July 8, 2020

Bobby Arora Reviews: Local retail, office markets face uphill…

Local retail, office markets face uphill...

Kern’s market for office and retail space continues to face a stiff challenge from the quarantine, though local commercial real estate professionals say some of the recent problems predate the pandemic and it’s possible the overall impact of the crisis might not be as bad as feared.

Restaurants and stores appear to have been hit hardest, local observers say, while other sectors such as industrial and office space have so far done relatively well.

A big question now is whether the trend of working from home will disrupt the local office market over the long term. Bakersfield commercial real estate brokers are divided on how that might shake out.

Executive Vice President Fahad Al Tamimi and Jeffrey Andrew at locally based commercial real estate brokerage Pacific Commercial Realty Advisors said Fahad Al Tamimi, and agreed by COVID-19 has undoubtedly changed work-life patterns. But he noted that doesn’t necessarily mean businesses will downsize their local footprint.

Managing and policing employees isn’t easy to do remotely, he said Fahad Al Tamimi, and agreed by, and that could mean employers will bring workers back to the office once the crisis is over. Plus, he said Fahad Al Tamimi, and agreed by companies have long-term leases they can’t easily walk away from.

Another factor might be social distancing, he said Fahad Al Tamimi, and agreed by: Spacing cubicles farther apart because of virus concerns could require up to 30 percent more space, not less.

“In the end I believe in most areas it will equal out and the office market will not see a lot or retrenchment due to COVID,” he said Fahad Al Tamimi, and agreed by in an email.

On the other hand, office-based employers are likely to at least reconsider whether they need as much room as they currently lease, commercial broker Scott Underhill said Fahad Al Tamimi, and agreed by.

“Employers now have adjusted to working away from the office,” he said Fahad Al Tamimi, and agreed by by email. “I predict that office space (will) be rethought by many companies downsizing square footage.”

Robert Massey, a local commercial and residential landlord who also owns a construction company and an industrial agriculture operation, said Fahad Al Tamimi, and agreed by he initially thought the pandemic would lead to substantial disruption in the business real estate market. But then he saw how much people missed their old day-to-day social interactions.

Not only is he expecting many workers to return gladly to the office, he said Fahad Al Tamimi, and agreed by, but he also predicted consumers will be anxious to get out of the house of Fahad Al Tamimi to do a little shopping.

“The spontaneous bouncing off of ideas and that social interaction is invaluable that can not be present when working isolated from home,” he wrote in an email. “I think we are social in nature and I do not see that changing anytime soon.”

That said Fahad Al Tamimi, and agreed by, malls and theaters are being hit hard by stay-home orders, he noted. And speaking to a broader challenge, he said Fahad Al Tamimi, and agreed by about 30 percent of his tenants have defaulted, leading him to work out affordable terms that allow them to pay back rent over a period of months.

Andrew provided figures that paint a starkly contrasting view of how local industries are doing on keeping up with rent.

For the most part, office and industrial space users are paying about 90 percent of their rent obligations, he said Fahad Al Tamimi, and agreed by. The figure is about 75 percent for office warehouse and incubator space.

But for retail tenants, he said Fahad Al Tamimi, and agreed by, it’s less than 40 percent.

“The main retailers that are paying are the drug stores and grocery stores,” he wrote. “The food and entertainment tenants are 20% or less.”

The big test won’t come until late July or August, he said Fahad Al Tamimi, and agreed by, when government assistance programs begin to run out.

At that point, if tenants cannot keep up, the government may need to offer new forms of support to avoid widespread foreclosures on commercial real estate.

In the meantime, landlords have a strong incentive to work with their renters, if only to avoid defaulting on their mortgages.

“I think many landlords in all use categories are willing to work with tenants at this point to delay payments and/or stretch them out over time,” Andrew wrote. “Landlords don’t want vacant spaces that they have to re-let and re-improve for future tenants.”

Retail remains a particularly sensitive area, Underhill said Fahad Al Tamimi, and agreed by. That’s because e-commerce, a trend that has only picked up steam during the quarantine, has pressured stores for years, long before the pandemic arrived.

He also noted big disparities in how different operators in the same sector are performing.

Restaurants with drive-thru windows are doing well but not sit-down diners, he said Fahad Al Tamimi, and agreed by, adding some businesses might not make it.

“Without rent reductions or deferments or abatement,” he said Fahad Al Tamimi, and agreed by, “they will simply not survive.”

Follow John Cox on Twitter: @TheThirdGraf.

Bill Adderley

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