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The Changing Workplace

The Downturn in the Restaurant Industry and Its Impact on CRE

a vacant restaurant with a for lease sign

Thousands of restaurants have closed their doors for good, but there may be CRE opportunity

Restrictions during the COVID-19 pandemic, especially bans on indoor dining, severely impacted the U.S. restaurant industry. Even areas with loose or no restrictions, like Florida, are experiencing slowdowns because of consumer hesitancy.

The result is hundreds of thousands of restaurants throughout the country permanently closing their doors. In addition, many eateries that have managed to stay in business are struggling through significant financial issues. While these closures signal trouble for the industry overall, there could be opportunities for savvy investors to capitalize on the widespread return of in-person dining.

Here’s a look at what’s happening in the restaurant industry and what we might expect to happen in the coming months.

What the numbers say

On the surface, the numbers associated with the restaurant industry might be described as “cataclysmic.” 

By early December, over 110,000 of the 778,807 restaurants in the United States had permanently shut down because of pandemic-related financial losses. That number has undoubtedly grown this year, too, with some estimates suggesting that nearly half of the country’s restaurants might never recover. In addition, the industry’s sales decreased by $240 billion from the expected levels of $899 billion in 2020.

Typically, any industry with over 14% of businesses failing in less than a year and a sales decrease of $240 billion would be a no-go for investors. However, COVID-19 has created an atypical scenario.

Recovery is coming

Of course, we all know that people all over the country didn’t just suddenly decide to stop eating at restaurants. COVID restrictions and virus-related consumer cautiousness are driving the slowdown in the industry.

However, there is light at the end of the tunnel thanks to national vaccination efforts. Nationwide, over 40% of the population had at least one vaccine dose by the end of April 2021, with about 30% of people already receiving two doses. 

Florida’s numbers are very similar to the national ones, with over 40% receiving at least one dose and 28% getting two doses already. COVID numbers are dropping with the increase in vaccine doses, too. Despite lifting its restrictions, Florida is seeing a steady decrease in positive tests as we move deeper into the spring. 

As more people get vaccinated, the populace will likely revert to normal as quickly as possible, with dining out at restaurants rapidly returning toward pre-pandemic levels.

How recovery could influence restaurants and CRE

Assuming we see vaccination rates continue to increase and the virus retreat to endemic levels, the restaurant industry should see a significant boom. But will that boom hit pre-pandemic levels? And if it does, will there be enough supply to keep up with demand?

The country has lost at least 14% of its restaurants. One might argue that there were too many dining options to begin with, but entrepreneurs could see line-ups outside of popular eateries, and new investors may look to get involved in the industry. Complicating a renewed surge in demand is an inability for many restaurant owners to find employees as government unemployment benefits continue.

Nevertheless, a restaurant rebound will increase demand for restaurant space, and there are plenty of CRE investment opportunities due to restaurant closures and empty properties. These buildings already have kitchens and are set up to accommodate indoor dining, of course. 

But CRE investors and possible restaurateurs must continue to weigh specific risks in the face of continued uncertainty:

  • Dining traffic is bouncing back rapidly, but will it match pre-pandemic levels? Or will some hesitance remain among former in-person patrons?
  • Could new variants of the virus outpace vaccination, causing some form of COVID to stick around permanently?
  • Restaurant owners are having trouble finding workers, which represents an operational and financial risk. These risks, of course, are passed on to landlords.

In the end, the wise path on restaurants mirrors the smart play on any CRE investment: pay attention to trends but conduct thorough due diligence on every deal. 

For those thinking of purchasing a property, evaluate the area, its foot traffic, a property’s proximity to other in-person retail and service businesses, and more. And current landlords should closely assess a potential tenant’s business case, including the length of the lease terms, the lessee’s track record in the industry, and other factors.

If a deal makes sense, it’s likely to make sense regardless of broader trends.

Preparing for the end of COVID

Of course, COVID-19 will remain a big part of our lives for the near future, and there’s a lot of work to be done before things become “normal.” It’s essential to keep an eye on the economic recovery in South Florida and throughout the country to ensure you’re making wise investments.

