Coronavirus uncertainty is hampering some CRE activity, but big leases are still being signed
This article was originally published in the San Francisco Business Times online.
The coronavirus’ spread both locally and nationally has caused widespread disruption and is impacting decision-making across industries by the second, and San Francisco's commercial real estate market is certainly no exception.
While large office buildings in the city's Financial and South of Market districts remain open and staffed, hours and services have been reduced as office tenants who are not considered “essential” businesses work remotely in an effort to comply with a three-week shelter-in-place order issued by the city and surrounding counties on Monday. As a result, some tours have been cancelled, and some transactions have fallen through.
While the general tone among local commercial brokers interviewed for this article is to err on the side of caution in advising clients to wait for the storm to pass, big leases are still being signed, because for companies faced with expiring leases, business must go on.
“It’s not the best of times, but we were able to get a deal we were working on for three months signed yesterday,” said Meade Boutwell, senior vice president at CBRE. “It was a sophisticated tenant in a Class A building downtown, they are moving in later this year, so their timing wasn't immediate. They (the tenant) said they had a business to run, so they executed.”
Like many of his peers, Boutwell was working from home on Tuesday, but said that he wasn’t buying into the panic just yet. Looking forward, he said that he has three large leases on “the 10-yard line” and hopes to close despite the coronavirus-induced chaos mounting around him daily.
“Those companies that need to make a decision — not the startups, but the sophisticated, ongoing companies — are all moving forward in an incremental way,” said Boutwell. “This temporary setback is not a reason for them not to move forward.”
No matter, Boutwell acknowledged that current uncertainty over how long the global pandemic will last is not good for business and has caused delays and cold feet, particularly among smaller office tenants, owners and CRE firms.
Boutwell reported a decrease in scheduled tours of office space — he normally has two to three showings per week, despite a low vacancy rate across his portfolio, which includes the 24-story, mixed-use 388 Market St. skyscraper — but said he had none scheduled this week.
He said that he is advising his clients that “don’t need to make a decision today,” to wait until things calm down, because “why not?”
That sentiment was echoed by those in the business of advising smaller office tenants.
“If I’m representing a tenant right now and they have breathing room, then I’m recommending that they put everything on the back burner, because certainly rents will be affected,” said Tony Zucker, senior vice president at Dunhill Partners West. “(Moving) is a lot of work. My recommendation would be if you can wait, wait.”
Zucker said that on Monday he received an email from a small company he represents asking for assistance in negotiating rent relief.
“I think the boutique firms will be more impacted than the national players,” said Zucker, referring to small office users who are more likely to struggle with paying rent. He added that non-tech clients, such as nonprofit organizations, are likely feeling the greatest impact as a result of the virus' spread.
Zucker serves on the board of a nonprofit whose lease is up in July and said that the organization is “definitely not going to seek a new office space.”
“They will work out of their homes until everything stabilizes because we have events now postponed and our operating budget is going down drastically," he said. “We will have to find new office space anyway so we will let the lease expire. We will have staff work from home and conduct meetings as needed until we are on better footing.”
A commercial real estate broker who represents “mid-tier” landlords and did not wish to be named said that some owners have already begun dropping rents, some as much as by $10 per square foot.
Jonathan Zoucha, a local tenant representative with Cresa, a Washington D.C.-based real estate firm, said that since Friday, all transactions that he had been working on — a total of 11, of which six are for subleases — have been paused.
“They want to see what happens,” said Zoucha about his clients, adding that the “same goes for companies searching for new office space.”
“Companies that have lease expiration in next 6-12 months are still looking but are more cautious about what their head count will look like in the next two years (and) about how much space they actually need,” he said.