2555 Kuser Road in Hamilton, New Jersey
Sunrise, FL; November 30, 2020 – Following a record third quarter in leasing and sales activity for his firm, President Ken Morris, SIOR, RPA, of Morris Southeast Group announced a recently completed lease transaction on behalf of his longtime client—The Legacy Companies—for 78,585 square feet at 2555 Kuser Road in Hamilton, New Jersey.
The owner of the Hamilton property is Scannell Properties. Terms of the lease were not disclosed. Mike Witco, a principal with Chilmark Real Estate Services LLC based in Morristown, NJ, provided local market knowledge and participated in the lease with Morris in representing The Legacy Companies.
This was the third distribution center transaction Morris SE has completed for Legacy in 2020. Earlier this year, Morris represented The Legacy Companies in a 110,000-square-foot industrial property lease in Reno, NV (also owned by Scannell Properties). The firm also executed a renewal of 61,137 square feet plus 8,700 square feet of expansion space at a Weston, FL property on behalf of Legacy in a building owned by a U.S. subsidiary of UBS.
Based in Weston, FL, The Legacy Companies is a leading foodservice manufacturer and consumer appliance company that sells a host of brands and products, including refrigerators, freezers, ranges, microwave ovens, wine refrigerators, ice makers, water dispensers, laundry appliances, and much more.
Learn more at https://www.thelegacycompanies.com/.
For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris Southeast Group is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties. Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.
We’re learning more every day about the novel coronavirus that’s wreaking havoc on our society, giving us additional insight on how to protect ourselves.
For example, it’s now common knowledge that the virus spreads person-to-person through close contact, but evidence also suggests that COVID-19 can remain airborne for hours in indoor spaces. It can even travel through HVAC systems. As a result, the longer people stay in an enclosed environment, the greater the potential transmission risk.
Indoor airborne transmission is causing problems in a variety of industries. Bars, restaurants, and retail establishments are riskier environments for staff and customers, while some office workers also feel unsafe returning to the job site.
The good news in South Florida is that we’re well-positioned to take advantage of the mild winter weather and can make better use of outdoor spaces than pretty much any other location in the country.
The restaurant industry is an excellent example of how to use outdoor space to keep a business open. The more fortunate restaurants have patios, and others are developing them, allowing patrons to stay outdoors while enjoying food and drinks.
One drawback is that patios can get crowded, with tables next to each other allowing for transmission to occur between diners.
We’re seeing some businesses create proactive solutions to this issue by expanding their outdoor dining spaces. While extending a patio often relies on cities making exceptions or changing their laws, municipalities worldwide are doing just that to encourage a safer environment for restaurant-goers.
Open-air shopping centers also allow for a safer experience for consumers with fewer restrictions on the number of people who can be in an area at one time. This additional flexibility assists businesses as they attempt to stay afloat during this difficult time.
New York City is taking the outdoor shopping experience to a new level by allowing retail shops to extend into outdoor spaces. As the holidays approach, as many as 40,000 small businesses could begin using nearby outdoor areas.
The weather in South Florida is clearly better than winter in New York, so it makes sense for businesses and commercial property owners to begin exploring the concept of open storefronts to allow shoppers to socially distance.
It isn’t just retail spaces that can use the outdoors to their advantage in South Florida, as offices can also shift certain meetings and tasks outside.
The easiest way to accomplish this is by using courtyards and nearby parks when face-to-face interaction is necessary. This trend isn’t new, either, as 79% of new construction in Manhattan since 2010 features outdoor space.
If your building has some outdoor space, like a usable rooftop or a place to build a terrace, property owners can consider renovating to create a brand-new amenity for tenants. Even though COVID-19 likely won’t last forever, the addition of outdoor space can attract renters well into the future.
Staying outdoors isn’t always feasible, as there are situations where the weather won’t cooperate or people have sensitive information that they aren’t comfortable discussing in a public setting. There’s also the fact that businesses are paying for these buildings, so they’ll want to use them.
That’s fair, and there are ways to make interior offices, stores, and restaurants safer for all who visit. Of course, cleaning and sanitizing help reduce the spread of the virus, but what about the air?
Encouraging employees and customers to maintain distance and using physical shields are part of the equation. However, as mentioned earlier, aerosols can linger in the air for hours and spread through HVAC systems.
One solution is to add ultraviolet lights to the interior of the building’s ductwork. In doing so, 99.9% of seasonal viruses will die before circulating through the building, keeping people safer from this type of transmission.