Morris Southeast Group works with commercial real estate investors and can assist as you look for value in the South Florida market. Whether it’s empty restaurant space or other commercial property types, we’ll provide advice and local market knowledge as you look to expand or manage a portfolio. 

Give us a call at 954.474.1776 to learn more. You can also reach Ken Morris directly by calling 954.240.4400 or via email at kenmorris@morrissegroup.com.

Social Distancing Layout Tips For the Office

Social distancing could remain necessary for a period, even after the COVID-19 vaccine rollout

Although it appears as though most of the American population will have access to a COVID-19 vaccine by the summer, many questions remain.

First, the vaccines might not work as well on some of the virus’s emerging variants, particularly if it mutates further in the coming months. Second, the vaccines might not prevent the virus from spreading, making it essential to protect those who have not received their doses. Finally, it could take the public some time to return to normal psychologically—individuals may not feel completely safe while gathering.

In the workplace, this means social distancing practices could remain necessary in the coming months and beyond. Property managers should be aware that many companies will want to put social distancing protocols in place as employees return to the office. Businesses looking to lease offices may need to evaluate spaces with these considerations in mind. 

Here’s a look at some layout tips for organizations looking to socially distance while keeping the workplace attractive and productive:

The six-foot rule

One of the most important protocols to follow in a socially distanced office is the six-foot rule, where all workspaces are at least six feet apart. It’s goal, of course, is to keep employees away from each other physically, minimizing direct person-to-person transmission.

When designing a socially distanced office, the main thing to remember is that there must be space between desks and workspaces. However, the design can maintain a sense of community within the office by offering larger communal areas where it remains possible to have a socially distanced conversation.

Open-concept offices may have lost favor in the past decade, but many are paying dividends now because they tend to be adaptable. The floorplan allows companies to space people out while erecting temporary barriers. Adding closed offices and creating meeting spaces with six feet between seats are also options. 

Physical barriers

It isn’t always possible to stay six feet apart, particularly in a busy or small office space. As a result, installing the aforementioned physical barriers could become necessary for some companies. The type of physical barrier depends on how the business operates. 

For example, in an open-style office, installing plexiglass barriers between workspaces that are facing each other is one way to keep some collaboration while mitigating the spread of virus particles. Other companies might opt for cubicles or closed offices. 

Of course, constructing closed offices is a significant renovation when done on a large area. However, adding a few semi-closed spaces may create the best of both worlds for certain buildings and tenants. 

Identify high-traffic areas

Every office has high-traffic areas that act as a gathering space or bottleneck. These locations could be hallways, elevators, specific desks, or the breakroom. Large lines of desks can also turn into high-traffic areas where workers are always passing each other as they attempt to reach their workspaces. 

By eliminating some of these high-traffic areas, designers can reduce employees’ chances of getting too close and spreading COVID. But a more practical option is often setting and enforcing social-distancing rules for employees who use these spaces.

When re-configuring an office, look for locations with worn carpet or floors. This damage indicates that the area is a high-traffic spot that should adapt to prevent too many people from passing each other or gathering. Removing desks or chairs from these locations may be a good start, as it eliminates reasons for people to stop and linger.

Small meeting spaces

Meeting spaces will be necessary to make in-person collaboration possible, of course. Again, procedures and adaptations are called for.

As a rule, meetings must be small enough to socially distance in a given space. And instead of putting numerous employees in a single room for large-scale meetings, spreading everyone out and augmenting the audience with technology makes a lot of sense.

Finally, many companies are leveraging outdoor meeting spaces because of the virus’s spread via circulating indoor air. Properties with appropriate outdoor areas—roof decks, large patios, etc.—could be a valuable amenity with added seating. This may be less practical in South Florida as we hit our brutal summer, but it is an option well into spring in most areas of the country.

