Commercial leases take a more generous turn 

Published January 29, 2021 by Carol Hazard

As Northern Virginia has been hit hard by rising office vacancies during the pandemic, companies there are increasingly seeking more generous lease terms and benefits.

“There has been a shift toward short-term renewals of existing leases,” says David Ritchey, executive vice president of JBG Smith Properties, a real estate investment trust based in Bethesda, Maryland, that is partnering with Amazon.com Inc. on its HQ2 project in Arlington.

The trend will likely continue, he says, until vaccinations reach a point to allow large-scale returns to workplaces.

“Our main objective is to ensure that our commercial tenants, especially small businesses and local retailers, are able to survive this crisis and that our residents remain safe and healthy. To do so, we are working with each tenant individually to craft tailored solutions to meet their near-term needs,” says Ritchey, who declined to give specific examples.

However, real estate experts say a trend known as “blend and extend” has been a common practice used to work with commercial tenants during downturns.

For example, if a commercial tenant is four years into a five-year lease and wants a reduced rental rate, the landlord may agree to a reduced rate for the fifth year and some subsequent years in exchange for a lease extension. Landlords also may temporarily forgive a month or more of lease payments, tacking those months onto the end of the lease for later payment.

Northern Virginia has seen a “severe vacancy expansion” in the past year, rising by 100 basis points from a year ago, says Nicholas Mills, senior market analyst for commercial real estate data company CoStar Group. “Rent losses aren’t as severe yet, but [the numbers] mask tenant improvement and concession packages.”

Some landlords are providing free rent, moving allowances or funds toward tenant improvements, says Joseph Farina, principal of the Washington, D.C., region for Divaris Real Estate Inc. However, landlords try to maintain rental rates per square foot to avoid property devaluation.

Meanwhile, some companies are extending leases early to take advantage of favorable terms, signaling that they are thinking beyond the pandemic. And other commercial tenants are taking advantage of more generous lease terms to build out space cheaply. “That is what is happening behind the scenes,” Farina says.

Landlords hope to get back to fair market lease rates within two or three years, he adds. “Let’s get through the winter and keep our fingers crossed that spring will bring good news.”