A Crisis is a Terrible Thing to Waste

December 29, 2020 • As we look ahead to 2021, hearty doses of pragmatism and optimism color our view. The recent emergence of effective COVID vaccines and a second round of federal stimulus factor into our calculations of what to expect.

From our vantage point as commercial leasing attorneys across the retail, office and industrial sectors, it’s clear that the rules of the game are changing in each of these sectors. Those landlords, tenants and lenders nimble enough to adapt will enjoy significant advantages, and those that cling to the past may soon face extinction.

Relevant Brick-and-Mortar Retail Will Continue to Strengthen

For the past six months, we’ve been working on new retail leases throughout the country. Locations range from regional malls and open-air centers to high streets. Tenants range from value to luxury and uses include quick serve restaurants, sporting goods, discount department stores, fine jewelry, fragrance and beauty, apparel, health and wellness, and entertainment. Coupling our recent market experience with that reported by national landlords including Regency, Brixmor and Kimco, we foresee continued strengthening in 2021 of relevant retail. By that we mean shopping centers and other appealing locations that are easy to access and feature stores that provide compelling reasons to shop in person.

2021 Market Rates for Office Space Will Reset at Lower Levels

Dire predictions have been made about the office market as we know it. The ten-year office lease is dead, co-working is a thing of the past, and so on. We have had numerous office tenant clients ask us whether they can terminate their existing leases or stop paying rent as a result of COVID, but only one has reached out about a new office lease this year. None of our office landlord clients has retained us to handle new office leases since the emergence of COVID and they report that their office buildings in New York, Atlanta, D.C., and L.A. are largely vacant, although in most cases close to fully leased. We believe that once people are comfortable mingling in the office and taking mass transit, office occupancy will rebound. We also expect that rental rates and resulting office valuations will take a hit across the country, as fewer office workers return on a full-time basis and corporate tenants re-evaluate the need for traditional offices.

Industrial Properties Will Bask in Real Estate’s Sweet Spot

We’ve been part of a flurry of industrial leasing activity in the 4th quarter of 2020 as our industrial landlord clients lock in significant increases in rental rates across their portfolios. We believe that transactional activity in the industrial sector will continue to be strong in 2021 and that cap rates will remain low as robust rental and occupancy rates characterize this sector for the foreseeable future.

Flexibility & Innovation Across Property Sectors Is Critical

The lines that distinguish retail and office from other property types will increasingly blur as flexibility and innovation take center stage and distinguish those landlords and tenants that prevail. Office owners will have to re-evaluate what it takes to create long lasting value for their tenants. This will accelerate some pre-COVID trends such as the hotelification of office buildings, which started years ago with the introduction of hotel-like lobbies, fitness centers and cafeterias. The old formulas for brick-and-mortar retail success will be less and less meaningful as we move through 2021. The whirl of retailer bankruptcies that we witnessed in 2020 will continue into the new year as many retailers, and their landlords, struggle to find their footing. Competition to acquire and occupy well-situated industrial properties will remain strong and those prospective owners and tenants without a compelling value proposition will find themselves sitting on the sidelines.

Toss Those Dinosaur Leases into History’s Dust Bin

One way landlords and tenants can start responding to the inevitable reset across property types as we move through 2021 and beyond is to modernize the single most important landlord/tenant document: the lease. We’ve been calling for the modernization of leases for years and our plea has largely fallen on deaf ears. But as was famously observed during the recent Great Recession, a crisis is a terrible thing to waste.