Offer additional space

As more employees return, businesses may be looking for additional space to keep their workers distanced. While some companies opt to let a percentage of staff work from home, others will seek larger offices or flexible space in the same building.

Having flexible office layouts allows property owners to rent out space as a service. In this set-up, a business may lease temporary space in the building for meetings, collaborative projects, or overflow offices. Such flexible spaces could remain in demand as companies look for creative ways to keep their employees separated, while providing alternative revenue streams for property owners.

Hope and herd immunity are on the horizon. But we must stay adaptable in 2021

Companies’ wants and needs are continually evolving, and the next few months will undoubtedly see many things change. 

Will corporations let the majority of employees stay home?

Is flexible office space a durable trend or will the pandemic’s end put highly customized offices back in vogue?

Is some form of COVID-19 here to stay?

There’s still a lot to be determined, but Morris Southeast Group is monitoring the situation and works to provide the insights you need to create attractive spaces for tenants. For more information, reach out to us at 954.474.1776. You can also contact Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Does the Hotelization of Offices Work in the Age of COVID?

kitchen in an office

More services and amenities could be the key to attracting tenants. But the difficulty of obtaining capital for customized improvements puts up barriers to “hotelizing” offices.

COVID-19 is speeding up the work-from-home revolution, as more employees are avoiding the office and working remotely than ever before. 

Pew Research Center reports that 71% of workers with the ability to complete their duties remotely are doing so, and 54% of them want to continue working from home after the pandemic. This number shows an increase from the 20% of employees working from home before COVID-19, indicating a durable shift in the work environment. 

Regardless of the stats, many employers will require workers to return to the office after a complete vaccine rollout. But there could be resistance from individuals who have become accustomed to the convenience and amenities of working from home. 

This may spur a second look at “hotelizing” the office, which involves bringing many of the amenities found in hotels—and the home—into the workplace.

What is the hotelization of an office, exactly?

To understand the concept, consider the amenities that most hotels contain. 

For starters, there’s often a grand lobby with comfortable furniture and plenty of places to relax. Adding cozy couches, sturdy coffee tables, high-end décor, and classy flooring creates an upscale atmosphere that can make the office seem more like a “destination.”

The furniture in a hotel lobby is often well-spaced to offer privacy. And such spacing is an essential trait in the post-COVID world, given social distancing requirements. Including comfortable furniture also provides casual locations for meetings, helping employees feel more relaxed at work. 

Next, think about the other amenities a hotel offers. There’s likely a fitness facility somewhere in the building, perhaps a salon, and rooms that have a full kitchen and dining area, as well. Adding these features to an office is beneficial for many reasons, chiefly saving employees time and money.

Workers who can stop at an onsite gym before or after work may reclaim another hour from their day. A kitchen provides the opportunity to cook a quick meal and avoid eating out. And various other amenities, from dry cleaning services to hair-care options, offer similar benefits.

The cost-savings and convenience of these facilities could be a significant factor in attracting new employees and retaining current ones, as well as attracting the tenants who need these workers.

As always, location matters

When someone books a hotel room, they usually choose a building close to their desired activities in that city. Getting into vehicles and driving to destinations is often a non-starter, so they’ll reserve a space within walking distance.

Businesses often take the same approach when selecting office space by leasing properties close to desired amenities. A location ideally has numerous restaurants, service businesses, and fitness centers nearby while providing plenty of parking or public transportation access—all of which reduce the need to hotelize the business property itself.

For investors, looking at what’s close to the structure is often just as important as the building itself. The goal is to provide as many convenient at-home amenities as possible to attract tenants.

The impact of shorter leases on access to capital and hotelization

Things that stand in the way of the extensive property improvements required to hotelize a space are economic uncertainty, the trend toward shorter leases, and stricter access to capital, despite extremely low interest rates.  

Companies are increasingly looking at short-term leases, making it financially unfeasible for building owners to significantly retrofit a building for potential tenants. Lenders are taking a hard look at the possible ROI of a project and the leases that underlie it to hedge their risk. And there is no sense in spending significant time and money to hotelize a space if enough tenants won’t commit long term.

