As part of CFO Studio stay connected initiative, the online video CFO business intelligence briefing series, virtual edition, presents accomplished, experienced, and select thought leaders who will share insights and ideas on topics that include customer acquisition and retention, supply chain logistics, employee emergency and alternative business methods, planning, cyber and other security measures, strategy, risk mitigation, operating efficiencies, driving growth in profits, and more.
CFOs may ask questions and offer their own thoughts during CFO business intelligence briefing series events and may elect to connect directly to presenters for specific guidance. I’m Chris Borgese. I’m vice president of communications with CFO Studio, and today’s event is powered by business development partners JLL and Sutherland.
The business intelligence briefing qualifies for one CPE credit. And if you request to receive CPE credits, guests must do the following in order to receive credit. Guests must answer four polling questions throughout the presentation. Guests must also complete the instructor evaluation survey after exiting out of the Zoom application at the end of the presentation. Q&A at the end of the presentation will take place at 1:55 PM.
Every Friday we will have a CFO business intelligence briefing series event. The schedule of CFO discussion series and CFO Studio live events will be announced shortly. As you may know, CFOs are invited to attend events at no cost. We invite you to make a minor financial investment to help CFO Studio defray its operating costs. You have no obligation to do so. You may provide the suggested amount of $99 or any amount you wish. It will be greatly appreciated. You may make that investment at the link provided in the chat room.
I’d like to introduce you to today’s CFO business intelligence briefing series presenters, Andrew Zezas, publisher and host, CEO CFO Studio, and managing director at JLL, and Scott Lesh, managing director at JLL. Andy Zezas conceived and founded CFO Studio to position CFOs as business and strategy thought leaders and to provide them with a beneficial platform. Through CFO Studio’s virtual and in person events CFOs forge peer relationships, share insights and intelligence, enhance their careers, and promote their companies.
CFO Studio magazine is read by thousands of CFOs and other finance executives, and has featured CFOs from AOL, Avis Budget Group, Bayer Healthcare, Dun & Bradstreet, Godiva Chocolatetier, Jaguar Land Rover, Johnson & Johnson, Mercedes-Benz USA, NBC Universal, the New York Jets, the Philadelphia Eagles, Prudential Insurance, PSE&G, Quest Diagnostics, Subaru, Verizon, and other exciting companies.
Hundreds of CFOs attend the CFO Excellence Awards, CFO Innovation Conference, CFO Business Bash, The Intell Dinner Series, Industry CFO Dinner and Dialogue Series, and Successful Women in Finance at which they share insights and experiences, network, and enjoy great food and conversation. CFO Studio serves as the catalyst for CFOs to share their knowledge on current economic, strategic, financial, operational, and business issues in a live event and content format that is unavailable elsewhere.
CFO Studio hosts conferences and events in Chicago, Manhattan, New Jersey, Philadelphia, and Washington DC, and elsewhere. Andrew, a lifelong corporate real estate executive, also founded Real Estate Strategies Corporation, and in 2015 transitioned his practice to the global real estate services company Jones Lang and LaSalle, or JLL. Andy serves as managing director at JLL in a business development capacity, responsible for client relationship development, real estate advisory, and portfolio alignment strategies, M&A, acquisition and disposition of transaction services.
Scott has over 25 years of experience in corporate real estate and currently leads new Jersey’s integrated portfolio services practice with a focus on solving complex business problems, including portfolio strategy, transaction management, lease administration, project management, facility management, workplace strategy, and economic incentives. Scott won the 2018 NJ NAIOP office deal of the year award for the purchase of a 500,000 square foot campus on behalf of Barclays, and was recognized by CoStar as a power broker in 2020 and 2017.
JLL is a leading professional services firm that trades on the New York stock exchange and specializes in real estate and investment management. Their vision is to reimagine the world of real estate creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so they will build a better tomorrow for their clients, their people, and their communities.
JLL is a Fortune 500 company with annual revenue of $16.3 billion, operations in over 80 countries, and a global workforce of nearly 92,000 as of June 30th, 2019. JLL is the brand name and registered trademark of Jones Lang and LaSalle, inc.
Today, Andy Zezas and Scott Lesh will lead us in a discussion entitled corporate real estate strategies in chaotic times. It gives me great pleasure to introduce my friends, today’s CFO business intelligent series presenters, Andy Zezas, publisher and host, CEO of CFO Studio and managing director at JLL, and Scott Lesh, managing director at JLL. Andy.
Thanks very much, Chris. Appreciate the introduction. Welcome everybody to today’s briefing. I seem to be getting a little feedback. Are you hearing that Chris?
I am not.
Now you sound better. Yeah.
Okay. All right. Thank you. So welcome everybody. Glad that you were able to join us. Chris, thanks again for your introduction. Scott, nice to see you, and to all of our folks, all of our guests, thanks very much for taking your time. It’s a beautiful day out, little chilly here in New Jersey, but a beautiful day nonetheless.
So we’ve got some interesting things to share with you. We all know what’s going on in the world of business, or at least part of it. We’re all experiencing our own issues being sequestered in our caves. But we do know one thing, the wheels of commerce need to continue, and that’s why you’re all here.
We plan to talk to you about a number of issues relative to your companies and real estate and how you might take action now and prepare for the future as to how to protect your company, how to protect its operations, its employees, how to be appropriately opportunistic given what’s going on in the business world.
