What The Results Of The NH Business Resiliency Survey Mean For Commercial Real Estate

In June, the University of New Hampshire Survey Center worked on behalf of the NH Small Business Development Center to conduct a survey of over 1,500 small businesses in New Hampshire. The survey was distributed through over 50 business organizations throughout the state, and the highlights can be found here https://www.nhsbdc.org/2020surveyresults. The questions asked in the survey were specific to the economy and COVID-19.  

We wanted to share our thoughts on the results, as it impacts commercial real estate.  Let us start with the more empirical data from the survey, as questions relating to a business owners belief or concern can be heavily swayed by many subjective items.

Employment is a key driver of real estate consumption. For office space, a full time employee will need 200 to 300 square feet of space in an office environment, though there is less of a clear correlation in the retail and industrial markets.  In February of this year a similar survey noted that all businesses in the data set averaged 22 employees, while the June survey resulted in 18. However, a positive sign is that the decline in employment was centered on only 40% of the businesses surveyed.

The suggestion from this correlates with the essential/non-essential data. Just over half of all of those surveyed were deemed non-essential. These were a wide range of retail, hospitality, and some service businesses.  It remains to be seen, but it appears that the steep decline in employment was centered on the non-essential businesses within the retail facing world. Largely speaking, office employment appears to remain steady. 

In addition to employment data, the survey also drew inference on businesses ability to meet their other commitments, such as paying rent. Close to half of all businesses surveyed claimed their revenue dropped by 50% or more. What is alarming is a majority of the businesses surveyed were unable to defer or modify any payments to vendors, such as landlords. Clearly this would create a huge imbalance that is not a surprise to anyone.

To reclaim these lost revenues, businesses sought new funds from various services to meet obligations.  Of the relief programs supplied by the Federal Government or the State, the Payroll Protection Program was utilized by 60% of all of the businesses, the Main Street Relief was used by about 40%, and the Economic Injury Disaster Loan was used by about 25%.  To get into the numbers, it appears that food service and hospitality were more likely to take out the EIDL Loans or the Main Street Relief Funds. These are the same businesses who were more likely to have their employees go onto unemployment while their businesses were deemed non-essential.

More subjectively, a majority of business owners feel that the NH Economy will recover within the year. But, business by business, there is concern about the forthcoming changes. A strong majority see work from home being a key focus of their business planning, along with changing a physical location. The data does not go into more specifics, but it is clear that we all are looking at ways to be more flexible with our space. It remains to be seen if this translates into a lower demand for office square footage.

Of note on the retail side would be that close to two thirds of all respondents see the need for curbside pickup and the same amount for delivery. In a practical sense, what will that mean for civil engineering moving forward? Do we need new lanes and parking spots to accommodate the quick in and quick out that these concepts demand?

The data is always to be taken for the snap shot it is. Commercial real estate is slow moving, as leases, purchases, and developments take time. It remains to be seen how these statistics will impact the details of the commercial real estate deal.

Leases In The Time Of COVID-19

COVID-19 has had a giant impact on our way of life, though at his point that doesn’t need to really be said. But with every day that brings us a new normal that we have to adjust to, it also brings new repercussions. That is also true for the commercial real estate sector, particularly commercial real estate investors and users.

As more and more businesses begin to shut their doors to work from home, or because of government mandates, questions have begun to arise for both owners of commercial spaces and their tenants. The biggest question of all, “do tenants have a right to stop paying rent due to the coronavirus?” This is a complicated question, one that, depending on how long the pandemic lasts, might be answered by the state, if not federal, government.

The answer to the question is, in most cases, no. Whether a tenant has a right to stop paying rent due to “force majeure” or any other number of clauses is ultimately based upon the specific language and terms laid out in each specific lease agreement. This, though, does not take into consideration if a floor or entire building is closed down by either the property manager or owner. Before mandating a floor or building closure, landlords and property managers should carefully review all possible impacts that decision could have.

While the legalese of each specific lease will ultimately determine whether a tenant is required to pay rent, landlords and tenants should still review their leases to ensure they understand their rights in these unprecedented times. 

At the end of the day though, due to the stress that many tenants, especially those in retail and hospitality, will be feeling at this time, the government may see it fit to step in and take extraordinary measures to ensure that businesses and people survive the financial impacts of the pandemic. For multifamily owners and tenants there have already been discussions within government of suspending rent payments, and some states, including New Hampshire, have already suspended evictions. This is also inclusive of commercial evictions as well.

