As I write this article it appears that the California, Los Angeles County and local City Stay at Home Orders are going to be extended past the current May 15 date and might continue for several more months. However, more businesses will be allowed to reopen. In fact, retail establishments are now open for curbside service and auto dealers are open with restrictions; however, restaurants and bars will continue to be take out or delivery only. As my partner David Poole mentioned in our April Sidebar Real Estate Disputes especially with commercial property owners will be plentiful. In addition, many jurisdictions have passed Ordinances prohibiting a landlord finding a tenant in default if their failure to pay is due to COVID 19 and prohibiting the ability to evict a tenant while there are still the Emergency and Stay at Home orders in place. In addition to these ordinances our courts have suspended most of its activities including the filing of Unlawful Retainer Actions and Governor Newsom has issued an Executive Order also delaying Unlawful Detainers, leaving a commercial landlord has few options to ensure that their tenants pay their rent in a timely fashion.
As you look at your commercial properties you should categorize your tenants into several categories. The first is whether they are not allowed to operate under the Government Orders and can not conduct any business. These are primarily retailers in small centers and malls. While there has been some recent opening of these restrictions, only curbside pickup is allowed, and it is unknown when even regulated small groups will be allowed into the stores and when malls will be allowed to reopen. Some restaurants have been generating some business with their curb side pickup and delivery programs. Initially, those who already had an extensive take out platform were able to hit the ground running, while others had to build up and enhance their platform and push their social media presence. However, even the most successful are probably doing less than 50% of their previous business which means less employees and a challenge to still pay their rent and the rest of their bills. Malls and retail centers were already being challenged due to the competition from Amazon and other providers of goods directly to the homes. This crisis will only make it even more challenging for retailers.
Another category are office tenants who either have been able to continue in business as essential or are now being allowed to reopen with health guidelines. During this crisis, many businesses, including larger companies, have arranged for their staff to work remotely. Our firm had already established a home remote system where our laptops could connect to the firm server and our office phones had WIFI connectivity, so they work at the staff person’s house. However, some firms had to develop systems to transition to the remote working format. It is important to note that even before COVID 19 more and more office workers and self-employed professionals were working at least some of the time from home and remotely. Although it is too soon to tell if this increase will become permanent due to the experience of COVID 19, if companies are able to ensure the performance of their employees remotely, it should be expected that many employers will continue to have more employees work remotely and factor in the significant cost savings in not having to lease large amounts of office space. This would result in the significant decrease in the need for commercial official space.
Commercial landlords can take several initial steps as this crisis continues. Regarding existing leases, work with your tenants considering any local ordinances to make amendments which can work for both you and the tenant. This can include deferring rent to later in the lease term and getting an extension to the lease term. If your tenant received a PPP loan up to 25% of that forgivable loan can go to rent and you should work with your tenants on that program. On the longer term, you need to brace for the potential of office tenants not renewing, or decreasing their rented space, as they find it cost effective for more employees to work remotely. You may have to provide new incentives and amenities which make a business understand the value of having their employees together, albeit safely.
Suburban communities like the Antelope Valley, Santa Clarita Valley and Ventura County will need to factor in this exodus of office workers to working from home in how they look at proposed commercial and mixed-use development projects.
Regarding housing, new developments have continued to sell new homes and according to the Southland Regional Board of Realtors prices of existing homes remain strong. While some development deals for new entitled projects are being delayed, others are proceeding and there are opportunities since the need for more housing, including affordable housing, has not changed. While local governments like the County of Los Angeles and City of Santa Clarita initially had limited staff upon the initial closing, in a couple of weeks staff was available remotely and all local governments now actively processing development projects along with building permits and inspections, some of which this firm represents. It appears that construction and new development could be one of the leaders for our economy out of this forced recession some great potential opportunities.
Please remember that the economy was in good shape prior to COVID 19 and once the Government Orders are lifted or significantly allowed with health protections housing should be a leader in the rebound. However, commercial properties, including retailers, will need to think strategically on how to survive this most recent impact on their business model.