So let’s jump right into it. My colleague Scott and I will be sharing ideas with you and with each other. And for those of you who would like to send questions to us, at the bottom of your screen, if you move your mouse to the bottom of the screen a menu bar will pop up and there is a Q&A option there. Send your questions through the Q&A option, not through a chat room, and we’ll do our best to get to all the questions at the end of the presentation.
Chris also mentioned that for those of you who are seeking CPE credits, there’ll be some polling questions during our presentation. In order for you to qualify for CPE you need to answer all of them. We invite those who are not seeking CPE to answer the questions as well.
So, as far as our presentation today we’re going to talk to you about three categories of information, business and real estate impacts of covid-19, short and longterm cost containment strategies, and that actually includes some risk strategies as well, and considerations for getting back to the workplace. Scott, if you could advance the slide. So let’s talk about business and real estate impacts of covid-19. Scott, good afternoon.
Andy, great to see you and hello everybody. Thank you for the opportunity. I know we’re going through this unchartered waters, and we’re going to spend the first couple of minutes talking about where we’re seeing the impact immediately as potentially as well as longterm in the different industry sectors, specifically retail, industrial, as well as office.
So obviously we’re seeing a lot of significant impact and severe challenges both in the restaurant business, travel and tourism, hospitality, education, real estate, and so forth. But as this continues to go on, we’re going to have potential challenges with risk and disruption on the legal, finance, accounting, and consulting practices. Where we’re starting to see some obviously opportunities for likelihood to expand, no doubt medical and biotech, along with e-commerce, data centers, warehouses, and so forth.
So we’re going to talk a little about this first, go through the details and then jump into the next section. So, if we talk about just the office real estate and what we’re seeing today and how it may have a cascading effect, we know there’s some work stoppages in construction in some of the major cities, New York and New Jersey in particular. Those are stall projects. And we’ve talked before where we’ve got clients who are now about to execute leases who need to move in by next March or April and are contemplating, could we get in on time, even if we were to execute this lease the next two or three weeks.
Scott, let me ask you a question, in your experience, for the benefit of our guests, construction delays are occurring because labor issues, because of the ability to receive materials, approvals at the municipal level, all the above?
Yeah. It’s all the above, right? So most of these spaces are nonessential. So right now they can’t go back. But some of the other underlying factors are most of these families have children, so the schools are closed in New Jersey at least until May 15th. How do those employees go back to work even if they can slowly roll back? So there’s some of those things behind the scenes that need to be considered.
What we’ve done with our strategies is, let’s at least come up with two or three scenarios. So if we could line up a lease to be executed, let’s say, by May 15th, we’re still looking at alternative scenarios, we’ll call it scenario B and C, to other sublease space where we can plug and play or try and negotiate and to have your current landlord come to the table. So where we used to just focus on one track, it’s now dual or three tracks running parallel to ensure we can mitigate the risk.
Work from home, obviously the WFH acronym has been used over the last five, six weeks extensively, and we’ll talk about how that’s being incorporated into portfolio strategies. And candidly, the biggest conversation today is really just the legal aspects of, forbearance, rent relief, rent abatement, and what that may look like going forward.
Scott, let me jump in and add something. We’re hearing from a lot of CFOs around the issue of work from home, they’re saying, we were never prepared to send our entire company to a work from home scenario. Most companies, especially larger companies, had some component of their workforce working from home. But we’re hearing surprise surprise work from home works. There’s some bumps and bruises along the way, some engagement issues and other issues, but for the most part, we’re hearing from CFOs, hey, this works, and the likelihood is we’ll probably consider some portion of our employees to work from home permanently.
And I know we’re going to talk about that in a little while, but I want to raise a question that we’ll also talk about later. There’s a flip side to that, respecting the role of CFOs to look for the opportunity to reduce costs and increase efficiency and productivity and mitigate risk. It’s not a net zero game or a zero sum game, as they say, relative to sending employees home. So I’ll just put that question out there and we’ll address it later on in our discussion.
Right. Yeah, I agree. So lastly and just around the office side, unfortunately, as there are some bankruptcies where landlords potentially may have to give the keys back, you’re going to have some vacant buildings. And one of the conversations we’re talking about now is how do landlords try to reposition their buildings to accommodate the post covid world, whether it’s HVAC changes, protocols to coming into the building, landlord versus tenant responsibility. So some of those components are part of that rolling re-entry, and we’ll get further into that as well. Okay.
So I would rank, industrial’s probably going to be one of the last to be impacted and one of the first to come out of this crisis. We’re seeing a significant demand in e-commerce, obviously you’re hearing about hiring and surge with Walmart, Amazon, all those kinds of companies announcing hires to help augment the demands from people who are shelter in place. We’ve noticed also in New Jersey specifically, the industrial market had been white hot, less than 2% vacancy rate over the last couple of years.
In the industrial sector, 2%-.
… vacancy. So, yeah.
So you started to see spec building, developers taking a chance on building without having a tenant in place. That’s now all been put on pause for the moment, but we expect them to come back pretty quickly. Cold storage, those type of warehouse components are very high in demand right now. We’re also starting to see some rent relief requests, mostly on the retail, hospitality, and travel groups that have industrial space. In most cases we’re seeing retail, multifamily retail office followed by industrial as far as who’s starting to make those requests. And we’ll talk a little about how they’re taking that approach.
Scott, let me add some thoughts here that for our audience, whether it’s industrial space, or office space, or retail space, or any kind of commercial property, at moments where there are significant negative economic events, it doesn’t get more significant than this or not too more significant, what comes into play very often in most real estate sectors, commercial real estate sectors is traditional real estate fundamentals prevail.