The most important thing for tenants and owners to do right now is open up communication channels to discuss issues both tenant and landlord face, and come up with creative solutions that benefit both parties. For example, relaxing enforcement of continuous operation covenants, or, if a tenant comes to a landlord needing rent relief, entering into short-term arrangements that provide partial base rent abatement.

While challenges do indeed lay ahead, they can be overcome. By understanding that we are all feeling financial and personal stress right now, and finding ways to work with each other, we can come to a common ground that is fair to both parties. Taking this approach in life, and in real estate, will make dealing with the effects of COVID-19 at least a little easier to handle.

Resizing the Retail Footprint

For those of you who split your shopping time between shopping on the computer and going to the store, you are not alone. There are more and more folks pre-shopping than ever before. So what does that mean for retailers and landlords?

For office managers or parents of kids returning to school

know, Staples has all of your office/school supplies that you will ever need. Their typical stores carry around 7000-8000 SKUs or different items in stock. They are considered a “Junior Anchor” in retail real estate speak with around 18,000 to 24,000 square feet per store. Their new model, introduced last year, will be about 12,000 square feet and carry about 15% fewer SKUs.

How can a store shrink their footprint and inventory and be successful? Like so many retailers… follow Apple. The major retailer’s stores are beacons for innovation. Shopping is an experience, with kiosks and a touch and play ability of their products.

Apple have the success to show for it. Each store, at 7900sf, earns about $5600 per square foot per year in revenue. The closest competition, Tiffany & Co., is half of that with Coach rounding out the top three. For those of us not shopping at Tiffany or Coach; Best buy has around $800 per square foot in revenue. In order to mirror Apple’s success of a shopping experience and its revenue per square foot, Staples is looking to have new kiosks and online shopping within their new stores.

Other types of retailers are getting into the mix. When was the last time you saw a “red roof” Pizza Hut under construction? The older model was in and of itself its own signage. However stand alone “pad” stores cost more money than their inline brethren on a per square foot basis. The new look Pizza Huts are not only taking advantage of these lower in line costs, they are also shrinking the foot print by 30-40%, for less overhead.

With shrinking footprints, what does this mean for property owners? For many owners it may be about diversity. Are there ways, over time, to add more suites to your space if you have downsizing of tenants. Rather than look at the negative, think of the diversity of income and the experience for shoppers. Who are complementing retailers for your existing base? Furthermore retailers will be demanding a better experience for their shoppers, so expect façade and ground improvements to be key among tenants.

Written by Chris Norwood, NAI Norwood Group

For more information about commercial real estate, please visit our website: www.nainorwoodgroup.com 

Press Release 21 Congress St. Portsmouth

Portsmouth, NH – Andy Fleisher of NAI Norwood Group Portsmouth announces that Thirsty Moose Taproom & Pizzeria, LLC has leased the property at 21 Congress Street, Portsmouth, NH. Andy Fleisher of NAI Norwood Group represented the landlord, Wenberry Associates, LLC and Chris McInnis, Paul McInnis, Inc. represented the tenant.

The Thirsty Moose moved in May 1, 2012 and will be opening soon. Owners Joe Kelley and Carrie Stepien have given the place a face lift complete with a new bar and a replica of the Memorial Bridge inside. They will have an amazing 100 beers on draft to accompany an American Bar & Grille Menu featuring meats made in house from scratch and gourmet pizza. Joe Kelly and Carrie Stepien also own and operate Joe’s New York Pizza and Fat Belly’s in Portsmouth.

Property consists of 7,000± square feet of restaurant and kitchen space and a 2,000± square foot lower level space that is built-out for a bar, with area for music and/or dancing.

NAI Norwood Group is an affiliate of NAI Global, the world’s leading managed network of independently owned commercial real estate brokerage firms. Through this network of 355 offices in 55 countries, NAI Norwood Group is able to leverage their strong local experience around the world. With our extensive background and strong local contacts, we are able to assist individual corporations in negotiating leases, sales, business brokerage, investments, relocation, site selection and development. For more information please visit http://www.nainorwoodgroup.com/. Or contact one of our offices: 116 South River Road, Bedford, NH 03110, (603)668-7000 or 100 Market Street Suite 200, Portsmouth, NH 03801 (603) 431-3001.

How to Tenant Your Building in Today’s Dynamic

by Chris Norwood, cnorwood@nainorwoodgroup.com

Spring is here. The clocks have been set forward and the flowers are blooming. The Red Sox are dusting off from last season and the B’s and C’s are planning for the post season. As we look forward to some late season action, we got to thinking: How is tenanting your building much like a late season or post season sporting game?