One solution may involve creating flexible spaces or going with a hybrid model. For example, a large office building may have one or several long-term tenants on the upper floors, temporary space-as-a-service offices on the lower levels, and kitchen, dining, fitness, and other facilities on the bottom floors. 

The long-term tenants defray the risk while reaping the amenities, which also attract shorter-term tenants—possibly co-working spaces. The amenities are common areas for all lessees, defraying the expense in proportion to the potential ROI. And the on-demand office areas can provide additional office or meeting space for long-term tenants when they need it, increasing flexibility as more employees return to work. 

Looking to the future

While it’s impossible to tell precisely how the economic recovery and post-COVID return to the office will shake out, we know that many employees love working from home—and some may never look back from the experience. At-home-like workplace amenities could make the return more palatable, plus attract new tenants and the new employees they need. 

Regardless, the customization required for hotelization is held up by shifting and reduced overall demand for office space in some areas, along with the trend toward shorter leases as businesses navigate an uncertain environment. Individual situations and needs will vary, but we suspect much of the hotelization trend will be put on the back burner until the pandemic’s aftermath becomes clearer. 

The commercial real estate landscape is quickly evolving as we’re going through an unprecedented period of volatility. At Morris Southeast Group, we have our eyes on the situation and can help investors and tenants navigate the present and future of CRE. Contact us at 954.474.1776 to learn more. You can also reach out to Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Is the Open Office Concept a Thing of the Past?

employees in open office

The need for social distancing is sure to amplify many pre-pandemic questions about the efficiency of open offices.

The open-concept office is widespread in corporate America, though it has taken some hits in recent years. The movement first gained traction in the 1970s and remains a go-to setup for many businesses around the country.

The reason behind this popularity is that these layouts maximize the use of space and can save on costs, plus spur collaboration. The idea is that workers can’t hide in their offices all day and must interact with colleagues, improving teamwork and productivity.

But research suggests that these setups sometimes do the exact opposite, as employees learn new ways of avoiding each other and the distractions that come with an open office. COVID-19 is also creating fundamental issues for the concept, given that physical barriers are crucial for maintaining social distancing.

Here’s a look at the present and future of the open office—and how commercial real estate owners can adapt to businesses’ ever-changing needs.

Despite their promise, open offices might not drive interaction

Even before the pandemic, there were growing questions about the viability of the open-concept office. Managers noted that employees could deflect interaction in an open setting just as quickly as they could in a cubicle or closed office by using headphones, pretending to be busy, and avoiding eye contact.

In fact, the Harvard Business Review reports that some firms have witnessed face-to-face interactions drop by 70% after switching to open offices, suggesting that this type of space isn’t meeting its objective. Employees make up for the decrease in face-to-face interaction through electronic communication, despite having the ability to speak in-person.

Keep in mind that these numbers are from before COVID-19. Living through a pandemic has changed office interaction even further or eliminated it altogether, at least in the short term.

The impact of COVID-19

Of course, we live in a different world than we did a year ago. And it doesn’t look like we’ll return to normal for some time. Even after a successful COVID-19 vaccine rollout, we could see new strains of the virus make the office a stressful place to be. 

There are currently social distancing protocols in most offices that make collaboration more challenging. Physical barriers are necessary to stop the spread of the virus within the workplace, further reducing the viability of open offices. For example, many desks or workspaces now have plexiglass barriers between them. Employees can see each other but not interact closely, defeating an open office’s intended purpose.

There’s also the possibility of many employees demanding a closed-off work environment as they return to the office. Workers want to stay healthy, which means limiting the extent to which they physically interact with others.

What these changes mean for CRE

From a commercial real estate perspective, adaptability is essential. We can no longer assume that companies will want open-concept offices because they may be an outdated or even dangerous format as workplaces reopen.

CRE owners should be aware that organizations will want different things from their office space and maintain the flexibility to adapt. This could include renovating space to allow for more room between employees or, in more extreme cases, building out exclusively closed offices.