So when you’ve got substantial vacancies either happening now or on the horizon, when you’ve got things like tenants looking for rent forbearance and asking for rent relief and tenant defaults and things like that, when you take a look at the fundamentals of real estate, the better quality, the newer facilities, the more technologically advanced, the better located, those with easier access and proximity to whatever markets they need to be approximate to, those properties tend to prevail. They tend to remain strong and solid and in demand.
A very important component of what we see happening down the road is, as Scott mentioned, financial solvency of landlords. There will be a domino effect here, and we don’t know to what extent, but we are counseling our clients to monitor the solvency of the landlords of the buildings they’re in.
You can have a rock solid landlord, very successful, incredibly professional, very wealthy, but each building tends to stand on its own as a separate financial and legal entity. And we’ve seen in the past where well-heeled landlords have made a decision that a particular building is no longer a viable investment and that building they let go. And the problem with letting it go is not what happens down the road, but what happens between here and there.
Buildings don’t to go bankrupt on Tuesday. They tend to get caught up over time. And as one tenant leaves and another tenant defaults and the landlord has some other challenges, very often we’ll see service falls off, restrooms don’t get cleaned, HVAC doesn’t get repaired and so on and so forth, and then you find out the building goes into receivership. So it’s important to monitor the health. There are strategies that you can put in place as you see the health of a building failing, the financial health of a building failing.
We encourage our clients, be wary and be alert, stay in touch with your landlords, and monitor the fiscal health of the building you’re in.
Thanks, Scott. Go ahead.
Yeah. So just a brief overview of retail. We’ve talked about how we’re seeing demand for essential good sore. Obviously that’s driving a lot of the grocers and other mass to scramble to keep up with demand. Funny, the technology is lagging. My wife tried to order food online, it’s a three or four day delay in try to get a queue into the system. So we’re thinking those things will start to work themselves out.
The social distance is going to be pretty interesting because I think these larger shopping centers, malls, are going to be a challenge. I know in Germany they announced yesterday, the day before that as they start to come up with a plan to roll out in the beginning of May the retail component, they’ve talked about mandating no more than 10 people in a space at a time. So those things are going to really be factored in.
And this goes back to the Trump administration rolling out this three phase concept last night. There’s no real timing in place, and obviously they’re trying to have the governor empowered to decide when and if, but really it’s the timing and putting some protocols. And we’ll talk a little more about that.
I’ve spent a lot of time, again, I’ve got two significant retail clients, we spent really the last week in March talking about the approach to go into landlords. And we learned a couple of things and talked through with CFOs as well. And the discussion started with, do we not pay rent and just not say anything, do we make a phone call and have a courtesy follow up, or do we send a letter? And we went back and forth. But the biggest conversation that came out of it, it was literally an hour or two, was really more around just understanding the reputational impact to this company if they were to make these requests.
In some situations they could pay April or May, but the domino effect that may have. So we’re evaluating and assessing not just dollars, but also the reputation. In one case we had a client send a letter to about a thousand locations, and in that letter they were offering some extension of about three or six months in lieu of. And in that letter they were allowed to… hopefully the counterpart would sign.
The challenge is in most locations it’s not the landlord you’re looking for approval from, it’s actually the lender. So the lender in most of these larger buildings are the ones who are going to drive those decisions, and too many times people focus on the landlord. So you’ve got these pre-workout conditions that need to be done between landlord as well as the lender, and that takes time as well.
So let’s talk about cost containment and let’s include risk mitigation in that discussion again, and let’s focus on both short and longterm strategies. Scott, would you go to the next slide? I’d like to start off with a polling question. And as a reminder for those of you who are seeking CPE credits, you must answer all polling questions in order to qualify for credits, those of you who are not seeking credits, we invite you to offer your thoughts as well.
So here’s my first polling question, for those employees who will return company facilities, you expect they will demand social distancing, continual extreme cleaning, avoidance of shared spaces, separate workspaces, and healthier and safer work environments. We’ll leave this open for about 30 seconds, and we’ll tell you the results.
All right. We’re going to leave this question open just for a few more seconds, and then Lorenz, when we close out the question, if you could put the results up on the screen, that would be great.
All right. Look at that. So everyone is expecting that from their existing employees. I frankly am not surprised. That’s part two of the item I mentioned before. We talked about the fact that most CFOs are saying work from home works and we’ll likely keep it as part of our overall occupancy strategy and maybe send more people home on a permanent basis. Well, the question we all just asked and answered is part two of that. While sending employees home, certainly we’ll have a cost reduction component to it.
There’ll be some additional management required of those employees, so it won’t be a net zero, but then what will the cost implications be of this question and this answer? It’s possible that workstations will be redesigned and become larger. We expect that there’ll be sneeze guards built around workstations. The shoulder benching that’s become prevalent in the last few years, that’ll be a challenging work environment, a lot of huddle spaces and so on and so forth. There’s more, we’ll talk about it as we get into it.
Yeah. I think, Andy, the one takeaway here is if you don’t feel safe and healthy, right, create that safe environment, nothing else really matters. That’s [crosstalk 00:22:51]. You’re going to start to see a lot more of that.
Scott, can you take us to the next slide?
Yeah. Sorry guys. Trigger finger.
