The world of commercial real estate is no stranger to major disruptive events. Each turning point tests the ability of investors, developers, landlords and renters to seek new opportunities in the shifting marketplace.
To review the state of the commercial real estate market amid the COVID-19 pandemic, and how it might influence office leasing in the long-term, we sat down with John A. Goldstein, a real estate attorney and officer at Greensfelder, Hemker & Gale, P.C., in Chicago. With more than 30 years of experience as a real estate attorney, he previously worked as a name partner at Harris Kessler & Goldstein.
Q: Could you start by telling us a little bit about your background and your career as a real estate attorney?
I’ve been practicing commercial real estate law since 1984, so I’ve witnessed firsthand the ups and downs and the highs and lows in the real estate market. I am based in Chicago, but my practice is nationally focused, and I handle international transactions as well. When the market is up, I represent clients in the purchase and sale of real estate; office, retail, industrial and manufacturing leasing; real estate financing; and land use and real estate taxation. I’ve always been in private practice, and I’ve been a partner at various-sized law firms. In all these years, I’ve never thought about practicing in any other area of the law!
Q: How have you seen the industry evolve in the past years?
It’s an entirely different world than when I started out in the mid-1980s. For one thing, the development of technology has changed not only how attorneys practice law, but also real estate needs in general. Because of technological constraints, everything was slower in the past. We used regular mail and overnight delivery and spent countless hours in closing rooms getting deals closed. Now, everything is immediate and virtual (the pandemic notwithstanding), which in my opinion is a great thing!
Where a tenant would have required interior space for file storage 20 years ago, today everything is paperless and “dead” space is a loss leader. Where a purchaser would have spent countless hours gathering and organizing due diligence items, cloud-based deal rooms allow us to get right to the actual review. Where hours were spent signing loan documents, DocuSign makes execution simple. I’m predicting that the whole make-up of office space will be radically different in the very near future – but more on that later.
Q: What would you say differentiates the commercial real estate market in Chicago from other major markets in the United States?
Chicago is a city identified by its architecture. After most of the city was destroyed by the Great Fire in 1871, Chicago rose anew and saw the construction of some of the most prestigious buildings designed by some of the most celebrated architects of their day. Daniel Burnham, Louis H. Sullivan, Mies van der Rohe, Helmut Jahn and Frank Lloyd Wright, just to name a few, all left their mark on the city. That brings a certain pride to Chicago, and users of commercial real estate embrace and celebrate that tradition. Where you house your employees, where you build your plant, where you sell your products — real estate entrepreneurs take into account the prestige of Chicago architecture, whether consciously or not, when making these decisions. The city is also a financial hub, which attracts businesses from all over the world.
Q: Considering the COVID-19 outbreak, what are your thoughts on the CRE market in the US today in terms of trends and challenges?
We’re going to be seeing changes in the near future – we have to. With current situations firmly in place, such as lease terms not yet expiring, loans not yet maturing and purchases and sales in flux, these changes may not come about immediately, but the pandemic and the remote work situation have made it possible to test the waters for alternatives to the status quo. For one thing, working at home frees up office space and offers the possibility of a “hotel style” work situation in which employees can sign up for available space, come into the office and plug in for a day’s work. The days of dedicated offices (and certainly large corner offices) will be less of a priority when making plans for office space use. This affects landlords who have purchased, and now lease, real estate and their lenders who make loans based upon real estate as collateral. It’s up and down the food chain. For now, until we see how things ultimately play out, there are a lot of questions still to be answered.
While many contracts account for the effects of disruptive events, what is your opinion on the upsets caused by COVID-19 and the changes in working arrangements? Might some of these lead to unique claims or litigation?
The COVID-19 pandemic has caused landlords and tenants to reevaluate their needs in the long term and analyze their existing leases in the short term: What are the force majeure provisions? (These are the so-called acts-of-god provisions which permit non-performance based upon the occurrence of certain acts.) Is non-payment of rent permissible under a force majeure clause? Do the documents contain buy-out or lease termination clauses? What are the assignment and sublease provisions? COVID-19 has also made borrowers and lenders closely examine their loan documents to determine what financial covenants have to be met, what modifications to loan terms can be made, and what are the pros and cons of “giving” the property back to the lender by foreclosure, deed in lieu of foreclosure or other means? Purchasers and sellers of real estate are looking for outs contained in the purchase agreement and are scrutinizing due diligence timelines to see what they can do in the times of the pandemic.
Q: Have you noticed any changes in lenders’ attitude towards investing in commercial real estate, especially larger office buildings, now that several tenants are considering remote work in the long term?
Lenders look to rental payments as one of the primary sources of repayment when making a real estate loan. If the property they’re lending on is fully-leased with quality leases, the borrower has the best chance at timely paying debt service on the loan. So, lenders are paying close attention to their borrowers’ leases now more than ever to ensure repayment, which means that the negotiations between landlord and tenants are critical. Landlords need tenants to occupy their spaces, but tenants are hesitant to enter into long-term leases in today’s uncertain market. Everything is in flux until things settle down and we can return to some sort of normal existence. One thing is certain: there will always be a need for space, which means there will always be landlords, tenants, sellers, purchasers and lenders.
Q: In your experience, what are the most popular concessions that tenants with long-term office leases try to negotiate for? Do you think the effects of the pandemic might expand beyond the present context?
Tenants want flexibility. Landlords want certainty and need to satisfy their lenders. There has to be a meeting somewhere in the middle. Tenants in today’s world are looking for flexible force majeure language, early lease termination options, space configurations as reflected in lease work letters that are flexible and technology-friendly, and liberal assignment and subleasing requirements. Landlords want tight leases, but they realize in this climate they have to give on certain items. Lenders also want their borrowers’ leases to be as tight as possible as well. We should know in the next 12 to 24 months where all this is headed.
Q: Any other insights that you’d like to share?
It’s certainly not all bad news. There are some good opportunities available now as well. Subleases are a great way for an existing tenant to offload all or part of the expense of unwanted space, and prospective tenants can often move into subleased space without incurring prohibitive build-out costs. Often, these spaces are move-in ready. Purchase prices of real estate are all over the place, changing all the time. With a watchful eye, savvy due diligence and keen insight, there are good deals to be found in these unclear times. But care must be taken because things are changing so rapidly that what appears to be a great deal today may not be so tomorrow. In all cases, it’s always a good idea to have documents and specific relevant provisions reviewed by legal counsel in order to avoid misunderstandings and falling into traps.