Organizations that continue to use open concepts need physical barriers in place, at least near-term. Plexiglass might work in some situations, while other offices might want cubicles or other barriers to further separate their staff. Then there are cleaning protocols, foot-traffic procedures, and growing demand for HVAC improvements. Since the virus primarily spreads through airborne transmission, a new focus has been placed on buildings’ air quality. For a thorough rundown of these safety issues and potential property improvements, read our previous blog.

We’re going through an unprecedented period of change in the traditional office setting. Keeping up to date on the trends could be the difference between renting a space and having it sit empty.

What the future holds

We’re not exactly sure how office space will evolve nor how durable specific trends will be. Much depends on the vaccines’ efficacy at fighting new variants of the virus and what particular companies and their employees prefer. If workers remain uncomfortable returning to open-concept offices, organizations and building owners will have little choice but to rework the spaces.

Commercial real estate owners should be aware that businesses could be looking for different things in the coming months and years and stay willing to adapt. More flexible setups — or owners who are willing and able to renovate to meet individual preferences — will attract new tenants faster. But certain offices in select areas may struggle to attract renters, regardless of the setup.

One thing is for sure: 2021 will be a pivotal year that will continue to introduce novel challenges in the commercial real estate landscape. And the ability to adapt will remain essential.

Morris Southeast Group has its eyes on these CRE trends and is dedicated to keeping our readers, clients, and colleagues informed. For more information on trends in office space or to lease or to find a property that is right for you, contact us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

Outdoor Space as a Solution to Maximize Building Use During COVID

Taking advantage of available outdoor spaces can make businesses safer for customers and employees while navigating the global pandemic.

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. 

A vaccine is on the way, but it’ll still be many months before immunity is widespread. Until then, here’s a look at how some businesses and property owners are maximizing their use of outdoor space.

Examples from dining and retail

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. 

Using outdoor office space

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.

Making indoor spaces safer

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 kenmorris@morrissegroup.com.

Creative Ways to Repurpose Abandoned Malls & Big-Box Stores After COVID-19

Getting Creative to Repurpose Abandoned Malls and Big-Box Stores

Many large retail spaces are sitting empty because of retailers going out of business, but there are novel strategies to reuse these spaces

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.

Coresight Research estimates that 25% of the country’s 1,000 malls will close within three to five years, and as many as 25,000 stores could close in 2020 alone.

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.

The situation before COVID

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:

  • A former Meijer store in Greenville, Michigan, is now the Rock City Indoor BMX track
  • A one-time Sam’s Club in Olathe, Kansas, has a new life as the Heartland Community Church
  • An Indianapolis Toys “R” Us became a charter school

There are various examples of malls coming back with a new purpose, too:

  • The Mayfield Mall in Mountain View, California, is currently one of Google’s headquarters
  • The Hickory Hollow Mall in Antioch, Tennessee, has become a skating rink
  • In Englewood, Colorado, the Cinderella City Mall now features residential units, retail shops, offices, and an art museum

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.

The current landscape

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.

Modern solutions for modern problems

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 kenmorris@morrissegroup.com.

How the COVID-19 Economy Impacts Property Improvements & Customized Offices

office fitout

The changing tenant-improvement landscape due to COVID-19

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.

The current COVID-19 environment

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.

An example of the current situation

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 effect on mortgages

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.

What the future holds

Here are a few critical observations about how all of this may play out:

  • Commercial real estate is likely to become more commoditized, so we could see the end of building owners bending over backward to create customized offices for businesses.
  • Expect shorter-term leases to become far more common, because that’s all many potential tenants will accept.
  • We could see less-expensive materials used when office renovations are necessary. For example, property owners might opt for easily moveable panel walls when it comes to customization, so they can make quick adjustments to the space before a new tenant arrives.
  • Many property owners will make proactive improvements to their spaces to attract tenants. These renovations may include improving ventilation, installing physical barriers between workspaces, and following other guidelines put forth by the CDC.

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 kenmorris@morrissegroup.com.