Nope. I think it jumped ahead one. Yeah, there we go. So PWC every couple of weeks has what they call the CFO pulse survey. It’s actually pretty good. And it’s a group of CFOs, large company CFOs for the most part, who they ask the same questions and different questions every couple of weeks. And this is a pretty interesting reflection of what the sentiment has been of CFOs during the crisis.
Initially about a few weeks ago 67% of US finance leaders surveyed said they’re considering deferring or canceling planned investments. Of that 67%, 82% of those CFOs identified that facilities and general capital expenditures be the leading investment category that would be canceled or deferred. So very timely, very pertinent to our discussion today.
Now look at this, four weeks ago 90% of the CFOs that responded to PWC’s pulse survey believe that the companies would be back to business in less than three months if the recovery began immediately, 90% of respondents. Two weeks ago it was six 76% of respondents, and April 14th it was 61% correspondence. So we’re not drawing any conclusions other than we’re all trying to figure this out and even the thought processes appear to be evolving.
Andy, two things. One conclusion I see from this is we’re recognizing that you’re not going to bounce back tomorrow. It’s not going to have this V shape we keep hearing about initially back in March and the beginning of April. Secondly, this is probably one of the best surveys I’ve seen obviously relevant to CFO community, so check it out. It’s great to see every two weeks tollgates of the sentiment of where people are thinking these financial leaders and where things are trending as well.
Okay. So we have another polling question. Again, those of you who are seeking CPE credits, you must answer all polling questions. Those of you who are not, we invite you to provide us with your thoughts as well. And we’ll leave this question up for about 45 seconds. Has your company sought rent or occupancy cost relief for leased assets or mortgage relief for owned assets? Yes or no, and we’ll leave this up for another 30 seconds or so.
We should have some elevator music playing right now while we’re waiting here. Okay. Another few seconds and then we’ll ask Lorenz to pop up the answers. By the way, we’ve got 43 CFOs and others on this call today. I want to welcome you all again, and thank you for joining us. Lorenz, can you show us the results? Very interesting.
50-50. That’s the first time we’ve seen a 50-50 split. So half of the folks who’ve responded to this question, it’s actually a little bit di… Yeah, 50-50, 16 and 16 have either sought rent or mortgage debt relief and half have not. Very, very interesting stat. Okay. Scott, can we go to the next slide?
Yup. [inaudible 00:26:23].
So let’s talk about short term strategies. The majority of our partners, our clients, occupy lease facilities. And these strategies are generic and not, they don’t necessarily apply to one property type or another, although they could be more or less applicable to one or the other.
Certainly we’re seeing a large number of companies simply request rent relief forbearance with or without a quid pro quo. Let me address that for a moment. We recently became aware of a company who, in the interest of being proactive, sent a letter in late March to their commercial landlords advising their landlords that company would not make the April 1st payment.
We know the company, they’re good folks, their intentions were good, they wanted to be transparent and proactive in communicating with their landlord, the manner in which they did it was not what their legal counsel thought [inaudible 00:27:25] that they should’ve done. And we were told that it amounted to premeditated default where the company was just looking to do the right thing and the way they went about it could get in their way and could result in a lawsuit.
So how you approach your landlords in cases like this, very, very important. And we certainly recommend that you secure not only business advice, but legal advice in advance. Another client said to us that they want it to be very proactive, and we had an opportunity to work with them and cultivate an approach that was very successful. They sent a letter out to their many commercial landlords requesting assistance, advising that they were having some financial challenges and requesting assistance, requesting a three months rent deferral.
And what they did was they offered, along with the request, they offered a quid pro quo, and it was something like, if you agree to defer our rent for three months we will agree here and now by virtue of this very simple one page agreement to extend our lease for six months.
Since their leases were sales offices and two or three year leases, the net present value of six months rent three years from now isn’t that much greater than the net present value of three months form now. So it was an easy decision, it was a reasonable offer, and it’s a you do something for us and we’ll do more for you. Everybody had a little pain, everybody had a little gain, and not surprisingly majority of the landlords said yes and they signed a simple one page letter and sent it back.
So this is a time for creativity and opportunity which can come from the chaos. We’re aware of some companies that have significant security deposits on account with their landlords, sometimes cash, sometimes letters of credit. Now standby letter of credit is a challenge because those funds are frozen in your account and it’s not productive capital. So we’ve actually seen some of our clients request from their landlords the ability to draw down on that security deposit on an interim basis with a commitment to replenish it at a later date. In some cases landlords have said yes.
Lease termination certainly becomes a consideration. But keep in mind, when you occupy a facility you may not have to terminate the lease for the entire space. If it’s a question of not needing all of the facility, then it may be in your interest and it May be beneficial to the landlord, May, capital M, for you to discuss a partial termination of the lease. Some landlords are being flexible, that could work better than a full termination.
Disposition of underutilized assets, that’s a catchall, whether it’s a lease or an owned facility, but taking not just a short term look but a longterm look as to whether in fact certain facilities should be disposed of or if it’s just a need for a short term resolution, that’s a different discussion.
Letters of credit and surety bonds, this is a very interesting one. We’ve seen this occur a couple of times. Recently received a… I had a conversation with a client who had a very, very large security deposit, and they’re a large privately held company, and the funds that they kept locked in their account, because the deposit was a letter of credit, is just unproductive funds. And the conversation with their landlord was could we swap the letter of credit for a surety bond? And that worked out very, very well. The surety bond had a much lower cost.
