Archives for August 2020

Now that COVID-19 has disrupted the regular course of business again, there’s both an impulse and a tendency to assume that the same course of action will take place in response to another decline in the real estate market. I anticipate that the number of subleases will rise again as a necessary option for companies looking to shed space in the short term, and a new normal will set in ahead of office leasing velocity restoring to regular rates in the coming years. However, there is one fundamental shift we have never seen before: landlords entertaining far more lease flexibility than they have traditionally offered.

For as long as I can remember, tenants have requested shorter-term leases than the typical 5-10 year terms that landlords require. Over the past few months, for the first time I can recall in my career, landlords have started calling me directly with an open space in mind asking if I have any clients who’d like to tour. While these types of conversations take place all the time between tenant representatives and building representatives, it’s the balance of power that has clearly shifted already, with landlords initiating discussions about lease flexibility that go against their typical desire for long-term leases.
Our discussions last year about two-year leases largely fell on deaf ears with these same landlords. Now, they are reaching out to renew talks about those types of deals because they’ve awakened to the possibility that in the current climate it might be the best course of action for both sides. Right now, the tenant hopes to stabilize their business and to project what this global health scare will mean for them. And the landlord is hoping in the long run that the market bounces back in their favor. COVID-19 has already forced nearly every landlord to develop their plan to welcome new tenants, those demanding flexibility, into their vacant spaces. Instead of a simple “No,” the flexibility question is at this time being answered with another question, “What does your client need?”
In previous downturns, there was never a direct discussion about the future of office spaces and whether offices need to exist for a majority of companies. All of us who work in this field are paying close attention to the various components at play. What’s evident so far is that the concept of office space must adjust to the times and the current rethinking and reexamining taking place for many clients. Even those who believe their teams work better in the office must consider whether it’s a worthy financial investment for them for reasons related to health, liability and other mitigating factors. That concern has left some landlords sitting on empty space, month after month, and realizing these once coveted spaces may remain that way for a long time. What makes this especially scary is that we can’t compare it to anything else we’ve experienced before.
The flexibility that’s emerging isn’t only happening with regard to the lease term, though. Because of this viable threat that spaces could remain vacant for so long, landlords are more open than before to tenants preparing to take office space right away. From the tenant perspective, the market has already improved in lower asking rents, additional concessions, and a more balanced lease negotiation process. What may have once seemed like a labor-intensive and sometimes frustrating process from their perspective has transformed into a more seamless and more productive interaction for the tenant.
We believe that once schools reopen here in New York City in September, and parents can leave home for longer periods of time than they could have since March, there will be an influx of people looking not only for new office spaces, but to move in quickly. In the past, that prospect would have been nearly impossible to influence, with deals getting held up for weeks with delays around lease language and more. Landlords have instead indicated to us that if someone tours and selects a space in September, they will offer faster turnarounds for teams seeking aggressive move-in dates—which is mutually beneficial. They are likely to be more turn-key solutions focusing on flexibility and the elimination of significant build-out times, a path that growing companies may prioritize over the amenity-driven market we had grown accustomed to pre-COVID-19. A safe office to work from or to visit for a few hours at a time may be more valuable than having access to a terrace, for example.
Getting market momentum back through deals with so-called first movers is the name of the game. Those who are willing to commit early to subleases or short-term leases are likely to receive the best deals and be able to negotiate a more favorable lease in general. We expect this tenant-friendly sentiment will remain the new standard for some time, especially as questions remain regarding how office space will need to adapt to a pandemic-fearing population.
What happens next? What does this all mean for the future? I believe we will, for the first time, begin to see a ‘sliding scale’ of options at different price points, based on what the landlord can offer and what a tenant is willing to pay for. It will all come as part of a larger undertaking to simplify a cumbersome, outdated and sometimes discouraging process for tenants. Landlords, tenants and brokers may all benefit from an expedited deal process, which will minimize deal fatigue for all parties, and tenants won’t have to adhere to a landlord’s one-sided expected lease. A revamped leasing process that addresses the needs of everyone ushers in the bright future I foresee for this evolving industry.
Source: “How COVID-19 Reshaped the Landlord-Tenant Relationship”

