Touchless elevators and turnstiles. Traffic patterns that allow maximum distance between employees. When thinking about the widespread and lasting effects that the coronavirus pandemic could have on office building occupancy and operations, it is hard not to make comparisons to the sweeping changes following 9/11.
“It’s no different than 9/11, when you had to provide tenants with that security,” said CohnReznick Managing Partner Jason Burian during the CPE Snap session “Looking Ahead: Changes to the Office Sector,” moderated by CPE Editorial Director Suzann Silverman. “And it happened across the country, even though (the event) occurred, unfortunately, in New York.”
Retrofitting buildings is just one unexpected cost office building owners are facing. In the near term, they must also contend with additional costs associated with lease reviews and rent relief, legal issues with tenants, increased security to manage social distancing, enhanced cleaning and cleaning supplies. In the future, there will be additional TI costs for tenants that may request office layout changes, costs associated with new building codes, and lease-up costs for unexpected vacancies.
“It is hard to tell what else is going to come up; everything is so fluid right now,” Burian explained. “Everyone is kind of settled in at home and trying to figure out a way to get back to the office. Everyone is waiting to see how the second quarter goes. That will be the first full quarter where we will have an effect from COVID-19 across the market.”
The impact on investment
As for when office investment will return, Burian cited two deciding factors: What will business confidence be in the second half of the year? And what will the value of rents and capital be at that time? Geography is expected to play a role. Without a vaccine, it will be harder to determine demand in more densely populated areas.
“If you can go back into the space and have social distancing in place, you will then see the impact of demand on square footage,” he said. “We just don’t know when that will happen.”
With all the uncertainties, the impact on valuations and underwriting is not yet clear. But there are a lot of factors out there right now that can hurt current and future income. Cap rates and cost of capital, therefore, are expected to rise for sellers whose tenancies are less than stable.
There is a lot of dry powder in the investment community, and plenty of opportunistic players ready to capitalize on troubled situations. Burian expects to see more investors acquiring operating companies in order to manage assets through the crisis, and he foresees more portfolio purchases rather than single assets in order to meet investment requirements and diversify geographies, tenants and workforces.
Some bright sides for owners could be increased consumption of space to allow for social distancing, the ability to lower insurance rates through safety measures, and the ability to pass off renovation costs in the form of rent increases.
“It’s all part of the long list today of the things we know will be a factor and some we’re not sure of,” said Burian.
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