Confronting the challenges together

As the economy reopens and the use of commercial buildings and spaces face change, commercial landlords and tenants need to work together

COMMERCIAL LANDORDS AND their tenants will need to collaborate and work more like a team to find solutions to the challenges they face as the economy reopens.

The mentality that they don’t need each other doesn’t fit in the current context, says Daniel LaBossière, assistant vice president, business development with BDC.

Each party needs to know what the other’s experience has been during the Covid-19 pandemic and shutdown, he says. And that means talking.

Collaborating to find solutions

“If you’re talking and taking the time to understand each other’s challenges, you’re more likely to find a collaborative solution,” says LaBossière.

“If communication between parties is absent or adversarial, it becomes very tough to find a long-term sustainable solution or to resolve the issue.”

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Both parties face hurdles. Landlords don’t want to lose their tenants and have vacant units, while tenants want to ramp up their businesses back to pre-Covid levels, he says.

Here are three issues that landlords and tenants can work on together to find solutions:

1. Rent deferrals and leases

Tenants should refamiliarize themselves with the terms in their lease agreement before starting discussions about any kind of lease amendment such as rent deferral that will need to be paid back, LaBossière notes.

This will prepare a tenant for the discussion and may help with finding creative solutions, he says. Landlords likely will be more responsive if their own situation isn’t critical and if their mortgage holder is flexible.

LaBossière says it’s important to remember that a lease is a legal contract and terminating it may be difficult. And both parties need to realize that replacing a tenant can’t be done quickly.

“Be more collaborative and take the approach that you are in it together,” he says. “Open communication brings more creativity.”

LaBossière says government rental subsidy programs can encourage property owners to offer rent reductions, which could help if they want to keep a tenant.

2. Changing usage

When the pandemic shuttered businesses for several months, consumers adapted to ordering more goods and services online.

“All that is going to be difficult for them to bring back those revenues to what they were before Covid,” LaBossière says. “Now you have to convince those people to shop physically in stores.”

For shopping centres, landlords will need to recreate a destination shopping experience. “People are still very wary about going into large public places.”

Landlords are going to need to be proactive in reconfiguring their lease space and be mindful that some tenants will need less space while others may need more for things like storage.

Some retailers might find that their online activity has increased to the point that a large space for products can be drastically reduced, or the space can be used for warehousing and shipping. They might not be able to afford a large amount of square footage.

Or, they could have showrooms in malls or other commercial spaces where people see goods, such as furniture, or try something on, such as shoes, and then order online, LaBossière says. This will also decrease the amount of commercial space needed.

3. Effects of working from home

Office buildings could end up with multiple tenants instead of a handful of major tenants anchoring a building due to the acceptance of more people working from home.

“They’ll alternate between when they go in and out of the office. Office spaces won’t be able to accommodate everybody at the same time,’’ he says.

Office space could be used for training and specific group meetings. Workstations will be flexible in their location and there will be cleaning protocols after they are used, says LaBossière.

“The days of having everybody in the office will no longer be the norm and it will be a very reduced workspace setting,” he says.

“We could see office buildings trending towards a more mixed-use model where office, residential units and different types of businesses are in the same building.”

Landlords are going to have to put more effort into attracting tenants into a building that has multiple uses, LaBossière adds.

Is there a possible silver lining?

There could be buying opportunities for those operating viable businesses and also leasing opportunities for tenants seeking to renew their leases. There could also be an increase in the realty supply in the market, which could lower realty market prices and lower the leasing cost per square foot.

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But LaBossière cautions there are potential risks for those investing and supplying commercial premises during and following this pandemic.

“I believe for landlords buying investment properties like office space and strip malls there is a lot of risk and a lot of unknowns on the quality of the tenants and how they were affected by the pandemic.” Article courtesy of BDC