Morris Southeast Group is on top of the newest retail, dining, and office space trends, ensuring that you can make the necessary adjustments to thrive in the current business landscape. A little flexibility can go a long way, and maximizing outdoor space usage, can be a novel way to attract consumers and tenants while keeping them safer.
Call us at 954.474.1776 to learn how Morris Southeast Group can assist you. You can also reach out to Ken Morris directly at 954.240.4400 or email@example.com.
COVID-19 is causing challenges in all walks of life, as everything from going to the grocery store to interacting with friends is different than it was this time last year. And as coronavirus cases increase across the country in a winter wave, we could see even more employees avoiding the commute and working from home.
But how long will it last?
There are some promising vaccines in the works. A collaborative effort between Pfizer and BioNTech and a shot produced by Moderna show excellent preliminary results, and the vaccines could start to be available before the end of the year.
However, there are significant supply limitations and logistical hurdles to overcome before seeing a roll-out to the masses. The pandemic is spiking again, and it’s going to get worse before it gets better. Still, we could see a return to “normalcy” as soon as the second quarter of 2021, with many people returning to the office before then.
Many workers want to return to the office, and offices will once again become a more in-demand commodity, albeit in a slightly different form.
Here’s one look at what we might expect regarding remote work, in-person work, and office space in the coming months.
Far more people are working from home than in pre-pandemic days, of course. A report by the Federal Reserve Bank of Dallas suggests that close to 50% of employees were working from home at least part of the time by August 2020.
The number of daily commuters has been increasing monthly since the first lockdowns, as we get more used to the new normal. However, it’s still nowhere near February’s numbers, when over 73% of employees commuted daily.
The average U.S. worker is now staying home 5.8 days per month, up from 2.4 before the pandemic. And those who occasionally telecommuted before COVID-19 are working from home for about 11.9 days each month.
What do these numbers mean?
In short, more people are working from home, and there is reason to believe that the trend will continue into 2021. There’s also a chance that the remote work revolution lasts—in part—indefinitely.
According to Gallup’s research, those who work from home for between one and four days each week are the most engaged and produce the best results.
Will managers notice this data and make changes to meet employee expectations? Maybe, which will lead to a durable shift in the way we use office space.
Those who own commercial property might see these numbers and worry about the future of their investments. Still, there will always be a need for office space, although we will likely see many companies seeking different things.
For example, many businesses may continue to allow employees to work from home on projects that don’t require collaboration. If a worker would otherwise be sitting in a cubicle or personal office without meeting with anyone, that’s a job that the individual could probably do remotely.
At the same time, there are many situations where face-to-face collaboration makes the process much easier. Some companies could begin looking for offices with large floor plans that make working together while socially distancing more accessible.
Class A office space will also focus more on specific amenities. KBS CEO Chuck Schreiber described these new demands well:
Now, we have the added element of preventing viral transmission, which is being achieved through changing office layouts; increased sanitation; installing barriers like plexiglass between workstations; adding antibacterial surfaces, like copper; erecting signage aimed at reducing crowding; and installing touchless technology to operate equipment in common areas, like elevators and appliances. This additional layer is expected to be a part of office development and operation for the foreseeable future.
Overall, companies will be looking to reduce the chance of airborne and surface COVID transmission in their office spaces in the immediate future. But we could see that trend continue to future-proof structures against novel illnesses in the coming years.
Companies will return to the offices, but they’ll want different things from landlords than before COVID-19. This pandemic has made it evident that we have to work to curb the spread of illness inside the workforce, and businesses will want to keep these practices up to reduce employee sick days and promote good health.
It’ll be up to property owners to adapt to the changing workspace by providing these organizations with the new elements they look for in class A office space.
Morris Southeast Group can assist as you evaluate adapting your office buildings to the new normal. We’ll provide solid advice to lower vacancy rates and attract businesses to your facilities while keeping in mind the capital availability to execute changes and the potential ROI. And if you are looking to lease space, we can find facilities that meet your workforce’s safety and volume needs—remote, in-person, or a likely mix of both.
Call us at 954.474.1776. You can also reach out directly to Ken Morris by phone at 954.240.4400 or via email at firstname.lastname@example.org.