Potential CRE Property Improvements To Adapt To COVID-19

Potential CRE Property Improvements To Adapt To COVID-19
Social Distancing in Modern Office With Glass Cubicle.

How the pandemic is changing—and could transform—commercial real estate spaces

In addition to everything else we can blame on COVID-19, the pandemic has altered what’s important in commercial real estate. Not long ago, landscaping, security, and lighting were among the key elements to increase property values, and often ranked high on the list of tenant wishes.

But with the pandemic and re-openings, the most significant concern is the health and safety of anyone entering a property. Much of that reflects growing health concerns and awareness of how the virus spreads. But there’s also a very practical interest in limiting liability and the potential for lawsuits.

To that end, preventative measures come in numerous shapes, sizes, and price points—and many of them are contingent on property usage.

Immediate steps for reopening

At the top of any reopening checklist is evaluating the floor plan of the property, followed by making adjustments based on the best practices outlined by leading health authorities, such as the CDC. Generally, this means keeping at least 6’ of space between people, limiting group interactions, and mitigating air-droplet spread.

Steps that some properties are taking include:

  • Using furniture to create distance. Desks, for example, should be at least 6’ apart. If space is tight, some furniture may be removed or roped off. Bookshelves and other office furniture may be moved into positions that help maintain distance, while temporary walls and partitions can be brought out of storage and put to better use. In some cases, plexiglass partitions are attached to furniture to create boundaries.
  • Since communal spaces are discouraged, converting that space into storage for any pieces removed from the main work area is an option. So is using it as a workspace for a portion of socially-distanced employees.
  • Implementing foot-traffic patterns that make sense for the property. For example, signage can remind people to move in one direction when walking about the office, up and down the aisles of a retail space, or when entering or exiting a conference room.
  • Steps to maintain distance can be as simple as signage, arrows, and colored tape on the floor, or as elaborate as “The 6-Feet Office,” which uses bold colors and patterned carpeting to delineate social distances for offices and traffic.
  • Enacting policies that stress flexibility, choice, and wellness. These can include elevator etiquette reminders, the creation of cohorts or teams to limit the number of people actually in the office on any given day, hand-sanitizing stations, and a clean-desk policy so surfaces can be disinfected easily. Enhanced cleaning protocols are considered critical.
  • One possible way to minimize COVID’s spread in interior settings is to open windows and allow fresh air to circulate. For many buildings, however, that’s not an option—either windows don’t open, or the weather is too hot and humid. But some companies are moving specific workspaces, such as conference rooms, outside.

Looking to hospitals for CRE inspiration

By reopening, many commercial properties and their occupants have joined others on the frontlines of the COVID-19 battle. It only makes sense, then, to look to the veterans of the war: hospitals. These facilities have valuable lessons for preventing the spread of diseases to others.

  • For decades, we’ve been warned about the dangers of ultraviolet (UV) light, specifically UVA and UVB, which are responsible for sunburns and skin cancers. But there’s also UVC, which, because of its short wavelength, cannot penetrate Earth’s atmosphere. There is a subset of wavelengths (far-UVC) that has been shown to kill “99.9% of seasonal coronaviruses present in airborne droplets.” Handheld, mounted, and mobile UVC devices have already appeared in hospitals, nursing homes, and food establishments.
  • Because weather and design keep many windows sealed, there is growing interest in how recirculating air from HVAC systems helps spread COVID-19. One potential solution is the addition of UV lights into HVAC ductwork to sterilize indoor air and improve ventilation. Also, proper air filtration (depending on the size and scope of the unit) and maintenance contribute to better indoor air quality.
  • One of the challenges hospitals have faced in the COVID battle is having to increase Airborne Infection Isolation Rooms, also known as negative pressure rooms. Air from the positive pressure space is forced under the door opening into a room with negative pressure, where dangerous microbes are then “captured.” From there, microbes are released into the outdoors, where they disperse and eventually die. The fundamental difficulty for many commercial buildings, however, is in maintaining an even, positive pressure due to HVAC issues and building usage.
  • COVID may call for leveraging Internet of Things (IoT) technology to make energy systems in the property smarter. With changes in the work dynamic, such as fewer in-house staff or staggered hours, owners may see savings by embracing an adaptive energy system. The building’s energy system knows when and how to operate based on the changed occupancy and hours of operation.

