While the pandemic has triggered a surge of legal work over the negotiation of rent relief for tenants trying to survive the crisis, commercial property attorneys say the long-term impact of COVID-19 on brick-and-mortar retail and the demand for office space remains to be seen.
Boston attorney Thomas Bhisitkul says the demise of brick-and-mortar stores was a hot topic even before the pandemic due to the rise of online retailers and with big-box stores such as Walmart and Target themselves diving into the online consumer goods market.
Bhisitkul, who represents national chains both in Massachusetts and across the country, says it’s too early to say whether COVID-19 has permanently impacted the market for storefront properties.
“The industry trade groups, like the International Council for Shopping Centers, have all claimed there’s still a place in the world for brick-and-mortar retail,” Bhisitkul says. “I represent national retail tenants, and they are still pushing forward with their store site acquisitions and new store site developments.”
But Boston attorney Paula M. Devereaux says the COVID-19 crisis has added uncertainty to the market.
“It’s so hard to know now what’s happening with retail that it’s impossible to say which retailers are going to be able to survive this and which won’t,” she says.
On the commercial leasing front, Bhisitkul says the biggest pandemic-related issue for lawyers and their clients has been payment default by tenants that were forced to shut down or suffered a severe loss of business.
On March 23, Gov. Charlie Baker issued an emergency order directing the closure of “non-essential” businesses. At the same time, he issued a stay-at-home advisory for residents. Baker commenced the phased reopening of the state on May 18.
Boston attorney Edward M. Bloom, a past president of the Real Estate Bar Association, says he’s been fielding inquiries from both landlords and tenants about the obligation to pay rent during the period of a government-ordered shutdown. But Bloom points out that the force majeure clauses in most commercial leases don’t relieve a party of an obligation to pay money or rent.
“Usually, the force majeure clause excuses the landlord and the tenant from undertaking non-monetary obligations,” Bloom says. “But always the obligation to pay rent is excluded from the force majeure clause.”
According to Bloom, most landlords have realized that if they don’t provide some rent relief during the pandemic, the tenant will either go bankrupt or leave at the end of the lease term.
Under the circumstances, Bloom says landlords have been open to arrangements relieving the tenant from paying all or part of the rent for a set period, such as three months.
“They don’t forgive the rent,” Bloom says. “What they’ll say is that in three months you will start paying rent again and you will pay what you owe for these three months. In other instances, the landlord might extend the lease term.”
To further complicate matters, Baker on April 20 signed into law a moratorium on evictions that encompassed “small businesses,” defined as excluding a business that “(i) operates multi-state; (ii) operates multi-nationally; (iii) is publicly traded; or (iv) has not less than 150 full-time equivalent employees.” He recently extended the moratorium until Oct. 17.
According to Bhisitkul, many commercial tenants had already paid for their April rent by the time the crisis had fully unfolded in late March. Defaults typically began occurring with respect to May and June rent payments.
“Most tenants in my experience started paying rent again in July and plan to continue paying rent going forward,” he says.
Bhisitkul says he’s been working with landlords faced with the decision of terminating a tenancy based on a default or working with the tenant to restructure the rent or provide a measure of rent forgiveness to help get through the crisis. He says landlords are ever-mindful that a financially distressed tenant has the option of filing for bankruptcy.
“It’s a nightmare for the landlord if the tenant goes bankrupt because then the lease is tied up in the bankruptcy proceeding,” Bhisitkul says. “The landlord can’t terminate the lease, which means that the tenant basically gets to stay in the space. If they think the tenant is really in trouble, it’s in the landlord’s interest to terminate the lease now and beat the tenant to the bankruptcy court.”
Part of the calculus for landlords in deciding whether to grant some form of rent relief includes the tenant’s long-term business prospects, Bhisitkul says, adding that default may provide some landlords the opportunity to rid themselves of unwanted tenants.
“It depends on the property,” he says. “If it’s a shopping center that’s at an A-plus location, those landlords never have a problem filling their spaces with new tenants. In some cases, it may be an opportunity to get rid of a lease that’s under-market.”
Demise of retail?
Devereaux, the immediate past president of REBA, says she’s noticed the pace of commercial real estate transactions slowing during the pandemic.
Acknowledging that the pandemic may accelerate the trend toward a digital economy, Devereaux says consumers may also be realizing the value of shopping at traditional outlets, grocery stores in particular.
“I have friends who have complained about the [food] shopping delivery services because they don’t get exactly what they want,” Devereaux says. “In the beginning, [online shopping] was OK because it was safe, but as this pandemic winds on, I think people are more apt to want to go back [to the store] to buy what they want versus getting what somebody else selects for them.”
Devereaux, who advises developers on financing as part of her practice, says she has seen a slowdown in lending activity during the pandemic.
“Banks are worried about the loans that they have on the books today as well as what might happen in the next six months,” she says. “They’re a little gun shy.”
Boston lawyer Daniel J. Bailey, who focuses his practice on the redevelopment of commercial property, says lenders are requiring more equity when providing financing for a project.
“With the COVID crisis, the lending [environment] has certainly changed,” Bailey says, adding that the pandemic has had an even more direct impact on his practice.
“I do a lot of mixed-use work,” Bailey says. “Any prospect of doing any sort of new build — restaurant or retail — is nonexistent. I had a couple of retail deals that died in March and probably aren’t coming back.”
In the Boston market, Devereaux says it’s notable that developer Millennium Partners recently scaled back its $1.3 billion Winthrop Square project due to the loss of financing at the beginning of the pandemic. Changes to the project included making planned apartment space into condominiums. She says she won’t be surprised to see other developers scale back their plans in light of the changing economic environment.
“That’s the tip of the iceberg,” Devereaux says. “You are going to be seeing more project changes.”
But Bailey says he has had success moving some of his clients’ projects forward by conducting virtual Zoom meetings with a number of municipal zoning boards.
“The hard part is presenting plans and charts,” Bailey says. “While those can be put up on the shared screen, it’s just not the same as having full-scale drawings.”
Office space for rent?
According to Devereaux, one positive to come out of the COVID-19 crisis is that laboratory space, which had already been in high demand, has become even more attractive because of the increased demand for medical research.
On the other hand, the pandemic has raised the issue of whether tenants may reevaluate their office space needs going forward after having success with employees working from home.
Bhisitkul says that issue has become a hot topic of conversation among brokers who do downtown Boston office leasing.
“Office tenants tend to be businesses that lend themselves to remote operations,” Bhisitkul says. “Unlike retail where you need people to physically be in place to operate, law firms, insurance companies and financial services companies can still operate by having people work remotely.”
Bloom says before the pandemic the office market was already roiled by the phenomenon of real estate companies such as WeWork that provide shared workspaces under licensing agreements. According to Bloom, social distancing requirements made the WeWork model of packing together employees from multiple employers into a shared workspace impracticable.
“That was one of the hot new trends in the commercial office sector,” Bloom says. “Now that business may be dying because of COVID.”
Because most office leases are for five years, it remains to be seen whether there will be a fundamental shift in the market, Bhisitkul says.
“What will tenants do [when those leases expire]? Will they re-up for the same office space for the same terms? Or are they going to go out into the market and downsize their office spaces? It’s too early to tell,” he says.