They received the release of the letter of credit from the landlord and the funds that they had on account immediately became productive utilizable capital. So, again, there’s a number of different ways to skin a cat, and this is an opportunity to think clearly and strategically and be creative. Go ahead, Scott.
And if I can add a couple of things, I think one is you’ve got to treat the landlord as a partner. This is really nobody’s fault. So I think it’s that working together solution, that’s one. When we started making phone calls for some clients back in late March, landlords weren’t really yet prepared to respond or act on those requests. Over the last two or three weeks we’ve started seeing landlords get a little more organized in their approach as far as how they’re taking inbound requests.
Usually it’s requiring a form that we’ll ask a couple of key questions. One is, what’s the reason why? Justify why you’re making the request. What have you done within your company to help reduce cost, whether it’s executive pay reduction, furlough layoffs, what is your three, six, nine month sales look ahead? Although last year may look good when they ask for your financials, it’s understanding what the next year may look like.
So those are some of the key questions landlords are asking. And again, they’re then taking those responses and going back to their lenders to then have those discussions. Unless this landlord has [inaudible 00:32:42] down the building, it’s extremely difficult to get those approvals. So again, I think the key is treating people respectfully. Going in there with more of the partnership approach will go a long way.
I would agree, and human nature is when you’re approached in a cooperative manner you tend to respond in a cooperative manner in most cases. However, keep in mind folks that when it comes to these types of discussions with landlords it’s advisable to review the rules of engagement. And what are the rules of engagement? They’re laid out in your lease. It’s probably that thick, and someone spent an awful lot of time negotiating it, legal counsel, business advisors probably, it may have been you as well.
It’s important to go back, do a thorough review, understand what your rights and responsibilities are, and see if there’s anything in a lease that you might be able to point to in your discussions with the landlord to encourage cooperation.
You want to take a look at a number of clauses. You see on the screen here, there are continuous operations issues. And forced majeure was an issue that the minute that we saw building shutdowns and companies sending employees home we got a flurry of phone calls across the country wanting to know if this was forced maj… Could companies exercise their force majeure clauses in the lease.
Well, that’s pretty much gone the way of the dinosaur in this case, because this was not an act of God. The pandemic may have been an act of God, a tornado didn’t knock down the building, either the government said you couldn’t send your employees to work, or the landlord closed the building, or the occupants chose not to send their employees to work, or all of the above. None of that is an act of God. It’s an act of government or an act of business. So forced majeure really doesn’t apply.
However, we do expect that force majeure clauses are going to be much more scrutinized and very heavily negotiated in the future. You should familiarize yourself with some of the more mundane things or seemingly more mundane components to a lease, like noticing cure periods, termination rights, what happens if you vacate and go dark, is there a go dark clause in your lease?
Most retail leases require you to remain in operation with lights on, doors open, and people coming in and out, which if you don’t follow through could put you into default. So you need to be cognizant of that. And the insurance provisions and business interruption, it’s imperative that before you engage in a cooperative discussion with your landlord or your mortgagee for that matter, you want to make sure you understand all your rights.
Andy, that’s a good point as well. So again, guys, the phone calls started to come in back in mid March. Some of my questions to my clients were send me your leases. So being organized, that business continuity and preparing, have that information readily available is extremely important. And I would take it a step further, add striking of the leases well in advance of a crisis so you can easily look at some of these key terms will help reduce that timeframe for the evaluation.
We had one client who sent us more than 30 leases, and we’re scrambling to add strike them. It takes some time. So they’re a little behind the curve. So that preparation would go a long way.
Let’s go on to the next slide.
Yep. Yup. I keep pressing two buttons, sorry.
One button at a time.
So, let’s talk about longterm strategies. Yeah. Some of the things we’ve talked about a few moments ago were more interim immediate action steps, but you don’t run your company just for today. You’ve got immediate issues you’ve got to take care of it and you’ve got longterm things to focus on as well. So when you approach your landlord, certainly as Scott said, you want to be prepared, you want to make sure you understand the rules of engagement, and you want to understand exactly what you’re looking for.
There’s an opportunity to maybe take an exploratory approach, but it’s always a good idea to go into battle if you will, even a cooperative battle, a more friendly battle, armed. And from a lease perspective there are a number of steps you can take. Lease financial restructure, turning a two year lease into a longer term lease, a five year lease, a 10 year lease and so on. There’re usually quid pro quos. To some landlords there’s value to having longer term leases.
To some landlords there’s value to having shorter term leases, depending upon how much of the building you occupy, what else is going on in the building, what the financial health of the building is, what the landlord’s intentions are for the building, how that building fits into the landlord’s portfolio. There are so many things that can impact how a landlord will or won’t cooperate with you, but lease financial restructures, restructuring renegotiating leases are very common ways to reduce costs, mitigate risk, and can be beneficial to both landlords and tenants.
Early lease option extension, again, as a result of due diligence and reviewing your release you’ll understand what your options are. If you have favorable option terms exercising them early maybe beneficial. Scott.
Yes, I mean, we’re going through an assignment right now where we’ve got a client who occupies entire building, their lease expires in 2024. However, they’ve got a termination right in 2022, end of 21. So we made a decision over the last two weeks to move forward with starting to have some negotiations with that landlord using that magic bullet to at least have some dialogue and bring them to the table in the hopes that we can get some potentially free rent today with a potential blend and extent option.
So although we may have some leases that expire in three or four years, we’re looking and seeing if there’s opportunities to extend it by getting some rent relief today.
