How Covid-19 is changing the face of the commercial real estate market

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Workers are expected to return to full force in the next few months as Covid-19 restrictions are lifted across Arizona and many employers are tweaking how to get everyone back to the office – or not.

One of Arizona’s top real estate attorneys Jay Kramer of Fennemore Craig, told the Chamber Business News about what to expect and advice for employers on how to move forward.

The first challenge will be to motivate employees to return to their jobs, Kramer said.

Jay Kramer

“People were out of the office for a while, and in Phoenix you can get there and back in 40 minutes to an hour,” said Kramer, a partner at Fennemore, based in Phoenix. “If they go back to the office and just walk into a booth or close their office door, that cannot be a reason to return. So we need to make it more enjoyable, more collaborative, fostering collaboration and communication, and providing people with quiet places to work. ”

Now that the Centers for Disease Control (CDC) has restrictions liftedKramer predicts that employees will be back in full strength by the end of the year.

Kramer offered his predictions for the future and some tips:

Forecasts for the short and long term

In the short term, the commercial office market will remain uneven, and Kramer advises staying flexible right now.

“I think there will be a knee reflex response first:“ How can we reduce the space? “” He said. “Most companies will be in a hybrid environment and wonder why they need as much space as they have when only 50 percent of their employees are in the office on any given day.”

More office space may be required in the long term due to the need for more collaboration space, social spaces, quiet spaces and conference rooms for meetings, he said.

“In fact, we may need the same or more space because of all these experimental requirements that we need to get people back to work in the office.”

Big headquarters may be out of date

The larger headquarters can be expected to move to closer regional support offices to provide greater travel convenience for employees, Cramer said. Many offices will also need to be “rethought” to make them more attractive to attract staff for a few days a week or more.

“Instead of having one large corporate office located downtown or on 24th Street and Camelback, it might be better to have two or three small offices around the valley, closer to where your employees are located, so that they there was a place to go where you could show a sense of camaraderie, community and firmness, ”said Kramer. “But at the same time, limit travel to work and limit your exposure to large numbers of people.”

Time to think about flexible rental options in the future

Over the past 14 months, many large companies have been able to get their mortgage and rental payments in 2020 because they were able to cut other office management costs by as much as 20 percent.

Going forward, CFOs may need to consider reducing the cost of existing leases through means such as sublease. Now is a good time to think ahead about how to renegotiate the lease to provide flexibility for expansion and contraction.

“It is very difficult to change a lease during the existing lease term unless you agree on a contract, expansion options, early termination clauses, or something similar,” Kramer said. “Thus, most of us will continue to have to live with the current office space.”

Sublease surplus right now

Now, when everyone is trying to sublet, it can be difficult to find takers. Companies may find they have to modernize their offices to survive.

“Flexibility will be key issues, which means being able to contract and expand your space, being able to extend the term, but also being able to terminate the lease,” Kramer said.

Knowing that government regulations or orders may limit the number of employees who can be in the office, more emphasis will be placed on force majeure provisions and leases and possibly convictions.

Tenants are now in a “leverage” position

Leverage is currently with tenants, which means landlords are more likely to operate with flexible lease terms and conditions.

“So, if your lease is about to expire, you can usually look at your lease 18 months before the expiration date, but you can start searching three years in advance now and see if there is something you can do.”

Residential property boom will benefit the commercial market

Given that the housing market in the Valley is on fire, the commercial real estate sector will benefit as well.

“With a lot of people, you assume that more businesses, whether small or large, will either start here or perhaps move their headquarters or regional headquarters to the area.”

As people move to the region, new knowledge-based businesses and higher salaries will follow.

“The next five years in the Valley will be good times for the real estate market. There will probably be some spikes, but I think the overall trend will be very positive. “

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