#0048 - Covid - Kicking It Down the Road

Confessions of a Recovering Landlord

Covid kicking it down the road is a weird title, but, it's a great concept. On today's podcast we'll discuss what it is and just how that panned out for one specific REATA client now that the year is expiring.

Last year we recommended to several REATA clients that they extend their leases for only 12 months. We did this because demand for office space had not only evaporated, but had gone negative meaning companies were giving back space faster than they were leasing it. At the same time, there was about 8 million square feet of office space still under construction. So it's the classic supply and demand discussion. Supply is increasing while demand is not only down, but non-existent. Therefore, rents must fall.

As you might expect landlords hated this. Short-term leases don't really add value to the building and it gives tenants greater flexibility to find other options whether that's other buildings or going to work from home. But several landlords agreed to 1-year extensions. Some said they wouldn't do anything less than 3 years, but ended up agreeing to 18-24 month extensions.

In one specific case last year, we were working with a client to expand and extend their lease either in their current building or one down the street. It was going to be either a 5 or 7 year lease. When Covid hit we immediately called the client to discuss the situation and we recommended that we halt all negotiations and reconsider everything. The client had lost a couple of employees just before Covid and they are in the financial services industry. As you may remember, the stock market fell precipitously in the early days of Covid. So we made the recommendation to just extend their lease, where they were, for 12 months. They didn't need to expand right away and needed time to stabilize their employee base as well as their client base.

The client was all for this idea - they didn't know that extending for only a year was even a possibility. So the idea of signing a long-term lease commitment for MORE space right at the time when the future was so uncertain scared them to death - understandably.

Listen to the podcast to hear what ended up happening for this client!