Landlords look to June rent to gauge office market

Building owners are waiting to the next rent quarter day to assess the fallout of the virus on their portfolios, but even if the outbreak eases, one developer said “don’t expect a big ‘back to school’ moment.”

As the coronavirus outbreak has caused widespread disruption across the country, with normal methods of working overhauled and many businesses unable to perform their usual functions, last week the Government announced protection for tenants unable to pay their rent.

“Many landlords and tenants are already having conversations and reaching voluntary arrangements about rental payments due shortly, but the Government recognises businesses struggling with their cashflow due to coronavirus remain worried about eviction,” a statement from the department for business, energy & industrial strategy said.

“These measures, included in the emergency Coronavirus Bill, will mean no business will be forced out of their premises if they miss a payment in the next three months.”

Speaking to Place North West, a developer-landlord acknowledged the importance of working with tenants on this issue but said: “Owners of the buildings still have mortgages to pay and staff to pay, so while landlords are sympathetic to the issues of tenants, many are also taking advantage, with some tenants using the argument that ‘we’re not using the space so we shouldn’t pay rent’.”

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According to one Manchester agent, office requirements were still in the market but were on pause, as tenants negotiated lease terms on their existing offices.

He said: “It’s fair to say these requirements are all going on the back burner. However, in three to six months when this all passes, those occupiers will be back and the market will be busy.

“These deals are led by lease events, such as break options or endings of leases, and those events are still occurring. However, requirements may reduce in size, partly because of the increase in agile working, as some staff are based in the office and some at home.

“It’s too early to say the impact that will be had on landlords regarding tenant payments, we expect the June quarter payment to be more telling.

“Landlords have been accommodating regarding extending lease breaks, such as moving the break to further down the year, as it gives them certainty of income, and from an occupier perspective helps them continue trading and operating. I’ve not heard of any landlord who has been difficult and awkward – everyone wants business to carry on.”

One Liverpool agent pointed out that while landlords were looking at giving rental holidays, tenants would be expected to make up the payments at a later date. In some cases, the period is being added on to the end of tenants’ leases.

“Our property managers are taking stock; if people pay then great, if they don’t then payment plans will be agreed. Big corporate occupiers are less likely to be affected by this, but if you’re a smaller independent tenant it could be the landlord will never get that money back.

“While we’ve just had the March quarter payment, that rental payment may have already been actioned and budgeted for before coronavirus happened, so it will be the June quarter payment which really reveals where the market is at.”

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In Liverpool, he said deals were still progressing: “Deals which are already in legals aren’t falling out of bed, in fact they are going for higher than market rents. We’re looking to get the deals signed, then have the lease commencement date to coincide with when the tenant can actually get into the building.”

While he pointed to an increase in use of virtual tours to show clients around offices remotely, another agent said VR would not be enough to drive deals to a conclusion: “Virtual tours are all well and good but people need to see the building to make a decision.”

While agents cited hope that the office market would bounce back after the coronavirus, with the potential for new occupiers entering the market who have grown out of the homeworking tech boom, one prominent Manchester office developer urged caution and told Place “there is not going to be a big ‘back to school’ moment.”

“For us and many businesses it’s still early days”, he said. “But there is probably going to be no normality for 12 months, if not longer.

“In terms of rents, restaurant operators are immediately looking to reduce costs where they can, this includes property and potentially they are going to go further than commercially necessary.

“For offices and workspace, we will need to look at June and the next quarter of payments. A lot of businesses will have paid March rent, and certainly across our portfolio the majority have paid, however whether they can pay June rent is a different thing.”

Once the Covid-19 outbreak reduces and Government restrictions are eased, agents predict a phased return of staff to offices, and a shift in how the spaces are used.

“Businesses obviously want to get back to work. Lawyers, accountants and banks are still busy as usual and there’s only a limited amount they can do at home. I can envisage a situation where the workforce rotates to allow for social distancing, potentially with a 50% occupancy in an office at any one time, and restrictions of movement in shared spaces. There won’t be a sudden ‘back to school’ moment.

“This could be the perfect market for coworking spaces, as office requirements look to something a bit more flexible, however pricing will have to adjust accordingly.”

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