Sunrise, FL; October 26, 2020 – In the teeth of the pandemic, President Ken Morris, SIOR, RPA, of Morris Southeast Group announced one of the best quarters in history for his South Florida commercial real estate services business. In the 3rd quarter this year, the firm completed 151,753 square feet in leases and was awarded new leasing and management assignments totaling an additional 220,000 square feet.
“To say it has been an unbelievable year would be an understatement; however, business goes on. The companies and people we were grateful to serve in recent months represent a mix of essential services and professional services that companies, corporations, and individuals need. It is a strange time to report a record quarter for our practice, yet we are certainly pleased with the results,” said Ken Morris, SIOR.
Recently closed transactions include:
The firm has been hired to manage and lease the Airport Executive Towers located at the
Southwest edge of Miami International Airport, comprised of two office buildings consisting of approximately 170,000 square feet. The Morris team is already hard at work replacing the entire HVAC system in Tower I and repositioning the properties for the new market conditions.
The firm has been hired by BHT Partners to lease the Medical Services Building located at 4101 NW 4th Street in Plantation that consists of 48,560 square feet. The building is located on the campus of Plantation General Hospital.
In addition to the firm’s deal-making successes during the quarter, Adriana Lilly was promoted to Vice President of Morris Southeast Group, Maria Alicia Wild has joined Morris SE as the Tenant Services Coordinator in Miami at the Airport Executive Towers, and Daphne Sullivan has joined the team as Marketing Coordinator.
Ms. Lilly joined the firm in July 2016, shortly after securing her license to sell and lease real estate, after years of working in the hospitality, health, and fitness industries in South Florida. She has been instrumental in growing Morris Southeast Group by sourcing, serving, and closing real estate transactions on behalf of tenants and landlords in Broward and Miami-Dade counties.
For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris Southeast Group is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties.
Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.
Technology makes many aspects of residential real estate more accessible, as anyone can go online, select a property, and begin researching. From there, interested parties can schedule tours, check market comps, or even make offers before ever speaking with a person.
Virtual tours make it possible to walk through a property without actually visiting, adding another layer of insight for prospective buyers. The process has become more efficient, and over 44% of home buyers begin their search online.
We’re now seeing similar technology make its way into commercial real estate (CRE), as investors and business owners can evaluate and even purchase or lease assets with minimal human contact.
This has its limitations particular to CRE, however. Online showings and virtual reality tours don’t supply comprehensive market insights or analyze all crucial available data before purchasing. Tech also doesn’t craft a CRE strategy that accounts for a client’s current and prospective needs. This missing information provides immense value—and many buyers will be left without it when shopping exclusively online.
Here are some of the effects technology is having on commercial and residential real estate and where these advances have benefits and limitations.
Online property shopping has become a stable of the residential market, and many websites provide the opportunity to look for a home online. The best known, Zillow, has countless options for home buyers and allows them to get much of the information they require in one place.
At its core, Zillow allows you to search through available residential real estate listings in your area. You can also look at pictures, take virtual tours, and connect with a real estate agent through the platform.
More in-depth features include market reports, housing data, and inventory information, with much of this information presented as easy-to-read graphs. In short, Zillow provides a great deal of knowledge throughout the home-buying process. However, it can’t provide you with real, local insight, such as hidden trends or intangible quality-of-life aspects about a neighborhood; only an excellent real estate agent or more profound research by the buyer can do that.
Redfin, RealScout, Realtor.com, and OpenDoor are similar services that list houses and connect buyers with agents. Most real estate companies and agents have websites with their listings and other information, as well. These websites provide value through the ease with which sellers can list, and the easy access and information they give buyers.
Another innovative residential feature worth mentioning is that OpenDoor and Zillow will buy a seller’s home and then list it on the market. Buyers are purchasing directly from these platforms, in some cases.
Keep in mind that all of these services use local real estate agents and brokers to facilitate the deals. However, in the future, websites like Zillow and OpenDoor will likely begin making more direct sales online, adding an entirely new dynamic to the process.
Technology’s influence on residential real estate is evident, and it is becoming more prevalent in the commercial real estate world.
The most talked-about new platform is Ten-X. It links brokers, buyers, and sellers in the CRE industry, making it easier for these properties to change hands. This end-to-end platform can already facilitate an entire sales process, and it dominates the market—Ten-X is behind 90% of all online commercial real estate transactions.
There are also auctions on the platform, so sellers or brokers will set a starting bid, and interested parties can attempt to purchase it with the highest offer getting the property.
