July 2020 Leasing Conditions in a Pandemic Environment

This report discusses the results from a survey about leasing conditions in the second quarter of 2020, capturing the critical period when almost all states implemented stay-at-home or shelter-in-place orders that ground business to a near halt, resulting in office, business, and recreational facilities closures and an unprecedented surge in unemployment.

The coronavirus pandemic has heavily hit the demand for commercial real estate: multifamily, office, retail, and hospitality/lodging. This report discusses the results from a survey about leasing conditions in the second quarter of 2020, capturing the critical period when almost all states implemented stay-at-home or shelter-in-place orders that ground business to a near halt, resulting in office, business, and recreational facilities closures and an unprecedented surge in unemployment.

The long-term effect on the demand for commercial space is still unraveling. This survey is intended to gather information on the impact of the pandemic on renters and landlords alike on key indicators such as rent payment received, rent payment options for renters, leasing volume, vacancy, rents, common area maintenance fees, lease term, and changes in the work place.

Key Findings

Rent Payment Received: Residential

95% of rent due in 2020 Q2 was paid among tenants in single-family rentals while 90% of rent due was paid among tenants in apartment unit rentals.
96% of rent due in federally-assisted housing was collected, higher than the 90% rent payment rate in conventionally-financed apartments and public housing.

Rent Payment Received: Non-residential

95% of rent due in 2020 Q2 was paid among tenants in office class A and industrial flex properties managed by the respondents., while 90% of rent due was collected from tenants in office class B buildings and industrial warehouses.
70% of rent due was paid among tenants in retail strip centers and free-standing retail stores, while only 53% of rent due was collected from retail malls.

Bar graph: Median Percent of Rent Due in Q2 2020 That Was Collected, by Property Type

Rent Payment Options: Residential

64% of respondents reported landlords offered rent payment options to residential tenants (36% did not offer any rent payment option).
The most common form of assistance was allowing the tenant to pay the missed rent over several months (43% of respondents reported this).
Rent payment options offered included rent abatement or rent reduction; frequent, smaller rent payments; and "other payment options" such as "no late fees or charges," "use of the security deposit," and "not increasing the rent when the lease is renewed."

Rent Payment Options: Non-residential

69% of respondents reported landlords of non-residential buildings offered rent payment options (31% did not offer any rent payment option).
The most common forms of assistance were allowing the tenant to pay the missed rent over several months (47% of respondents reported this as an option) and rent abatement or reduction (43% of respondents reported this option).
Other payment options cited by respondents were "extending the lease term for deferred rent," "extended term on rent abatement," "using deposit for rent," "lump sum due in one year," "no late fees," "amortizing unpaid rent over some months," "deferring missed rent to end of the term," "delaying common area maintenance dues."

Eviction: Residential

The median response about the fraction of residential tenants who were in the process of being evicted in 2020 Q2 was 2% for apartment class B/C tenants and 1% each for tenants in conventionally-financed apartments, public housing, and single-family rentals. The median was 0% among tenants in apartment class A and federally-assisted housing buildings.
However, the median response about the fraction of residential tenants that have been evicted as of 2020 Q2 compared to the number of tenants in January 2020 was 0% for all types of residential housing.

Bar graph: Percent of Residential Tenants in the Process of Being Evicted in Q2 2020, by Property Type

Eviction: Non-residential

The median response about the fraction of non-residential tenants who were in the process of being evicted in the past quarter was highest among retail strip center tenants at 5%, followed by office class B/C tenants, at 3%.
The median response about the fraction of tenants who were in the process of being evicted in office class A and industrial flex buildings was 0% each.
However, the median response about the fraction of non-residential tenants that have been evicted as of 2020 Q2 compared to the number of tenants in January 2020 was 0% for all types of residential housing.

Vacancy Rates

Hotels had the highest vacancy rate, at 73%, followed by retail malls, at 25%, and free-standing retail stores, at 20%.
Office vacancy rates were at 15%, and industrial vacancy rates were at 10%.
Residential buildings had the lowest vacancy rates, at 8% among apartment buildings and 5% among single-family units.

Leasing Volume

Leasing volume (renewal and new leases ) declined the most at retail malls, down by 10% year-over-year in 2020 Q2, by 8% in strip centers, and by 7% in free-standing retail stores.
Leasing volume was down on average by 5% year-over-year in office properties.
Leasing volume in apartment buildings was down 3%. On the other hand, leasing volume increased by 1% in single-family home rentals.
Industrial warehouse properties had the lowest decline in leasing volume of 1%.

Effective Rent

Hotels suffered the largest decline in effective rent per square foot, at 7%, followed by retail malls, strip centers, and free-standing stores where rents were down 3% to 5% on average.
The effective rent for office space declined by about 3% year-over-year.
The effective rent for apartment was down by about 2% to 3% year-over-year. However, it was slightly up for single-family home rentals.
Industrial flex and warehouse properties had a slight decline of less than 1% year-over-year, with a lower rate of decline in the effective rent in industrial warehouses.

Common Area Maintence Fees

Across all property types, respondents reported that the bulk of landlords have not increased common area maintenance (CAM) fees.
On average, respondents reported a decrease in CAM fees for non-residential property types. Some respondents had reported that not increasing CAM fees was one way of assisting tenants with the rent payment
While CAM fees declined on average, about a fourth to a third of respondents reported that landlords have increased CAM fees, with the highest share of respondents reporting an increase in CAM fees in office buildings and retail strip centers.

Lease Term and Changes in the Workplace

Seventy-three percent of respondents reported they are seeing more office implementing staggered work schedules, so more than half also reported that companies are paying for expenses related to working from home (54%) and making investments to keep work places safe (71%).
Forty-two percent of respondents reported more short-term leases, but nearly half reported that lease terms have remained the same.