Historically, when the economy goes bad subleases are a really challenging way to dispose of space as a rule. Of course if you’re in the right property and your space is unique or for some other reason is desirable, subleasing can be very effective.
But, Scott, you pointed out the other day how given what’s going on currently, specifically with the anticipated delays in tender improvements and construction, well-designed space offered for sublease in quality buildings, again, going back to fundamental real estate issue, the buildings that are quality buildings, well maintained, and in a good location and all the other fundamentals, sublease space could actually become desirable. You want to expand on that?
We anticipate, I believe, in the suburbs, if you’ve got good plug and play environment in a good quality building, being that the furniture’s in place, the space is already built out, we think we’ll see an uptick in demand. Because again, the uncertainty on the construction side and potential exposure on the holdover.
So for example, if you need to be in by next March, which is 9, 10, 11 months away, but we don’t know what the impact may be on construction, you probably have some language in your lease that says, if you hold over, it’s 1.5 or 2 times your current rent. So those are some significant financial exposures that need to be factored in. And we think the sublease product may have an uptick based on that as well.
Thanks, Scott. So we talked earlier about lease termination. Purchase from a financially unstable landlord, that’s a very interesting approach. We’ve been in dialogue recently with some companies who we’ve counseled, as we’ve done here today, that they should monitor the fiscal health of their landlords, of the buildings they’re in and the landlords, two separate things, building and landlord.
And in a couple of cases we’re dealing with well financed, well capitalized companies that expect to get for this and have access to capital and said, well, if the landlord goes belly up or if the building becomes insolvent, maybe we’ll assist the landlord and keep the landlord stable, or maybe we’ll buy the building. The expectation is we’ll be able to protect our own position by either financing the landlord one way or the other or acquiring the building from the landlord. So again, this is an opportunity to be creative.
As it relates to own properties there are really four things you can look at, sale leaseback, partial sale leaseback, sale of a vacant facility, and placing mortgage debt on the property. Sale leasebacks are interesting. We’ve encountered some finance executives over the years who’ve said, well, we own this building and it’s an insurance policy for us that if ever we find ourselves in need of capital or in a financial struggle, we can always sell and leaseback the building. That actually doesn’t work quite that easily, and that equation doesn’t play out properly.
In sale leasebacks, while the fundamentals of the real estate are important, it’s got to be good quality of building, right location, again, everything we talked about earlier. A sale leaseback really isn’t a real estate transaction as much as it is a structured finance transaction, because the investor is willing to invest its money typically in a sale leaseback less so because of the real estate and much more so because of the promise of the seller/future tenant to pay rent on a regular and continuous basis throughout the term.
That’s a traditional sale leaseback, and I’m talking about terms of 10, 12, 15 years or more. There are hybrids where sale leaseback happens for a year or two as a means of accomplishing something else, and I’m not really addressing that kind of transaction here. But if your company is at the top of its game, doing very well where its balance sheet is solid, then a sale leaseback is likely a good vehicle for you.
And certainly, given what Scott mentioned earlier about some industries that we all know about are struggling dramatically today and others who are very strong, if your company is perceived as being in an industry that’s struggling, you may not get a lot of play on a sale leaseback. So again, it’s not only having a solid balance sheet and having good real estate fundamentals, but also being perceived by the investor community as being a good risk.
As you can imagine, given what’s going on in the world today, a lot of investors have pulled back and there are fewer investors today seeking these kind of transactions. We think many will come back, but the question is when. You also have the ability, if you own property, to enter into a partial sale lease back. You don’t need to sell the building and walk away if there’s a reason for you to control it or the company’s preference is to continue to hold it. You can sell an interest in the building with a leaseback.
Vacant facilities have a complete different profile in sale leasebacks. Frequently over the years we’ve been asked by companies what’s a building worth, and they get a bunch of questions from us before we can answer, because a building will have a different worth depending upon the nature of the transaction and the objectives of both buyer and seller.
If you’re selling a building on a sale leaseback, it’s a cashflow transaction, it’s a structured financial transaction, and the overall value of that transaction rests primarily on the rents that’ll be paid going forward and the credit behind it and then ultimately the real estate fundamentals. In a vacant building, it’s a corporate housing issue for the purchaser.
So the value that typically an occupant will look to pay will be very different than what an investor would pay on a sale leaseback for the very same building. And in a third case the value for that very same building as described by an investor who’s buying it vacant who plans to fix it up, market it, lease it to tenants, that could have a third very different value.
So whether you’re selling a vacant building to an investor, to an occupant, or you’re looking to take that very same building and remain in occupancy and sell it on a sale leaseback, you’re looking at likely vastly different valuations. Scott, you wanted to add something?
Yeah. A couple of things. So one is, we’ve been getting a lot of phone calls over the last two weeks from clients who own property. So we’re helping them develop broker opinion values, recognize they may not want to sell today, but at least understanding rough order of magnitude what their property may be worth and going through these scenarios.
So the last item on owned properties is definancing. Capital markets are in disarray right now. A lot of lenders have paused their willingness to lend against commercial real estate. So it’s an option to explore. You may hit some bumps in the road.
In terms of overall occupancy measures, looking at employee space utilization is going to be very important. As Scott mentioned before, when employees return to work the very dense pack approach that we’ve seen many companies pursue in the design of their facilities over the last few years, that’s going to be reexamined because I don’t think a lot of employees are going to want to be sitting on top of each other.