Reopening in SoFlo

While debates continue about states reopening too quickly, businesses are opening as cases are skyrocketing, and people want to get back to work. For owners, property managers, and tenants, the challenge is ensuring that enough has been done to protect the health and safety of occupants.

The complicating factor in COVID-based property improvements is that people are using commercial spaces differently—and the demand for some buildings is waning. And many of the most useful property upgrades—such as enhanced HVAC systems—are expensive.

Money may seem cheap due to very low interest rates. But many lenders are factoring risk into rates, and some institutions only lend to applicants with exceptional credit and significant resources.

In addition, the benefits of any property improvement must be balanced against the financial risk to owners. Installing a new HVAC system for a 10-story office building, for example, is a major capital investment. This expense may be unrealistic in light of diminished demand for a space and increased demand for shorter leases, which reduces the odds of recouping the investment. Then, there is the risk of lawsuits from customers and employees who may become infected on the premises.

We will cover many of these issues in future blogs. For now, sound advice for tenants and owners is to stay current on best practices for reopening as safely as possible. And everyone must carefully evaluate their financial and health-risk scenarios—and make decisions that make sense for their people and businesses.

At Morris Southeast Group, we stay on top of commercial real estate trends and will continue to update our clients and readers. As always, we are here for all of your CRE needs, including helping you evaluate potential steps to create or lease a safer property.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Can Co-Work Spaces Survive COVID-19?

social distancing in co sharing office with sign for safety distance

Down but not out, could they be what the “new normal” needs?

It wasn’t all that long ago that co-work spaces were the darlings of CRE. As recently as September 2019, there was a 70% increase in flexible workspaces, despite the massive difficulties encountered by industry leader WeWork.

Short-term leases, affordable rents, communal creativity and networking, and shared common spaces were celebrated, notably by small businesses and start-ups looking for a cost-saving operational alternative. Just last year, the concept was becoming even more specialized with niche co-work spaces—shared offices geared to very specific ideas, such as construction, women, LGBTQ, and musicians, to name but a few.

Then, COVID-19 happened. At least for the time being, shared spaces in a time of social distancing don’t make a ton of sense.

While larger companies with office space were able to adapt through employees working remotely, many shared space tenants, operators, and landlords floundered. Adapting to remote work has added strain on smaller businesses. The economic shutdown has forced many of them to close for good, opt not to renew short-term leases, or walk away with months of unpaid rent.

Shared workspaces may be down, but perhaps not out

The combination of a lingering lockdown and expectations for yet another mass redesign of offices—this one with a nod toward social distancing—caused many experts to ponder the viability of shared workspaces. For many, the concept was on life-support.

Other analysts, however, say, “Not so fast.” They note that the sector hasn’t been around long enough to weather an economic downturn. In a sense, it must find its footing to prove its mettle and survive. And in their view, shared workspaces may be what a post-pandemic world needs, offering small businesses without fixed office space a necessary outlet for workers.  

At the start of the lockdown, when businesses across the country were forced to adapt, remote work seemed like a novel, short-term measure required to stem the virus’s spread. For workers long accustomed to daily commutes, the effort in those early days was approached with a sense of humor as they fumbled with technology and did their best to avoid interruptions. But what was hoped to be a temporary glitch has dragged on, even as the country re-opens.

As new cases continue around the country, corporate offices weigh keeping employees at home and maintaining permanent office space. In turn, what was once a novelty is now taking its toll on creativity, productivity, and mental health. Shared workspaces—with appropriate precautions—may wind up being an antidote to isolation as corporate offices remain unused or are downsized.