Currently, brokers are still a huge part of the process at Ten-X, at least when it comes to selling. However, buyers can place bids or agree to make purchases directly through the platform. This technology is sure to alter the CRE landscape even further as it becomes more common.
It’s easy to see why investors are considering technology like Ten-X, as it provides a quick look at properties all over the country without having to leave the office. This convenience makes the basics of evaluating commercial real estate more accessible than ever before.
But there is a drawback. Online CRE shopping could lead investors to make snap decisions without considering underlying market conditions and vital data that can make or break a deal’s profitability.
When it comes to finding information relevant to your objectives, there’s no substitute for speaking with a local, human expert on the subject. An algorithm or virtual real estate agent can provide you with data. But figuring out what the numbers really mean—or even knowing which data are crucial for your situation—requires a deeper dive.
The same can be said for commercial tenants, as tech seeks to take on some of the responsibilities of a tenant rep advisor. But no platform will help negotiate a deal, find the exact property to suit a business’s needs, or focus on your interests and understand your situation like an advisor does. And in-depth local knowledge is often the difference between a successful contract and a regretful decision.
Thus, some aspects of this CRE tech trend may leave commercial tenants and investors at a disadvantage.
Morris Southeast Group is excited about this technology and how it will provide CRE clients with greater knowledge and access. And we are already using much of it! But where we—and other highly-qualified advisors—shine is in helping commercial real estate investors and tenants conduct due diligence before signing any agreement.
Our team will gather all relevant data, organize inspections, go over the legal contracts, assess your financial goals to ensure the deal is right, “future-proof” decisions, and quite a bit more. And having a SIOR designee advisor on your side is an immensely valuable asset in many transactions.
To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or email@example.com.
Although the struggles of shopping malls and big-box stores aren’t new, as eCommerce has been cutting into their sales for years, the COVID-19 pandemic has been the final straw for many retailers.
Malls are struggling after having their anchor stores go out of business without other retailers to pick up the slack. Even big-name brands like Men’s Wearhouse, J.C. Penney, and J. Crew have filed for bankruptcy since the beginning of the pandemic.
Simultaneously, discount chains like Target, Wal-Mart, and Home Depot are thriving, as they provide the necessities at lower prices than many other retailers can match.
But what if a retail property doesn’t have a Wal-Mart or Target to help keep it afloat?
Developers and owners have to repurpose the space for another use. And the good news is that there are some emerging options to consider once we’re through the current crisis.
Traditional retail stores closing isn’t a new trend. It’s harder for certain companies to survive in a brick-and-mortar environment when online retailers can offer more selection and an ultra-convenient shopping experience. Many online shops also have significantly less overhead, allowing them to reduce their prices.
These changes in shopping patterns have led to various big-box spaces and malls closing their doors. But developers are turning some of these spaces into completely different entities.
For example, the Under Armour headquarters in Baltimore, Maryland, sits on a 58-acre site once home to a Sam’s Club and several other businesses.
Other reused big-box store examples include:
There are various examples of malls coming back with a new purpose, too:
There are numerous ways to repurpose former big-box stores and empty shopping malls, but the strategy might change a bit because of COVID-19.
We’re seeing less demand for corporate headquarters and other establishments that gather mass amounts of people because of the pandemic. With so much of the workforce currently operating remotely, there’s less need for larger office buildings. And some existing recreational facilities sit empty or at reduced capacity because people can’t be within six feet of each other.
So, what is the solution to these empty buildings?
It takes significant adaptation, but there are examples of commercial real estate owners repurposing empty malls, big-box stores, and other retail shops into indoor farms.
One such location is AeroFarms in Newark, New Jersey, which has indoor farms in buildings that were once steel mills, nightclubs, schools, and laser tag arenas. Today, AeroFarms operates the largest indoor vertical farm globally, producing food for people throughout the Newark area.
Another indoor farm, Wilder Fields, is currently under construction in a former Target store in Calumet City, Illinois. Once completed, it will have 24 separate rooms over its 135,000-square-foot space and produce enough crops to distribute to supermarkets and select restaurants in the area.
Medical marijuana is another crop that can thrive indoors, as is the case with a former JC Penney store at Copper Country Mall in Houghton, Michigan. The business plans to act as a dispensary that grows its products on-site in the abandoned store.
It’s also possible to turn these stores into fish farms, which are advantageous because their waste can feed other crops within the facility.
