THE SECRET OF THE LONG-TERM LEASE

March 2, 2021 1:31 pm


From the vantage point of ten months into the Sequester, when we look at New Jersey office properties we continue to see a remarkably consistent trend. Almost ninety percent of large office tenants have been paying their rent on time, each and every month, for the entire Sequester.

Why is this so remarkable? Well, as we  also pointed out in last month’s edition, more than seventy percent of office tenants have not returned to the office and those companies have not yet determined if or when they plan to return.

Now, if the heat supplied to the office buildings were not working this winter, or the water to the bathrooms were not turned on, you can bet that Tenants would be making one hell of a stink about it. They might even threaten to stop paying the rent. So, here comes the Pandemic and not only are tenants not complaining, they are not even willing to talk about it.

We were told to shut down for two weeks to stop the spread, which turned into thirty days to blunt the curve. Here we are, almost a year later and we are not back in the office and not talking about this. Remarkable!

Keeping our focus on office space, what no one could have imagined pre-pandemic is that work from home could turn out to be such a successful and easy to accomplish transition. Zoom did come at just the right moment, but it is far more than that. Our connectivity has allowed employees to practically be at the office from the safety of the home. They have access to all of the data that they would need at the office from the convenience of their living rooms.

It is also surprising that so many companies have been doing rather well throughout all of this. While we see that there are some winners and losers, the majority of companies seem to be doing just fine and, as we have pointed out in this series, these folks have not yet focused on the next steps.

Throughout all of this, Landlords of office properties in the Garden State have also been doing rather well. My readers have been asking me, “what is it that keeps office tenants paying their rent while they are not occupying the space?”

The secret is the LONG-TERM LEASE.

A little history. Back in the 1970’s New Jersey experienced a building boom leading to the construction of suburban office buildings and parks by speculative developers. Most of the office buildings we see in New Jersey were actually built way back then and there hasn’t been much new construction since. What was it that enabled these Landlords to successfully construct speculative office properties?

The secret was the acceptance by tenants of the long-term lease. Typical office leases here in New Jersey for newly constructed properties evolved as five or ten years, depending on the size of the tenant and the extent of the build out. For the last 50 years this formula has proved highly successful. The long-term lease was the accepted formula by New Jersey companies even as we later suffered through the recessions of the 1970’s and 1980’s and the subsequent savings and loan crisis. It was during those recessions when most of the original “Mom and Pop” entrepreneurial developers were replaced by pension funds and REITS funded by much stronger Wall Street investors, creating tremendous stability and far less volatility. Now jump ahead 50 years! So, when the Pandemic hit us last year it turns out that these stronger more stable Landlords have been able to stay focused and hang on.

The question now is where is all this going? What will happen as these long-term leases begin to expire over the coming years? Will Tenants want to renew and extend their leases? Will they determine that they need less space if work from home becomes the new normal forever? What affect will these factors have on NJ Businesses? How will all this affect the Landlords? Are we about to see the next great real estate recession? How will the new normal affect the LONG-TERM LEASE?

We at Dickstein Real Estate Services are helping decision makers at companies to rethink their office space from top to bottom. Do you need to reimagine your lease? If so, please call us for a confidential meeting to learn why, “OUR DIFFERENCE IS YOUR ADVANTAGE®”.

Regards,
Lawrence Dickstein

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