Facility expansion or reduction. We’re still hearing from some of our clients that they fully expect to pursue their expansion needs, but many of them strategically are saying, let’s pause for a moment, let’s see if there’s going to be a correction in the real estate markets and see if it’s to our benefit, but ultimately we plan to pursue our expansion needs. Maybe you should be expanding, maybe you should be reducing.
Multi location facility consolidation. Obviously there’s financial benefits in consolidating, but most companies will be asking themselves if it’s better for us to consolidate or diversify our facilities, because the possibility is this stuff may happen again. Relocation to get out of the way of a future catastrophe or a relocation for any other reason, now’s the time to be taking a look at it. And facility management becomes a very important component of an overall occupancy measure, occupancy strategy in terms of risk mitigation and cost reduction.
Scott, you want to talk a little bit about facility management issues?
Yeah. I just want to go back for one moment. So, Rich Thompson, who leads our supply chain and logistics practice, came up with an article today about the significant overhaul of supply chain and diversification and the importance of whether things are going to migrate back to the US or back to North America. So it will be interesting seeing how that approach goes. And then going back to the FM, because again, as we mentioned before, health and safety is going to be paramount and the FM group is going be extremely important in those solutions, both from the landlord and the tenant side.
Well, Scott, let me add one more thought to the issue of supply chain because I didn’t talk much about it. There’s an awful lot that’s going on in the supply chain world. We held a business intelligence briefing with Rich Thompson and Dr. Walter Kemmsies a couple of weeks ago, and they had some phenomenal insight.
Three years ago a lot of manufacturers started looking at China and said to themselves, maybe we should no longer sole source from China. And a lot of companies diversified the places in the world from which they source their products. But now with what’s going on, with certain US ports that have closed down dramatically or that are experiencing significant volume reductions, a lot of the companies that are sourcing globally are saying to themselves that we should look for port diversification as it relates to how and where we bring products into the US.
Instead of coming in through the port of LA, we should also be coming in through Houston, and Savannah, or maybe New York. And then of course from a critical components’ perspective, domestic independence becomes very, very important. Do we want to rely on sourcing products or having components manufactured in countries that may be hostile or may just not be able to get things to us, or maybe the ports will be shut down or maybe some other reason? Should we be focusing more on domestic sourcing independence?
So there’s a whole lot of exciting things going on in supply chain. And we think there’s going to be a lot of changes that, of course, when it comes to supply chain, will affect your real estate facilities decisions. Scott, you’re up.
Yeah. Why don’t we do the last polling question, Andy, and then we can talk about the reentry.
Yeah. Thank you. So again, those of you who are seeking CPE credits, you must answer all the polling questions. Those of you who are not seeking credits, feel free to share your thoughts with us. For what percentage of your company’s employees is management considering a shift to longterm remote working, work from home? Over 50%, up to 50%, or up to 10%? We’ll leave this open for another 30 seconds and then we’ll provide the results.
Okay. Lorenz, let’s close this question, and if you can show us the results. So, look at that. Of the respondents, 17% said that over 50% of the workforce may shift to a longterm work from home, 37% said up to 50%, and 47% said up to 10%. Very interesting stats. Very interesting. Okay. Thanks ladies and gentlemen. I think there’s one more polling question after this. Scott, you’re up.
So, last couple of discussion points around what we’ve learned in the last couple of weeks, and then what we’re seeing in Asia, and then just how we’re starting to prepare for, I like to use the term rolling re-entry. So we’re seeing a lot of our clients establish diverse task force, including bringing health executives or leadership with consultants [inaudible 00:51:22] advise from a health and safety standpoint.
There’s no doubt we’re trying to understand and develop what the criteria will be to create a comfortable and safe return to work. The accommodations, as we mentioned, regarding the facilities management, the quality of the air, the density, the thermal testing, the cleaning and disinfecting are all becoming top of mind. And then just the timing, right? When do we start to go back? And I’ve have talked about, do you turn the light switch on, or is this more a dimmer where you slowly turning the lights on through a dimmer system?
So we’ve been watching very closely with our counterparts in Asia as far as how they’re moving forward and slowly reentering the workforce. In Asia mostly we’re seeing government mandates where there’s no more than 50% occupancy at one time. The PPE surgical masks are mandated by all employees. There are thermal checkpoints, although that’s not the only solution, it’s one of the components. And then preparing for business continuity in the event there’s going to be a possible re-infection.
So as we navigate towards the reentry, I don’t know why my slides are not turning when I press it, but there we go. Okay. So-
[inaudible 00:52:43] technology works, isn’t it?
Early considerations, right? Obviously we’re starting to hear what the administration wants to do about the trigger for corporate re-entry. We heard the three phase discussion last night, HVAC, the hygiene, the cleaning protocols are going to be extremely important. Landlord versus tenant responsibilities, I can’t emphasize, where is that demarcation, the building HVAC system versus the internal space that you’re touching, and then just the density.
So although you may have some of your employees working from home, you still now may start to space out your overall employees. So you may remove chairs from your conference rooms so that no more than three or four people are sitting in the space, your hotel hot desks may become more fixed environments. So those are the kinds of things we’re looking at as well.
Scott, let me add something here. For those of you who have mobile workforces that come in and out of the office, or flex desking, or hot desking, or hotelling, however you refer to it, think about the implications of that for a moment in a post pandemic environment.