Central Detroit Christian Farm and Fishery took over a retail location from a food market and now operates an indoor fish farm featuring tilapia. The irrigation system pumps wastewater from the fish tanks to fertilize the on-site crops, creating an eco-friendly food source in a space otherwise sitting empty.
These examples of property owners reusing empty commercial buildings in creative ways provide hope for the post-pandemic world. The world is changing, but large spaces remain useful and can benefit society beyond their original purpose.
As we come out of the COVID-19 recession, some CRE sectors and buildings will fare worse than others—and various empty buildings won’t have enough tenants. Commercial real estate owners and developers will have to get creative if they wish to fill specific structures, especially as the virus’s course remains unclear.
If you’re struggling to decide on the next step for your retail property, Morris Southeast Group can help. We have our finger on the pulse of the commercial real estate environment and can assist as you adapt to the changing world.
Give us a call at 954.474.1776 for expert guidance. You can also reach Ken Morris directly by phone at 954.240.4400 or via email at firstname.lastname@example.org.
At the height of lockdowns and quarantines, it quickly became apparent that what was considered essential expanded far beyond first responders and hospital staff. Truck drivers working long shifts to get goods to supermarkets, and the employees stocking shelves with those products quickly rose to the top.
Another business that quietly made the essential list was medical marijuana dispensaries. In many states where medical marijuana is legal, including Florida, the dispensaries were allowed to remain open through the shutdown.
In fact, many dispensaries expanded their operations to get products to regular and new clients, many of whom were diagnosed with PTSD and anxiety linked to the stay-at-home orders, via delivery services and drive-thru windows.
Getting to that point, though, was no easy task, primarily because the cannabis business operates in a grey zone. Although some states have legalized medical marijuana, the substance remains a controlled one on the federal level—and how stringent the feds follow that law depends greatly on who happens to be inhabiting the White House and who is Attorney General.
While there are indications in many regions around the country that the medical marijuana business is steering property values upward, there’s a fair share of risks and considerations for landlords looking to lease space to dispensaries and growers.
For a CRE owner to get involved in the marijuana business, it’s imperative to make sure that all T’s are crossed, and I’s are dotted.
One of the first issues is if the owner is carrying a mortgage. If so, it’s imperative to review if there is a clause in the terms of the loan that stipulates that the borrower, the property, and its use will comply with “all applicable laws, rules, and regulations.”
Because there is a disparity between how marijuana is viewed at the federal and state levels, and because federal law technically preempts state law, many banks are less likely to allow a borrower to lease to any party involved in the marijuana business. The cannabis-related leasing deal may be dead before it is even on the table.
Similarly, the property owner may have to seek alternative funding sources for the property as long as the lease with the marijuana business exists.
Even without a mortgage, there are some additional issues, outlined by the American Bar Association, that the landlord should consider:
If a property owner is interested in leasing to a marijuana-related business, there are a few clauses to consider within the lease terms. While many of these may seem obvious, putting them in writing indicates the owner has taken steps to ensure the lease is following the law and eliminating any grey areas or misinterpretations of the landlord’s position.
Although the road to legalized medical marijuana in Florida has been a long and rocky one, its presence is seen as a boom for the commercial real estate market. Still, there are key areas of concern that all parties must examine before entering any leasing agreement. The pros at Morris Southeast Group can help both landlords and tenants negotiate the legal twists and turns.
To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at email@example.com.
Downtown Miami has one of the planet’s most spectacular coastlines, featuring buildings that seemingly jet from the ocean as you approach from the air or water.
This beautiful location comes with challenges, however. Namely, the impacts of climate change, which may be causing more frequent and severe hurricanes and leading to rising sea levels, are paramount.
The U.S. Army Corps of Engineers has a $4.6 billion plan to build a 10 to 13-foot-high wall along Biscayne Boulevard to reduce storm damage. In theory, these walls could save the city about $2 billion in damage every year—but there’s more to the discussion than protecting the city.
In short, yes, walls could be an effective way of reducing storm damage in downtown Miami. However, there is some dispute over where the Army should build the walls and whether some neighborhoods would still find themselves underwater.
The current plan calls for constructing moveable storm surge barriers on the Biscayne Canal, Little River, Miami River, and in the Edgewater neighborhood. These barriers would have gates that close as a hurricane approaches, preventing surges from overflowing the rivers and flooding low-lying communities.
