My thoughts this month continue to ponder 2021 and what might be ahead for us in commercial real estate.
I suspect a tremendous amount of “shadow space,” better known as subleases, will fill the landscape of office and retail availabilities next year as occupants adjust to the realities of the pandemic economy.
Sure, we could also see industrial overruns but for very different reasons.
A bit of context to begin. Commercial real estate is occupied by the building’s owner, also known as an owner-occupant or by a tenant. In the case of the latter, a contract exists. Leases or rental agreements state the terms of the relationship — monthly rent, number of years, responsibility for maintenance and who pays the property taxes and building insurance. When a change occurs during the term of the lease, one result is sublease space.
So, with that general background, allow me to explain excess square footage and specifically what causes it with office spaces, retail storefronts and industrial boxes.
In our first example, let’s take your local attorney’s office. Generally, these counselors lease their spaces. Some take advantage of the benefits of owning their locations. But, play along with me …
Assume at the beginning of 2021 that three years remain on a five-year lease the law firm signed in 2019. Once “stay at home” orders took effect in mid-March, the firm found itself with most of its practitioners working from home – and loving it! Now, that marble floor and mahogany paneled boardroom is rarely used.
The plethora of private offices — which are typical — now lay fallow. However, rent payments are still owed. It’s decision time. Is the under-utilization permanent – meaning a need for a smaller footprint? Or, will full staffing exist soon? In the former, you have the classic need to find an occupant willing to morph into the vacant seats and fulfill the law firm’s remaining obligation — a sublease.
Another situation that often floods the sublease market is seen at many regional malls, power centers, strip, and freestanding big-box retailers in SoCal. Pier One, Steinmart, Bed Bath & Beyond, JC Penney, Brooks Brothers, Forever 21 and other name brand outlets all took their lumps this year. Many shut their doors for good. Others are surviving but just barely.
In every business failure, leases must be considered. Some are abandoned through bankruptcy courts. Select ones leave vast, vacant dark holes where vitality previously existed. Bargain retailers such as Tuesday Morning take over. Although, for how long? Creative solutions emerge such as the Union Marketplace in Tustin’s District Legacy – a former Border’s book store. There, the larger space was chopped into smaller experiential retailers. But suffice it to say, leases must be consumed.
Finally, industrial buildings. You know, those concrete behemoths that house a variety of manufacturing, warehousing and service concerns. A very different dynamic will create vacancy in 2021 as companies outgrow their spaces.
With the spate of online shopping, e-commerce providers cannot keep enough stock on hand. Food producers are slammed. Any company manufacturing repair and replacement parts is thriving. Try getting a plumber out to fix a leaky toilet at your home or business — good luck!
One of our clients distributes mufflers. With the number of folks staying home and extra $$ piling up because they can’t go to Disneyland or the movies, car repairs are soaring. This company is facing a building conversation next year. They’ve eclipsed their capacity. Another is also an automotive distributor. Recently, their demand was so great they opted to double their square footage and find someone to sublease the building they vacated.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at email@example.com or 714.564.7104.