Howard Greenberg: The future of Westchester’s commercial real estate market

The word unprecedented has been used an unprecedented number of times recently, but it is the most accurate word we have to describe what has happened to our world.

At some point in the foreseeable future, we will begin to move toward a new normal. What will that look like in Westchester”™s real estate market? Here are my initial thoughts.

FIRST THINGS FIRST

When the stay-at-home orders end, the first priority of businesses will be to get back to some sort of normal work. They need to assess where their business is, to understand cash on hand and projected cash flow. They need to project what volume of business they anticipate for the next quarter, six months, etc., and to assess what workforce and materials they will need to achieve that volume.

Many companies have furloughed employees. Which of their employees will they bring back and when?

How will they deal with debt they have accumulated during the stay-at-home period? What will their supply chain issues be?

These will be the first and most difficult issues they will face and will occupy their minds and time when they can reopen and get back to business.

Insurance brokers, attorneys, construction companies and other businesses and professions will have to prioritize work backlogs.

There will be a crush on courts, building departments and other governmental and private institutions as they begin to deal with their backlogs and new items, as claims, litigation, etc. start to flood in, all starting essentially on the “back to work” date.

WHO IS PAYING THE RENT?

Landlords are dealing with many tenant requests for rent relief. As they did during the Great Recession, they are taking them on a case-by-case basis. There are businesses that are totally shut down (including retail, restaurants and gyms) that may never go back into business.

Other businesses continued to function during the pandemic but have had restrictions.

My law firm clients who defend insurance companies have new cases and claims coming in, but the courts are closed. So, the highly compensated litigation attorneys literally cannot work and cannot bill for their time. This segment of the law profession will be extremely busy after the courts reopen. But for now, they are not functioning at full capacity.

Every business is trying to conserve cash, so collections have surely slowed.

Landlords are taking the position that leases are still in full force and effect and that rent is due. They must pay their mortgages, real estate taxes and the costs of operating their buildings, even if no one is in them. Office buildings are not locked. Tenants still have access with their card keys. If landlords did lock the buildings, they could be liable for lawsuits for constructive eviction. They cannot shut off the HVAC systems. If they do, they risk formation of mold or other issues that would be costly to resolve. So, their expenses are not going down very much.

In their initial responses to tenant requests for rent relief or deferral, the landlords are including information on the various government programs that tenants can and should take advantage of to get capital to pay their rent, payrolls and other expenses. Landlords want to make sure everyone is feeling the pain if they must grant some kind of rent relief or deferral to tenants that are in dire straits. They want to make sure the business owners have laid people off, applied for all applicable loans, taken pay cuts themselves, etc., before they reach into their pockets to bail them out. The impact of the government stimulus programs has yet to be felt, as loans have not yet been approved and cash has not yet flowed to businesses.

There has been little written about the impact of building owners not paying their mortgages and real estate taxes. How will the lending community or the federal government deal with that?

There will be landlords who will default on mortgages due to the pandemic and the interruption of rents. Either they will be able to make deals with their lenders or there will be foreclosures. I have seen large real estate funds being raised to take advantage of this scenario to buy quality properties at below-market prices, much as some did during the Great Recession.

WHAT WILL HAPPEN TO OFFICES?

I still believe that offices will be important, and that the world will not automatically default to a fully work-from-home environment.

When the business environment is stable, I am sure companies will debrief their management and employees about their feelings regarding working from home and talk about how important it will be in the future. But employees need to be managed. Important ideas emerge from person-to-person contact in offices. Teams need to have in-person meetings. Those businesses and professions that deal with paper flow work much more efficiently in an office environment.

I have seen several articles that address how offices may change as a result of this pandemic. Suggestions include:

Ӣ Going to four-day workweeks to reduce density in offices.

Ӣ Increased office and common area cleaning.

Ӣ Reducing density of workstations (or raising their height to place physical barriers between densely packed workers).

Ӣ Reducing the number of seats in meeting/conference rooms to increase the distance between people.

Ӣ Installing hands-free controls for doors, landline phones and other touchpoints.

Ӣ Clean-desk policies so that furniture can be sanitized as part of normal cleaning.

Ӣ Increasing humidity and fresh air circulation to reduce infection transmission.

SEVERE ENVIRONMENT FOR RETAIL

It is generally agreed within the real estate industry that warehouse properties will be hurt the least of any asset class by this pandemic. Supply chains are ever more important as essential stores need to be stocked and people at home are ordering increasing volumes of merchandise from online retailers.

The impact on retail tenants and landlords will be the most severe.

There will be many restaurants and other small businesses that will not survive. As difficult as the retail environment was before the pandemic began, I believe there will be an unprecedented amount of vacancies of retail spaces and a real need to repurpose them to other uses when this is all done.

Hotels will also have a very long road back. Travel will take a long time to come back and it will take some time for people to be comfortable holding large events, both business and personal. Zoom and other video meeting platforms will occupy a larger place in both the business and personal worlds going forward.

INCREASED VACANCIES

There will be increased vacancies in office buildings. Tenants whose leases are expiring soon may take short-term extensions to figure out what their needs will be, and most landlords will accommodate them as there will not be many tenants in the market to backfill empty spaces.

Rental rates were rising in Westchester before the pandemic. They will likely reverse course due to increased supply and reduced demand by businesses that are not yet sure how they, and the economy, will recover.

Tenants whose leases are expiring and need to expand will be in great demand. Landlords will need to go to their banks for capital to pay for tenant fit-outs and other transaction expenses. General leasing velocity will take a long while to come back to where it was.

Westchester had just turned the corner toward being a healthy market due to years of building demolitions and repurposings to other uses. The pandemic has stalled that process.

COMMUNICATE

There is a personal aspect to the rent forbearance requests and negotiations.

Some tenants have close relationships with their landlords. Others do not. But the personal communications to resolve these issues will mean a lot.

Landlords (whether they are small private owners, large partnerships or publicly traded REITs) must understand tenants”™ varied business issues. Tenants must understand landlords”™ issues.

There will have to be a lot of new thinking on everyone”™s part to help the economy and the real estate market recover from this shutdown. As conditions have changed day to day during the pandemic, they will continue to change rapidly as the economy reopens.

Howard E. Greenberg is the president of Howard Properties Ltd. He has represented tenants and landlords for 34 years in Westchester County, throughout the U.S. and Europe. He can be reached at 914-997-0300 or howard@howprop.com.