Office Market Update
Nevada experienced a sharp decline and disruption in real estate activity after a stay-at-home order for the State of Nevada was issued due to the spread of the Coronavirus. All non-essential businesses were shut down while the virus continued to spread throughout country. Commercial office demand for lease and purchase came to a halt with the exception of critical service providers (insurance, finance, legal, real estate, healthcare) who were willing to commit to the typical 3-7 year lease terms.
To date, Nevada has seen little to no compression on lease rates thus far, and only a minimal number of subleases hit the market. Sales volume have fallen significantly, but cap rates held firm for those transactions that did close during this period. There were eight (8) significant commercial office sale trades in the month of May. All were investment sales of high occupancy multi-tenant buildings. Building sales with closings set for June/July were either cancelled outright, stalled or resulted in re-negotiations of 5-10% reductions in price.
While construction was considered “essential”, many planned office projects were forced to reassess their viability and timing. It is anticipated that only 40-60% of the projects planned in Las Vegas pre-COVID will actually deliver in the next 18-24 months.
The majority of lease transactions that were in active negotiation prior to and during the pandemic were signed at market asking rates. A lag in permitting/construction/inspections, furniture delivery and phone/data install lead times contributed to tenants experiencing some delays in taking possession of their office space during the pandemic. There were some tenants that put their real estate decisions on hold temporarily, and a minimal number that canceled altogether. Typically, negotiation terminations were smaller lesser credit tenants, and some back office and call center tenants that were unsure of the long-term impacts of social distancing and health protocols on their overall operations. These groups appear to be gravitating towards shorter lease commitments that reduce their overhead and directly impact their bottom line.
During the shutdown, many tenants qualified for assistance under the CARES ACT and PPP loans. Those tenants immediately caught up on their temporary delinquencies. Other tenants that did not qualify or qualified for limited amounts continued to seek rent relief to help offset business losses and keep them from shutting their doors. Most landlords have been willing to work with these tenants to come up with mutually agreeable plans and effective solutions to assist and retain them. These solutions vary from rent relief, rent reduction, term amortizations, and rent deferrals with term added on the back end and partial payments to at least cover operating expenses.
Social distancing, online virtual meetings and a remote work force, initially thought to be temporary, are starting to emerge as the next “new norm” as the pandemic lingers. It will take at least a few more quarters to fully assess what the real estate landscape will look like as companies take a hard look at their long-term space needs, and what percentage of their workforce will continue to work from home. A recent Colliers International survey of 4,000+ office professionals in 25 countries found that 80% of employees preferred to continue to work remotely at least one day per week, and 76% indicated that their work/life balance was improved by working from home. Many experts evaluating the effects of the pandemic are predicting that working remotely is here to stay. To this end, companies will be forced to invest more heavily in technologies including cybersecurity as data privacy becomes a major concern in many industries as employees’ personal devices do not have the appropriate measure of protections in place.
Companies looking at full and partial re-entry of their workforce, will need to be extremely cautious. Appropriate health and safety protocols driven by the CDC, OSHA and local governing bodies will need to be implemented. These protocols include social distancing, sanitization, ventilation, provision of PPE for their employees and visitors, clear on site messaging and training regarding new policies, sage points of entry, non-sharing of equipment, staggered work shifts, travel policies, responsiveness to reporting of symptoms and diagnosis’, limited occupancy and in-person meetings, protection of visitors, contactless interactions, and providing trusted sources of information. The well-being of their employees also needs to be taken into consideration. Employees are faced with making arrangements for at-home distance learning having extremely limited access to childcare, caring for at-risk family members and senior parents, and an employee’s own fears or returning to the workplace due to underlying medical conditions.
Mark Nevins of Forbes said recently, there is no “playbook” for what to do in the face of a pandemic or any “silver bullet solutions”. However, surrendering is not an option, and most industry leaders have taken advantage of the downtime to reinvent themselves and create new effective ways to conduct business and thrive. Our industry faces many unknowns over the next 6-18 months, but no doubt in my mind we are up to the challenge, and the market will recover as it always does through every cycle and economic crisis, and what tests us ALWAYS makes us stronger.
August 12, 2020
Patti Dillon, SIOR
Sr. Vice President
Colliers International
patti.dillon@colliers.com
