People are asking me what the fallout will be from the COVID-19 pandemic. What follows the pandemic shut down will certainly be a recession, but the “other shoe” hasn’t dropped yet. Tenants are getting a lifeline from the government in the form of cash infusions, disaster loans and eviction moratoriums. Landlords not wanting to invite calamity are extending a
lifeline in the form of rent deferrals and in a few cases, rent relief. This may be enough to help some tenants weather the economic hurricane but not all. Many businesses will fall over the precipice when the relief efforts stop.
When office space users fail or change course, their one hope is subleasing their space. Sublease space is typically priced below the market to compensate for the lack of term flexibility and the absence of landlord tenant improvement capital. Discounted sublease space competes with the landlords that are trying to lease vacant space in their buildings and in turn drive rents
down. You get it: the typical recession spiral.
By some accounts, tech-centric Silicon Beach (Santa Monica, Venice, El Segundo, Playa Vista, and Culver City) had already crested and the pandemic shutdown only gave it a push into the coming recession. Sublease space in this submarket is now a jaw-dropping 5% of the total office inventory…normal is about 1.5%. This is a particularly dramatic example but expect sublease
availability to rise everywhere.
Landlord’s are more resilient to market wavers and can hold the line on rents. Desperate tenants that are burdened by rent they cannot afford are more likely to panic to get rid of these obligations. For opportunistic office tenants, now is the time to start looking. Get a good tenant rep broker on your team to keep an ear to the ground for great deals in your submarket.
Happy hunting!
If you or your clients are feeling unsure about their options or strategy going forward with respect to their business real estate, feel free to reach out to me for some complimentary guidance at (213) 258-6921.
