In the latest Coping with COVID-19 video, OBJ examines how an unprecedented disruption in regular business activity will severely impact the city’s real estate sector, especially retail and office leases.
The video panel discussion included three high-profile commercial real estate experts: Martin Aass of Cresa, Michael Church of Avison Young and Shawn Hamilton of CBRE.
The following is an edited version of that discussion. Watch the video for more.
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OBJ: Martin, let’s start with you. You’re a little bit unique on this panel because Cresa is a tenant-side only real estate company, meaning you represent businesses looking to lease, not landlords. So let’s start with a tenant perspective, what are you hearing?
AASS: Well, the smoke is still clearing. Like every industry, real estate is evolving quickly. On the positive side, for the most part, deal flow is still happening. Tenants, if they’re in the middle of a negotiation or discussion with a landlord, they’re continuing. I think businesses realize that if their lease ends in six months, they need to deal with that. No matter what’s happening today. Their operations are shut down for the most part, but they are continuing with transactions that are underway … So there’s another part, of course. How are tenants financially right now? There is a huge chasm in what the retail folks are experiencing and what the office folks are experiencing … Office tenants are reaching out to us and they’re asking if we can be of some assistance in discussions with their landlords. Everyone is asking that question. How much can I get in an abatement of rent? Am I legally entitled to call what’s going on force majeure and not pay my rent?
OBJ: Michael, let’s take a look at the other side of this. Everyone in the media is jumping on the idea that tenants should stop paying rent. This could cause massive financial harm to landlords, too.
CHURCH: Let me say this to tenants first. You’ve got to maintain a dialogue with your landlord. If you don’t and simply go quiet, then you’re going to exacerbate the problem. Here is something to remember. Let me use the downtown office market as an example. Most of those buildings are owned by pension funds or insurance companies. And they have shareholders. Take World Exchange Plaza. It’s owned by the BCE employees’ pension fund. So not receiving rent from tenants goes to the performance of the real estate fund. They all have dividends and life and retirement funds to pay out. So it’s a cyclical thing … What’s happening today is that we’re seeing tenants ask not so much for rent forgiveness, but abatement. The tenants are trying to find a way to get through the next 60, 90 or 120 days. Most of these companies are strong and they’ve been around for a long time … The rebound on this is going to happen, but you’ve got to treat the landlord as a partner in this. You can’t just say, “I’m not going to pay my rent.” It’s got to be a symbiotic relationship. Everybody is in the same boat.
OBJ: Shawn, this really is unprecedented. This is creating a mess like we’ve never seen before. How do we resolve this?
HAMILTON: I think we’re starting to realize how much the real estate community is interrelated. We’ve been set up in the past as landlords versus tenants. Now everything is out the window. I mean, certainly contracts do have a place in time, but we’re really seeing that this is a community-based problem. What we need to avoid is creating a chasm between landlord and tenant. They’re in this together. We have to remember that some landlords are big pension funds, but a lot of them are also independent businesspeople as well. People who own assets that are important to them. So not every landlord is the big greedy landlord that the press sometimes likes to say. They are normal people who are just trying to hang on. Rent deferral or abatement doesn’t really solve the problem. What we need to see here is everybody chip in. So we need to see the federal government and provincial government chip in. We need to see everyone who is a line item cost in the commercial real estate world chip in. So that means landlords need to hurt a little bit. That means tenants need to hurt a little bit. That means banks need to hurt a little bit in terms of deferring mortgage payments. That means the city needs to hurt by suspending tax payments. So the answer is that everybody needs to take a collective pause on the payments that are owned to them for the next six months so we don’t create a logjam of expenses at the end of six months. There are two prongs to the problem. Surviving and then recovering.