This Is Not a Fire Drill
By Brion J. Kirsch and James F. Martin
Remember in elementary school when they would have a planned fire drill? The alarm would go off, and students lined up in an orderly fashion and walked single file to the nearest exit and out into the schoolyard. Inside, the school was completely empty.
Obviously, the circumstances are light years apart, but that’s essentially what occurred in office buildings in March 2020. One minute, every room is filled with people working at their desks; next thing you know, the entire place is vacant.
What would always happen after the fire drill — everyone was back at their desks in about 10 minutes — didn’t happen in office buildings. It’s been almost three years. Some are never coming back.
Remote or hybrid work is here to stay, and people’s habits and expectations have changed. As a result, the commercial real-estate market is facing challenging times. In Western Mass., for example, the vacancy rate for office space is of concern to landlords along with the reality of expiring leases for downtown office space. However, the more attractive rental price per square foot of class-A office space in Western Mass. serves as a significant advantage to retaining and attracting tenants when coupled with the lower cost of living in contrast to Eastern and Central Mass.
Thus, there are some reasons for optimism, and potential options for landlords and tenants alike.
The continuing development of multi-family apartment complexes in both the cities and the suburbs is a promising sign. And with the proliferation of shopping from home and consumer subscription services, industrial properties like warehouses and fulfillment centers are in high demand.
Options for Tenants
For employers who now have more workspace than on-site workers, subleasing is an interesting option that can both reduce expenses and boost revenue. This requires a conversation with the landlord, but if conducted in good faith, it can be a win-win situation.
With a landlord’s consent, a majority of commercial office leases allow subleasing and partial assignments. But finding an occupant to sublease part of your space is far from the final step; legalities and practicalities abound. The documentation must be specific and thorough as there’s an extra added layer of complexity in these situations.
Taking a contractual agreement between two parties and adding a third opens up room for all sorts of unexpected conflict and misunderstandings. The language in the agreement must be crystal clear.
“With a landlord’s consent, a majority of commercial office leases allow subleasing and partial assignments. But finding an occupant to sublease part of your space is far from the final step; legalities and practicalities abound.”
The biggest concern is historic and/or prospective liability. One party’s transgression may have a direct impact on the other party, even if there is fault on only one side. Something else to consider is the construction of a demising wall for the new tenant’s subleased space. To be up to code, this new area will also need proper access, exits, and restrooms, in addition to other possible requirements, such as a kitchen or metered utilities.
Depending on the terms of the lease, there may even be an express option that simply allows for the reduction in the total area being occupied and would prevent the need to sublease.
Options for Landlords
There’s an opportunity now for landlords to make a long-term play by allowing tenants to make modifications to their original lease. The value in this circumstance arrives in the form of an early renewal or extension of the current lease, in exchange for allowing the tenant to sublease a portion of their space or shrink their footprint.
As many business owners have discovered in other industries, incentives are becoming a more crucial part of attracting customers or, in this case, tenants. And just because a space was previously used for one purpose, that doesn’t have to remain the case. Repurposing is an exciting and risky but sometimes necessary option.
Taking an empty office building and converting it to multi-family apartments or mixed-use commercial space is a large undertaking. But the strong demand for housing seems likely to continue, while office space continues on a more uncertain path.
While interest rates and the cost of construction materials both remain high, supply-chain issues are easing, and real-estate profits from the past decade have some property owners’ war chests well-stocked. It’s also likely that property values will begin to fall in the coming months and years.
It’s anyone’s guess how the current confusing climate of high inflation, low unemployment, rising interest rates, and massive tech layoffs will shake out in the coming years. Some say a recession is inevitable; others are optimistic one will be avoided. One thing we do know for sure is that we’re not in elementary school anymore. And this is not a drill.
Brion Kirsch and Jim Martin are attorneys at the law firm Pullman & Comley, which has offices in Connecticut, New York, and Rhode Island, as well as Springfield. Kirsch co-chairs the firm’s real estate, energy, environmental, and land use practice and practices in both Massachusetts and Connecticut; Jim Martin is located in the firm’s Springfield office and is a recognized practitioner in the areas of commercial real estate and real-estate planning.