At the end of the 2004 season, Terrell Owens at the prime of his career with the then NFC Champion Philadelphia Eagles was set to play the New England Patriots in the Superbowl. We all know that the Pats went on to win that game, but on the losing side of the ball, Owens played one of the more dramatic roles in a Superbowl loss. Owns snagged nine receptions for one hundred and twenty two yards in a loss, on a broken fibula. Win or lose it was the last game of the seasons so he went out there with a broken leg and played.

Game six of the American League Championship Series against the New York Yankees in 2004. In a must win scenario, Curt Shilling takes the mound for the Red Sox with his injured ankle. It was “do or die” and in those situations anyone is available. Any player, injury or not, rest or not is available to pitch or be in the field, because “there is no tomorrow”.

As bleak as “there is no tomorrow” may sound, it has its applications in real estate as well. When positioning your property to the market and to prospective tenants what are your realistic terms to get the property leased. Would you take a short term lease? What about the credit of the tenant you are seeking? Would you consider a gross lease? What about pricing? What role does your lender play? Often times properties are marketed like it is an early season baseball game. We will field our team and see what happens, if our pitcher gives up a few hits, we will leave him in and see if he can work out of it.

We feel that today’s market is much closer to a post season game. You want to leave some players warm in the dugout or in the bullpen, but make sure you put your best team on the field. Consider lowering the price, or furnishing the space. Not all lease negotiations are about the rental rate.If you would consider improving the space, why wait, do it now to attract the tenant or have a conceptual or a rendering done. It makes sense to have these discussions before the property is put to market and before the marketing has been created.

Most real estate plays out that a landlord will put property out there for lease and a tenant comes along and puts in an offer. The landlord, feeling he has some negotiating room puts in a counter offer, figuring that there is one more bite at the apple. But the apple never comes back, the tenant relocated to another building. Negotiations in today’s economy are one or two innings, not nine like they used to be.

Most importantly in today’s market, once a tenant is found and has some interest in the space, give Shilling the ball. Put your best foot forward, bloody sock and all, and give your best offer to the tenant. The Sox had a game seven that year and went on to win the World Series for the first time in generations. A landlord may not have the luxury of a game seven.

Just What Am I Surrendering In a Surrender Clause?

by Chris Norwood, cnorwood@nainorwoodgroup.com

If you have a lease, either as a tenant or as a landlord, there is no telling how many pages it could be. Some of you may have three page leases, others thirty or more pages. It is safe to assume that if you have a three page lease, the likelihood of a surrender clause being inside is slim. But no matter how many pages, review your lease to find out if you have this clause, it could make all of the difference when the lease is done.

Surrender does not mean that you are laying down your arms and raising the white flag. In this case we are discussing what the condition of the leased premise will be when the tenant vacates the space. The clause will dictate what should stay or should leave with the tenant and what the consequences are if the tenant does not perform based on that outline.

There are no standards when it comes to what to expect when a lease is up. It is fair to say that reasonable wear and tear (carpet stains, wall marks) is acceptable to landlords, however this is not always the case. The largest thing to investigate from both a landlord and a tenant’s perspective is what if there has been construction. What happens then?

CASE STUDY:

Sally’s Seashells sells seashells in the seacoast. In her original 5 year lease Sally leased 1000sf in a small strip plaza. In her third year space was going so well that she leased an additional 1000sf. She knocked out a firewall that joined the two units and build out some new offices. In addition she installed, at her cost, a new loading dock so she could get larger seashells delivered. Now five years is up and she is leaving… What now?

In a simple context, most items that are affixed to ground will stay with the landlord. This would include new offices and a loading dock. But what if the loading dock at an electronic leveler, that was movable? What about the demising firewall, should Sally install a new one to put it back how it was? What if 2000sf units are now more leasable than 1000sf units?

A seemingly black and white lease clause becomes somewhat variable based upon market conditions and the desires of both parties. The recommendations, though simple, are very effective. 1) Before entering a lease, take pictures and itemize what is there. 2) if either side performs construction or amends the lease, itemize everything and discuss your intentions. 3) when tenants are known to be leaving start the conversation early, you may find that both sides share more common ground.

There are no guarantees and leasing is no exception. As such there are no “standards” when it comes to lease language, you must consult your own lease and your own counsel if necessary.  However, our team is always available should you have any questions on this clause or any other’s in your lease, we will be happy to point in the right direction.