Office Lessors Dangle Carrots To Tenants As Properties Lie Empty
USA – The COVID-19 pandemic has shifted the US office market in favour of tenants as lessors have become desperate enough to offer concessions to entice or retain lessees, given that the appetite for office space remains lacklustre as working from home becomes more prevalent now and inthe future, reported The Motley Fool on Tuesday (22 September).
Landlords are getting seriously worried, as there’s a high chance that existing occupants wouldn’t renew their leases, or tenants would renegotiate for more advantageous terms amidst the impact of the coronavirus outbreak.
Consequently, lessors have become more willing to give creative and versatile incentives, mainly in the form of free rent and improvement allowances for lessees.
As a matter of fact, the two aforementioned were among the most common rental concessions offered by commercial property owners in the second quarter of this year, according to real estate agency CBRE. It’s a logical move as the demand for office space in the US plunged in the prior quarter.
Moreover, office space lessors are dangling other types of incentives to existing and potential tenants. Some are offering more versatile rental terms and duration. Others have added opt-out clauses in their contracts, whereby occupants can terminate their lease earlier, as long as they shoulder the cost of finding a replacement tenant.
However, landlords could also face serious problems if they provide concessions. For instance, if they often agree to free rent – which tenants will likely hope for due to the uncertain economic times – it would impact the revenue of lessors and risk defaulting on their property loans.
As for offering versatile rental duration, it’s perceived as being less risky. With this, rental income is at least guaranteed for a certain period of time, as opposed to contending with unoccupied space.
In addition, landlords stand to lose more rental income if they offer lots of concessions.
Agreeing to flexible rental terms could also lead to issues with tenants once the virus outbreak is fully under control. Occupants – who are already enjoying free rent and flexible lease terms – may react negatively if these incentives are suddenly withdrawn once the office market regains its footing.
Nonetheless, commercial property owners may have no choice but to currently offer concessions if they don’t want to fall into dire financial straits, with many of New York City’s once-bustling offices now lying empty.