Publications

- November 1, 2021: Vol. 8, Number 10

5 Questions: Time for office investors, operators to get creative

by Phil Raglin

There has been much speculation whether office real estate will ever fully recover after getting slammed with record high vacancy rates during 2020 because of the COVID-19 pandemic. A report from JLL found an unprecedented occupancy decline of 84 million square feet, with 40 million square feet vacated in the fourth quarter alone.

Things looked up briefly this year, only to have the Delta variant of the virus catch fire and infect tens of millions. Investors and operators of office space have become pressurized by the situation, though they are not without options to help alleviate their situations, according to Phil Raglin, CEO of Alpha Lease Management.

You have indicated that pandemic shutdowns have caused significant pressure to vacate or sublease office space. Characterize the situation.

As companies switched to remote and hybrid work models during COVID-19, most tenants at some point during the pandemic were not occupying their leased space; therefore, vacancies and subleasing increased. In fact, according to Cushman & Wakefield, the amount of office sublease space on the market across 90 North American markets the firm tracks is up 99 percent since the beginning of the pandemic, and rose 76 percent year-over-year in second quarter 2021. Also, many leasing markets are not on track to fully recover until 2025. As a result, a portion of the sublease space currently on the market will remain so until a better solution is found.

You’ve urged landlords to view tenancy as an investment. Explain, please.

Trying to fill or sublease vacant space can be time-consuming and frustrating for landlords and property managers, especially when many potential tenants have been postponing signing leases during the pandemic. Also, the longer space remains vacant, the more money stakeholders are losing. They may be tempted to rush to fill the space and end up with a less-than-creditworthy tenant, which causes even more problems.

Instead, owners and operators can partner with a seasoned tenancy expert who will occupy or lease out the space for them. By spending a little money and looking at tenancy as an investment, landlords can work with firms that will in return guarantee them a stable long-term tenant with the expertise to operate the space and add deep value.

How can building operators take advantage of common areas, parking areas and rooftops?

These traditionally unleasable spaces can present creative leasing opportunities that generate income for owners at little risk to property stakeholders. Best managed by people with expertise in this area, these common areas can be monetized while maintaining property aesthetics through interactive digital signage, innovative vending, micro-events, traffic analytics, and hosted meetings, among others. Parking areas can be activated without affecting existing tenants through electric vehicle charging, vehicle storage, food-truck rodeos, pop-up events, solar canopies, and more. And, to monetize rooftops, solar can be installed and arrangements made for agreements such as small 5G cell tower leases, outdoor advertising, naming rights, and even vertical wind turbines to add cash flow to an asset.

How does the ‘master lease’ come into play during this situation?

Owners can become passive investors by setting up a master lease with a professional tenancy firm, which then assumes the task of making that vacant space perform. Master leases can be customized with negotiable terms and rates based on the ideal outcome for the property. Another benefit to this arrangement is that primary lease terms can reach 30 years, often including annual increases. And, in most cases, existing leases become subordinate to the master lease, which allows property owners to collect steady increases while the master lessee awaits periodic increases from other tenants.

This structure allows active investors to become passive, while providing them with speed, transparency and ease.

What leasing alternatives do office buildings have beyond their traditional tenants?

Office owners can lease out space for micro-data centers and cryptocurrency farms. These technology uses offer a creative use of space from small to large and provide new sources of rental income for property owners and managers.

Micro-data centers, about the size of a school locker, can tackle issues that traditional data centers aren’t able to manage. They work well in office spaces and can be set up in retail stores to run security systems, cash registers and other systems.

Cryptocurrency farms condense huge quantities of computing data into tiny spaces. They are perfect for warehouses, small offices or even residential spaces.

 

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