“While the world is on fire, people are smoking more cannabis,” says McGraw, noting that the pandemic and lockdown elevated people’s stress levels to an all-time high, and cannabis “helps with that.”
An American Marijuana survey of 990 pot consumers verified McGraw’s contention, finding that 48 percent of participants stocked up on marijuana products amid the pandemic and 55 percent said they did it to help with stress.
BDS Analytics data also confirmed the premise, finding that cannabis dispensaries are seeing double-digit increases in sales, even after the $600 expanded federal unemployment benefit expired this summer. This is a trend that’s likely to continue after COVID-19 is long gone, according to Marijuana Business Daily.

However, there has been a lot of confusion among investors, especially at the start of the pandemic, because some states, classified cannabis an “essential” business, but others did not, notes Eric Altstadter, the lead partner with the accounting firm EisnerAmper’s cannabis practice. This was compounded by some states declaring medical cannabis “essential,” while recreational cannabis was not, he adds.
With pot now legal for recreational use in 11 and medical use in 33 states, cannabis is currently at $9.3 billion industry, according to Medical Marijuana Inc., which predicts that sales could grow to an estimated $30 million by 2025.
Going forward, the economic impact of cannabis sales on state and local governments may accelerate legalization of cannabis in more states, according to Altstadter.  “Speculators and entrepreneurs are starting to prepare for possible legalization of medicinal or recreational cannabis, or both, in six states expected to vote on this issue in the coming months, including Arizona, Mississippi, Montana, Nebraska, New Jersey and South Dakota,” he notes. McGraw adds Missouri, Vermont and Florida to the list, and says that Massachusetts is expected to open up more medical licenses and legalize it for recreational use.
“Cannabis has remained remarkably resilience through the pandemic, with better than expected sales growth in most markets,” agrees Matthew Karnes, CPA and founder of Greenwave Advisors, a New York-based cannabis research and advisory firm. But he warns, “As the economy continues to worsen, we remain cautious that these trends are sustainable.”
Heightened levels of anxiety and health concerns, in addition to the financial assault brought about by the COVID-19 pandemic, have arguably enhanced the cannabis legalization debate, Karnes notes. And to minimize budget shortfalls, it stands to reason that many states that are not already generating tax revenues from cannabis sales will now seek to address the prospect of legalization.
Practically speaking, it takes two years or more for a state to establish a cannabis market, but due to the need to increase revenue states may accelerate this timeline if medical marijuana is already legal there, he notes. Karnes cites, for example, New Jersey, which recently expanded and positioned its medical marijuana program so at the “flick of the switch” it could realize added tax revenue from recreational use sales if the measure passes in November as expected.
But the positive sentiment toward cannabis legalization isn’t translating into real estate investment activity, notes Jim Fitzpatrick, principal at Costa Mesa, Calif.-based Solutioneers, a consulting firm that helps real estate investors identify cannabis-compliant properties and obtain financing, who notes that economic uncertainty and other factors unique to the cannabis industry are negatively impacting real estate investment. As a result of the COVID-19 induced recession, Fitzpatrick notes that the U.S. capital market is highly constricted, but the high cost of occupancy (taxes plus rent) for cannabis tenants is also stifling investment activity.
Noting that Canada is still seeing cannabis real estate investment, while comparable U.S. figures remain flat, he contends that high taxes on cannabis recreational products are having a major impact on both the viability of legal cannabis production and real estate investment in cannabis-related assets. McGraw says he located his cannabis business park in an Opportunity Zone in Williams, Calif., which has no local or revenue tax, for this very reason. “This is a substantial competitive business advantage for our tenants as it lowers their overhead and increases margins for investors,” he says, noting that the average local or county tax in California is 7.6 percent, but can be as high as 25.0 percent.
“Cities are trying to fix their revenue shortfalls on the backs of cannabis businesses,” Fitzpatrick notes, explaining that high taxes, along with rent premiums in “green zones,” are driving the cost of recreational cannabis products to levels unacceptable to consumers. As a result, cannabis recreational users are returning to the illicit market or obtaining medical marijuana cards, because medical cannabis products aren’t taxed or are taxed at a much lower level.