Some associations are frustrated at still having to pay for office space while the COVID-19 pandemic keeps employees at home. A commercial real estate expert suggests organizations look at their lease terms, consider their options, and work with the landlord to help mitigate the financial strain.
While most states are in some phase of reopening after COVID-19 shutdowns, many associations have yet to return employees to the office. Unfortunately, those same associations have leases that require them to continue to pay for space they can’t occupy. If that’s the position you are in, Mindy Saffer, LEED AP, managing principal at commercial real estate firm Cresa, has some advice.
“Everyone is probably feeling very frustrated,” Saffer said at a recent ASAE Finance and Business Operations Professionals Advisory Council-produced webinar, “What to Consider as You Plan to Re-Open Your Association” (member login required). “We keep paying our rent every month, and it’s been several months since we’ve used our space, and it may be several months more before we use it [again].”
Saffer said the frustration is as real as the cashflow problems that come with paying for space you can’t use. I spoke with Saffer after the webinar to talk details about some of the strategies associations should consider.
“First, they need to find out what exit strategy their lease has,” Saffer said. “Terminating the lease is something that can be exercised, [but] not every lease has a termination right.”
Organizations with significant time left on a lease can ask for a rent deferral, but doing that might require extending the lease. Another strategy is a security deposit burndown. For associations that paid a high deposit, the landlord would pull rent payments from that. However, Saffer said the tenant would have to pay back that security deposit in the future.
Depending on the type of lease, tenants can seek a break on rent costs based on the operating expense savings the landlord is accruing by not having people in the building—such as reduced janitorial and electrical costs. “Work with the landlord to try to figure out how to restructure the lease,” Saffer said. “Landlords are very flexible.”
An association can also consider subleasing its current space. According to Saffer, organizations shouldn’t assume everyone in the market shares their desire to leave it. “There are those who are saying, ‘My lease is going to expire, and I can pick up sublease space for really cheap,’” she said. “There are always going to be people looking. They may go from 40,000 square feet to 15,000, but they’re still looking for space.”
If you’ve got just a few months left on your lease, you’re in a good position. “If you don’t have that much time left, there are landlords that are willing to buy out your lease,” Saffer said. “They would rather buy out the lease and get in someone who wants to be there.”
If a buyout isn’t in the cards for short-term leaseholders, don’t renew. “There’s no reason to re-sign,” Saffer said. “But you have to prepare to not have space.”
While online groups suggest many organizations will go completely virtual, Saffer hasn’t found that to be the case. “More are not looking at 100 percent remote,” she said. “They are looking at, ‘How do I create a flexible work environment for my employees so we have whatever they need? If they are going to come to the office, we need to make sure the office space is built out and provides them maximum ability to do their jobs.’ It’s not just a one-size-fits-all. It takes an analysis of what our current position is.”
No matter what an association decides in terms of office space, now is a good time to consider their future path.
“It’s an important time to be rethinking our real estate,” Saffer said. “We’ve learned a lot during COVID. We’ve learned that our employees can work from home, that our members can meet virtually, that our board can be productive virtually. Let’s take all of this that we’ve learned and build better solutions.”
How is your association dealing with leasing concerns during the pandemic? Share in the comments.