The coronavirus has cloaked some aspects of Vermont’s commercial real estate market in uncertainty as landlords work to keep current tenants amid economic tumult in sectors such as hospitality and retail.
Landlords say they have been renegotiating rent with many restaurants and retail stores, which are working to stay open with restrictions. Other aspects of the market — such as pricing impacts and the future of office space — remain uncertain, according to brokers.
“It’s been a significant interruption,” said Brad Minor, a principal at the real estate appraisal and analytics firm Allen, Brooks & Minor of South Burlington. “Certain segments of the market weren’t really able to operate for an extended period of time.”
Erik Hoekstra, a managing partner at the Burlington-based property development and management group Redstone, said his firm has been working with tenants “on a case-by-case basis.”
“We try to understand what’s going on with each individual tenant and come up with a plan that works for them and works for us,” Hoekstra said. “The challenge for us is, the rent we collect from our tenants pays the bills. We still have property taxes and insurance and mortgages and all kinds of things that we have to pay for. So outright forgiveness of rent is very difficult for us to do unless we can get forgiveness somewhere on our side of the equation.”
“A lot of it is trying to give short-term relief where we can and work out some sort of a longer term payment plan for tenants,” Hoekstra added.
Joe Larkin, the chief financial officer of Larkin Realty, said flexibility offered by banks on some mortgage payments has allowed him to provide some increased rent flexibility. “But that can’t last forever, either,” he said.
The possibility of businesses shuttering — particularly mom-and-pops that have little in the way of cash reserves and firms in the retail and hospitality sectors — worries many landlords.
A market study conducted by Allen, Brooks & Minor has shown a slight increase in Chittenden County commercial vacancies. Retail vacancy jumped from 5% to 8.1% between December and June and office space vacancy saw about a 1% increase over the same period, according to the study. (Minor emphasized that the increases may not be solely attributable to the virus and that some impacts may not yet be visible given the length of many commercial leases.)
“I have a lot of concern about businesses that, in the end, just won’t be able to make it, despite giving it everything they’ve got to try to survive,” Hoekstra said. “On our end, that may mean that we’re taking space back we thought we had leased for years and then trying to figure out, how do we fill that space at a time in the economy when things are kind of sluggish?”
The pandemic has also cast uncertainty over the future of office space use. Some real estate agents worry that firms may make the shift to remote work that has taken place amid the pandemic permanent as they seek to cut costs.
But Meg McGovern, a senior associate at Donahue & Associates, said she expects the need for social distancing in the workplace to negate any demand reductions resulting from shifts to remote work.
“At first I thought everyone was going to downsize — everyone was going to say, ‘we need less space,’” McGovern said. “But in reality, I think they’re going to need the same amount of space because I think some people will continue to work from home — especially people that are vulnerable — and then the people that are coming into the office are going to have to space more so that it actually probably would be the same.”
The pandemic has also stymied some ongoing commercial developments. David White, the president of White + Burke — a commercial brokerage and development firm — said that the three major development projects the company was working on this year have all been disrupted in some way by the virus.
“It’s been a mix of cancellations of potential projects or transactions and putting things on hold to see how things evolve,” White said. “There’s not a lot of deals being closed right now.”
Minor, the Allen, Brooks & Minor principal, said Covid-19’s impact on commercial real estate pricing remains to be seen.
“Real estate isn’t like the stock market where there’s all this information that’s readily available instantaneously as far as what’s happening with prices,” he said. “It’s an imperfect market with few transactions and scarcity of data.”
“A lot of what is going to unfold is still dynamic and taking place and won’t really be apparent for months, if not years,” Minor said.