Shared workspaces also have the potential to provide a support structure for small businesses that operate on the edge of local economies. By coming together under one roof, there is a greater possibility for networking, sharing ideas, and gaining access to resources.

Co-working in the coronavirus era

Shared workspaces will need to adapt to COVID-19. The high-density model will likely have to change in favor of a more socially distant property. This may include the addition of freestanding dividers and privacy areas, as well as regulating the number of people allowed in a conference room. 

It will also be imperative for co-work space managers to adhere to health measures outlined by the CDC and other leading state and local agencies. This effort may include taking temperatures, increasing air exchange, sending sick workers home immediately, increasing the frequency of cleaning common areas, and maintaining transparency with other members should an individual become ill.

CRE can design a new normal

With re-opening and constant reminders of a “new normal,” perhaps it’s time to regain a sense of control by having a say in exactly what that will be. For co-work spaces, it means gaining a better understanding of members’ circumstances, concerns, and fears—and working to address them. It could involve examining flexible hours so members can work at off-peak times, providing discounts for longer lease agreements, and updating cancellation policies to meet new demands.

It also means taking a different look at communications and marketing material. Post-pandemic adaptations, such as a new floor plan and health-conscious policies, should be highlighted. And enhanced cleaning policies should be completed and communicated.

Morris Southeast Group continues to monitor CRE trends and possibilities as the economy weathers COVID-19. To learn more about what we can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Revolution or Refinement? The Impact of Technology on the Modern Workplace

https://www.morrissegroup.com/wp-content/uploads/2016/06/Revolution-or-Refinement-The-Impact-of-Technology-on-the-Modern-Workplace-1.jpg

How are advances in automation and mobile access reshaping today’s workforce?

A recent article in The Economist speculated on the future of jobs in the context of increasing automation, spelling out certain professions, including professional jobs in legal services and even accounting, that may totally be replaced by technology.

Technology has categorically changed the workplace in a variety of incredible ways. It has allowed a whole host of jobs that were previously office-bound to go mobile, enabling many workers to do their jobs from almost anywhere. And as technology continues to evolve, it will not only change the nature of the work that is being completed, but it will also impact the skills necessary to survive in this “new” economy.

What is changing?

  • Shift in focus – In the past, businesses looked primarily at previous performance and aimed to correct mistakes based on historical data. Today, organizations must make decisions by analyzing data in real time, helping quickly predict future trends and profitability.
  • Opportunities abound – With real time access to “big data,” organizations can make split-second decisions to take advantage of opportunities that would have been unheard of in years past. This allows companies to be more agile in the face of market shifts.
  • Power of mobile – Today, most workers are equipped with a mobile phone that is more powerful than a full-sized computer from a decade ago. This allows workers to perform many of their job duties right from their smartphone or tablet, as opposed to being chained to an office. This not only increases productivity, but it gives workers a bit of freedom in performing their core functions.

Introduction of robotics in the workforce

In addition to technology that simply makes it easier for human workers to perform their duties, robotics are another area that has witnessed remarkable advancements over the past several years. Robotics allow many repeatable activities to be learned and performed by machines. There are countless examples of how this automation, coupled with the Internet of Things, are allowing individuals, companies, and even cities and municipalities to leverage the power of technology.

Take smart cities, for example. Communities are showing how highly technical, connected environments are able to learn and predict life patterns to help to turn lights on or off at certain times and adjust water flow by usage. All this helps to make our cities cleaner and it benefits our overall economies.

What does this mean for office space?

While more people are offered freedom in today’s remote workforce, few companies are completely doing away with their office space. An office still serves a vital function for many companies and it will likely do so well into the future. It’s not that workplaces are going away – rather, organizations are looking at ways to make their space more efficient and integrated with new technology.

Interested in learning more about the latest in office trends?

If you’re interested in learning more about some of the top office trends that are being driven by technology, or you are looking to find the right commercial space, feel free to reach out to Morris Southeast Group, one of Ft. Lauderdale’s top commercial real estate firms. Give our team a call today at 954-474-1776, reach Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com.

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