The walls would extend north and south of these barriers, providing even more protection for the surrounding neighborhoods. Some buildings would remain outside of the walls, though, leaving them in a tough spot during an incoming storm.
It’s also worth noting that these measures wouldn’t protect the city from rising sea levels. That’s because Miami is built on porous rocks that would let water seep through, even with the walls in place.
To address rising sea-level concerns, Miami intends to elevate roughly 10,000 properties and flood-proof 7,000 more. While this is a good start, that investment would still leave thousands of buildings exposed.
Investors and developers will want to keep a steady eye on this situation. If this proposal ends up going ahead, properties with wall protection will likely retain more value than the buildings that sit outside the walls and remain exposed to storm surges.
Property owners around Miami aren’t unanimously in favor of the wall-building strategy because of how it would change the Magic City.
First, there are the aesthetics of the change. Ten-foot walls in the downtown area would eliminate ocean views for some buildings, potentially hurting their value. And from a functional standpoint, the walls would cut off boat traffic from sections of downtown Miami and could make the Baywalk obsolete.
These factors are definitely worth considering, of course. But if Miami ends up underwater, the issues will be moot.
Once the official proposal is released, investors will have the opportunity to see the re-imagined downtown Miami, which will provide a clearer view of what the future holds.
For that reason, the Downtown Development Authority is asking Miami-Dade to consider nature-based solutions to the storm surge problem, such as restoring nearshore coral reef, building artificial islands, and growing more living shorelines.
Environmental groups, including the Everglades Coalition and Miami Waterkeeper, have seconded that idea. And other groups would like to see the Army Corps of Engineers include flood protection in more impoverished neighborhoods, rather than focusing exclusively on downtown.
There’s still a lot to be decided on this project, as the Army will work with Miami-Dade to develop a locally preferred plan. From there, the project is brought before Congress before funding is approved.
Much work remains on potential protections for the Miami shoreline. But it’s only a matter of time before we get something to stop the influx of storm surges in the downtown area.
Developers need to know that their investments are safe and that they’ll provide value moving forward, which becomes challenging when hurricanes and flooding are a persistent worry. Simultaneously, a massive wall along the coast could take away from Miami’s beauty, walkability, and appeal.
Coming up with a solution that’s effective and balances the concerns of various stakeholders will be vital.
For information on potential CRE impacts, or to learn about Morris Southeast Group’s commercial real estate investment or property management services, give us a call at 954.474.1776. You can also reach Ken Morris directly by phone at 954.240.4400 or through email at firstname.lastname@example.org.
Before the COVID-19 pandemic, it was common for tenants in “Class A” buildings to ask for significant improvements to office space as a part of their real estate lease. In essence, this practice allows companies to obtain a highly-customized office as part of their agreement.
The owners of Class A office buildings would routinely agree with these demands because it was normal and customary in the market. And for longer-term leases, the costs would be underwritten by the rent paid by the tenant.
But things have changed. There are numerous and increasing office vacancies, and some companies are debating whether they will even need office space in the future. Many businesses now ask for more flexibility and shorter-term leases, putting a strain on property owners as they look to earn a return on investment and secure financing.
The result is that in many cases, it may no longer make financial sense for commercial property owners to pay for custom office renovations and property improvements upfront. There’s simply no guarantee the tenant will stick around long enough to make it worth their while, especially if the initial lease is short-term.
Here’s some information on this situation and insight into what we can expect moving forward.
Pre-pandemic, it was customary for commercial tenants to sign 10-, seven-, and five-year leases. These terms made it easier for property owners to secure loans. And office customization was palatable because there was plenty of time for amortizing the cost of the improvements and maintaining a steady ROI.
Today, however, businesses are looking to sign one- to three-year leases or one-year extensions on their current arrangements. They don’t want to make long-term commitments because they have no idea how their business will look in one year, let alone five.
This trend causes significant follow-on effects, as lenders don’t want to provide long-term loans without long-term leases backing them. Financial institutions typically agree to five to 10-year commercial real estate mortgages when they’re supported by a rent roll with an average term—but that often isn’t possible when tenants are angling for shorter periods.
The lack of long-term tenants also creates difficulty when valuing the office space because short-term leases are fundamentally less valuable to the owner in terms of refinancing or trading the asset. In turn, property owners may opt to charge more to make up for the lack of a long-term commitment—but the increased costs could scare many companies away.
And, fundamentally, owners are also now less likely to agree to property improvements or customized offices—the chances of recouping their investment shrink dramatically.
