples was everybody’s aware that grocery store business picked up dramatically, but he was able to illustrate how the full service grocers were doing much better than some of the boutique stores like a Trader Joe’s.

Neil Johnson:

Because it’s let the shopper make less trips. They were able to get all their shopping done with one stop, which is more appealing in the way we’re trying to live our lives right now. And Trader Joe’s which we go to regularly, has a more limited selection. So you can’t necessarily check off everything off your weekly or in our case, every other week grocery shopping list.

Neil Johnson:

Another example was home improvement. And in the early weeks of the shutdown, Lowe’s Home Improvement stores were doing really well. Lowe’s, which focuses on the weekend warrior, do it yourself type, was really, really strong at the beginning. But then as businesses started opening up and contractors were starting to go back to work, Home Depot, it tipped in favor of Home Depot, which focuses a lot on the requirements of contractors. What’s anyone else seeing with retail trends or restaurants? I guess, would fit under that. That heading as well.

Joel Miller:

Hi Neil, this is Joel, out of your office.

Neil Johnson:

Morning Joel.

Joel Miller:

Good morning. We’ve seen a significant shift in, I think the, tenants that are most active right now. We were looking at a lot of fitness deals before COVID-19. Those are across the board, dead in the water right now. None of the fitness tenants that I’ve been working with have any plans to expand this year. They pushed all their plans off at least through year end. And we’ll be evaluating whether growth is still in the cards once they make it through this. Restaurants we’ve seen a good bit of pullback from even the national casual restaurant, fast casual and casual dining, more or less across the board.

Joel Miller:

At least I’m seeing with my clients a lot of activity from the independent restaurant groups. That are well financed that have had an intention to grow are coming back to the market, looking for opportunities. So in our portfolio, the tenants I’m representing, I think I’m probably writing more LOIs than I’ve ever written. But we’re writing really aggressive LOIs and a lot of marketing go anywhere. 65% of ask, 70% ask, with long abatement periods, PI packages and built in protections for future shutdowns. So I think that’s the biggest shift is the kind of tenants that are in the market today.

Joel Miller:

We really are seeing a lot more of those independents that are more opportunistic getting out there and saying, “Hey, I’m going to take advantage. If somebody will give me a good deal, I’ll jump in today.” But a lot less activity, at least in the market I’m working from, the typical players, the national retail brands that have a real growth strategy in place. Those seem to be putting a pause on things and waiting to see how things are going to progress before they really push hard again.

Neil Johnson:

So Joel, you’re an exclusive tenant rep for a restaurant chain nationwide, what are you seeing with air plans?

Joel Miller:

We are pushing into a few new markets right now. We’re moving into Florida, a couple of some markets within Orlando that we wanted to enter for last couple of years, but just couldn’t find the real estate. This is creating some opportunities, so we’re looking to take advantage of some of the closures and some of the vacancies and new developments, lack of competition from other tenants, and try and find our way into some markets that for the most part we’d simply couldn’t afford.

Joel Miller:

We’re hoping that this is going to translate into an ability to do deals where we’re comfortable. Same goes for Virginia, the Eastern portion of Virginia outside of DC. We’re looking at the same thing. It’s a market we’ve looked at for a while, but, weren’t ready to pull the trigger on just because the economics there. So I think from a national strategy for a couple of these tenants, we’re looking for this to be an opportunity to let us enter some markets that we wanted to enter, but didn’t feel comfortable with the economics.

Joel Miller:

And those are all fast casual brands. We’ve tightened our square footage a little bit, we’re not doing as larger footprints. We’re paying a lot more attention to what the outdoor dining landscape looks like. And that’s been a growing piece, that’s been weighing heavier on decision making, going back probably 12 months or so as we started looking at ways to better utilize outdoor dining. But this has certainly accelerated those discussions and deal. Like I said, we’re putting a lot more importance on what those alternate options are for delivery, for carry out and for outdoor dining that we had in the past.

Neil Johnson:

Thank you.

Joel Miller:

And then the other brands that I rapped that haven’t missed a beat are the drive through brands. And that’s across the board or anybody who’s been doing a drive through it doesn’t feel like any of those tests and have skipped a beat through the entire shutdown. Their sales have been strong. A couple of my clients that are in the QSR drive through space, between 15 to 20% [inaudible 00:36:15]. In terms of year over year sales based on projected last year. The drive through QSR those deals are getting done. We’re competing with other QSR brands for those spaces and there’s really no slow down on that part of the retail. I think it’s the only part of retail that hasn’t slowed down and where the economics really haven’t changed at all since the beginning of this.

Neil Johnson:

And those drive throughs have always been a premium but they’ll probably be even more so moving forward. All right. Last call on retail comments. Last sector is industrial, Amy made a good comment. I look forward to seeing your article on blast mile. Certainly the internet shopping has created an additional demand. I think in sizes of industrial will be doing well in the future. Some of the recovery issues are the same for small, in line flex space. We’ll need some time to come back, but I think the demand is going to remain strong for all types of industrial. Anybody have other specific industrial illustrations for us.

Neil Johnson:

So what do we see for the future? I think a silver lining from my point of view for leasing brokers is that, it may mean more inventory. We’ve discussed a lot of retail will be closing for good, others will be changing the footprint or their approach, office will be reinventing itself in a number of different ways. And, that almost certainly means more inventory and elevating our role as leasing brokers.

Walt Arnold:

Hey Neil, Walt Arnold. I think also the thing that’s important, is us for the advisors is just, this is a great time for us to really use our knowledge of the market to try to see the trends that are happening in the market, evaluate those and really help our clients and customers, landlords and tenants to make the right decisions in the market. I think if we just use the knowledge and the tools that we have and stay in front of things, we can really be an asset to both landlords and tenants in this market. And I think it’s a great opportunity to start to reach out to people just like we talked about having the amazing conversations.

Walt Arnold:

I think it’s still a great time to reach out and talk to people as much as you can. And I think there’s going to be a lot of opportunities moving forward, either as a tenant reps or on the landlord side for leasing space, office, industrial and retail. So I think it’s to use our expertise and to use our knowledge and to use our collaboration help from people across the country and other [inaudible 00:39:46] brokers to help our clients and customers have some great results.

Neil Johnson:

I agree at one of the national conferences years ago, during one of our transitional economic times, the observation was made that the best thing for brokerage is change. It’s when things are absolutely stable, which translates to people aren’t moving, it makes our job and being vital to our clients a little harder. We are certainly moving into uncharted territory now. I don’t think anybody knows for sure what the world’s going to look like in the fall or winter, or certainly next year, but it will create opportunities for brokerage, both in the leasing side and in the sales side, our office obviously does both.

Neil Johnson:

I’d like to open it up to any other topics or questions that people have. If there’s nothing more, I want to thank you for taking your time to be on the call today. Feel free to contact Walt or me if you have any leasing related questions or suggestions. And I wish you a healthy and profitable rest of your summer.

Walt Arnold:

Thanks Neil.

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