June 5, 2020
Time will tell how long office and retail tenants continue making rent relief requests, as well as how long property ownership will continue granting them. That being said, “the dramatic dislocation in the economy across sectors has resulted in an increasing number of rent relief requests” at present, JLL says, and the firm has prepared a benchmark study drilling down into these requests.
“At the most basic level, tenants are opening the conversation with landlords as to how to manage these costs best given demand declines they have seen in their industries,” the report states. General inquiries account for 28% of the activity, but the rapid shift in economic conditions has led to 34% of tenants asking for direct rent abatement and another 28.5% seeking a deferment from paying until conditions normalize.
The more rapid and extreme slowdown that hit the retail and non-office sectors “has made their situation more immediate,” JLL says. Accordingly, 68% of the tenants in these sectors have asked for immediate abatement or deferment. Retail and non-office tenants originate more than 42% of the requests for rent relief in JLL’s study, compared to the 3.6% of such requests that have come from coworking providers.
“Because rent abatement immediately impacts bottom-line building income, landlords are generally opting to provide abatement only when part of broader ‘blend and extend’ lease restructuring,” the report says.
This approach provides the tenant with financial relief and keeps the landlord’s occupancy and income stream whole until market stability returns. “At the same time, these negotiations may be re-priced to include some rent discounts and/or additional concessions,” according to the report.
The study found that tenants of trophy/Class A properties are slightly more likely to make relief requests than those in either B or C properties. “While trophy/Class A properties likely have larger, better capitalized companies on their tenant rosters, the space users may be under higher financial pressure,” the report says.
Such businesses chose high-quality, high-cost space to compete, but also to retain and recruit staff, JLL says in the report. “They have also seen a rapid rise in office rents during this cycle, possibly making any revenue decline more acute and—requiring rent relief. In contrast, companies in Class B and C space are already in affordable locations, and, for the most part, with more modest drains on their resources.”
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