Let’s say a doctor is looking for some office space and signs a 10-year lease with a property owner. This physician needs the office arranged in a specific way to meet with patients, and the cost to retrofit the space is $50 per square foot.
When averaging these numbers over the 10-year lease, the office’s customization will cost the landlord $5 per square foot per year. Therefore, if the doctor pays $40 per square foot, the landlord nets about $35 (though, for simplicity’s sake, we aren’t counting expenses like mortgage interest and maintenance). Since there is a 10-year period to make money on this investment, the property owner could accept these terms and be confident about the customizations.
However, when you shorten the lease period from 10 years to three, it paints a very different picture for the property owner.
Instead of spreading the cost of improvements over a decade and paying $5 per year per square foot, the shorter lease guarantees the landlord only three years to pay for the renovations. Therefore, the office customization costs $16.67 per square foot per year, leaving the property owner with a profit of only $23.33 per square foot before mortgage and maintenance expenses.
It’s easy to see how the owner could end up losing money in that situation—especially if the tenant bails after three years and the renovated space doesn’t work for other potential tenants.
The result is that landlords will likely avoid offering buildouts and customization on shorter deals. If a business wants property improvements and a short-term lease, it will most likely have to pay for them.
The problems COVID-19 has caused commercial property investors to go beyond a hesitance to customize office space; these issues also influence how lenders approach loans.
Commercial real estate loans typically have seven to 10-year terms, after which a balloon payment for the remaining balance becomes due. These loans usually have amortization periods of about 20-25 years.
Many lenders hesitate to take this type of risk because commercial real estate is currently volatile, and tenants that back the property owner’s income stream choose shorter leases. There’s no telling if a lender will get their balloon payments at the end of the loan term or if stable tenants will back refinancing—so they’re more closely evaluating applications.
This, in turn, puts pressure on the investor to only offer lease terms that make sense and show a clear profit margin. And significant customizations are likely not part of the equation.
Here are a few critical observations about how all of this may play out:
We’re in a difficult period for businesses and investors, and the uncertainty is having a significant impact on the commercial real estate industry in many ways. For a read on some other vital issues, please check out our previous blogs:
If you’re struggling with the prospect of investing in or leasing commercial property during COVID-19, call Morris Southeast Group at 954.474.1776 for expert guidance. You can also contact Ken Morris directly by calling 954.240.4400 or via email at email@example.com.
In the rush to predict how an economy crippled by COVID will look, many experts have tossed around the shapes of letters to illustrate how an economic recovery will look. There is the gradual but steady upturn of a U, a V’s immediacy, and the yo-yo effect of a W.
The newest letter to be added to the alphabet soup is K. While it assumes that everyone starts at the same point, it depicts what has taken shape since the virus reached the United States—different trajectories traveling away from each other.
K represents the differences between Wall Street and Main Street, people who can work from home and many of those who can’t, and individuals with the liquid assets to survive or thrive in a recession and those without them.
The K-model can also be applied to commercial real estate, where each sector faces its own unique challenges and opportunities. Some will move upward while others will face a greater struggle during recovery—if they recover at all.
For example, here are a few sectors seen as winners:
Sadly, COVID has had a more substantial negative impact on some sectors. These areas look to have a tougher time bouncing back to pre-pandemic levels:
When looking at the K recovery model, there’s that point where the two trajectories begin their outward journeys. It’s here that some sectors may linger for the foreseeable future before picking a definitive course.
These examples, of course, are far from exhaustive. The crucial lesson of a K-shaped recovery and its impact on CRE is that different properties will have significantly different trajectories. Investors must closely evaluate an investment’s potential in the new environment.
More than likely, the economy will recover in phases. And there may be setbacks (depending on a future surge) and lags (especially in sectors that cater to underprivileged socio-economic communities). At the same time, other factors—consumer confidence, virus positivity rate, cost-control efforts from the corporate sector, the arrival of a vaccine, and a Presidential election—are influencing not only the speed and scope of the recovery but also the exact shape of the K.
As an investor, the reality is that any rebound, regardless of the letter, will take time. Therefore, it’s essential to diligently assess investments and property improvements and choose those that make sense. A regional mall project or an office skyscraper that requires significant capital investment, for example, likely wouldn’t be wise choices.
For assistance in determining how to proceed with an investment or to find the right property for your needs, please call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at firstname.lastname@example.org.