Not only, Scott mentioned HVAC as well, not only will occupants and landlords have to look at the possibility that an HVAC system could harbor bacteria, viruses, germs, could move them around a facility and may have to make modifications on that basis, think about your hot desking, where if I’m an employee and you want to attract me to your facility and keep me, attraction and retention are very important, right, and you want to keep me at that company or attract me to it, and the desking facility is a hot desk, and I’m supposed to sit there today from two to four o’clock.
Well, when I sit down at that desk at two o’clock I’m going to expect you to insure me that that environment is safe and will not a risk my health. So the keyboard, the phone, the workspace, the chair, the drawers, the area around it, how will you insure me at that facility will keep me safe and healthy. And then when I leave, the next person again and the three people before me who sat at the same desk multiplied by so many desks by so many facilities. So-
… the issue of cleaning, this is more than a spray bottle of Windex and a roll of paper towels. This is going to become a very key ongoing facility management issue that will be critical to mitigating the risk of your company, attracting and retaining your employees.
Yeah. I think the first bullet point, the longterm planning, and when I say longterm, probably more than six months from now, a lot of conversations with the architects and design teams, are we just going to make a subtle change to our current workplace, or will there be new workplace designs that can incorporate materials that are easier to clean, whether it’s lighting, fabric panels for your partitions and so forth. So that dialogue is happening as we go through it.
No doubt the social behavior and just our own personal responsibility to maintain cleanliness will be thorough and throughout, protocols we’ve talked about and so forth. But you’ll start to look now at travel and meeting policies, virtual events. The business continuity planning will be extremely important because you’ve got to anticipate it’s going to happen again. And how do we mitigate that exposure? So I think just working remotely at the end of the day will become a big factor in the overall planning.
Scott, can we have the next slide?
So we said to you at the beginning we were going to talk about business and real estate impacts of covid-19, short and long term cost containment strategies as well, so just risk, and considerations for getting back to the workplace. There’s an awful lot here that you can be doing as CFO, not just to protect the company, but also to protect the employees and ensure that your business prevails and your business continues.
There are an awful lot of folks who you can tap into. There are legal issues, there are business issues, there are real estate issues. We hope that we shared some good thoughts with you today. We will take questions. If you have questions for us, send them through the Q&A button at the bottom of your screen. If you don’t see it, just move your mouse and it’ll pop up.
I do have one more polling question. For those of you, again, who are seeking CPEs, you must answer all the polling questions. And we’ll also ask you to respond to a survey afterward. That’s also a part of your CPE requirements. Those of you who are not seeking CPE, we invite you to answer this question as well. How likely is your company to disperse office logistics, manufacturing, or other facilities across markets or geographies in preparedness for future business disruptions? Likely, neutral, or unlikely? We’ll leave this open for about 30 seconds.
Okay. Lorenz, if you would close the polling, and let’s see the results. So 23% of respondents said likely, 43% are still considering, and 33% are unlikely to disperse facilities. That’s a very interesting stat. Good stuff. Thank you for answering our questions, ladies and gentlemen. Chris, why don’t I turn it back over to you?
Thanks, Andy. Hey, great dialogue gentlemen. Just want to take a moment to thank JLL, Andy Zezas, and Scott Lesh. And every Friday we’ll have a CFO business intelligence briefing event at 12:45 PM. We welcome you to join us. The schedule of the CFO discussion series and CFO Studio live events will be announced very shortly.
As you may know, CFOs are invited to attend events at CFO Studio at no cost. We invite you to make a minor financial investment to help CFO Studio defray its operating costs. You have no obligation to do so, and you may provide any amount you wish. It’ll be greatly appreciated. You may make that investment at the link provided in the chat room. And now back to the Q&A with Andy and Scott.
Now, we’ve got a couple of questions, interesting ones. First one from our friend Sas Mukherjee. Hello, Sas. We hope you and your family remain healthy and that you’re well. Scott, here’s Sas’ question, the governor of California laid out a plan for reopening the economy. He talked about the new normal where retail, restaurants, and office spaces will have to be reconfigured to support the new world of physical distancing and more virtual working. Do you believe this will create more opportunities for JLL to assist your clients with navigating through to the new normal?
Sas, good to hear your voice, or I guess, good to see your question. I hope you’re doing well. So I think the short answer is absolutely. Probably more than half my day every day the last two or three weeks has been about this kind of discussion and how we can educate our clients about what this re-entry may look like in anticipation of going back to a new normal.
So we’re going to see this throughout. It’s affecting every industry and everybody. I mentioned at the beginning of this discussion how Germany was trying to roll out this retail mandate about minimizing no more than 10 people. So, it’s going to impact their bottom line, but also the physical condition of the space.
Thanks, Scott. So here’s another question from another friend of ours, Dan Cannon. Hoping you are well, Dan, and your family and your friends stay healthy as… you, your family, and your friends stay healthy. Interesting question, Scott, Dan asks, what do you feel the impact will be on coworking spaces, he mentioned WeWork in particular, in light of covid as it relates to pricing, utilization, and so on?
There’s really two issues there, right? One is the future health of that industry given what we’ve seen in the news about WeWork in particular, but I don’t think that’s really the question. I think the question here is in light of what’s been going on with covid, do we see coworking and the closeness of those environments being affected by covid and possible future pandemics?
I think the answer is yes. And time will tell, but I think they’re trying to now reevaluate the way they work. One of the biggest benefits to coworking has been the short term flexibility. That’s why it was driving a lot of business to that kind of setup. That’ll still be a significant factor as clients look to evaluate their real estate and not have to commit longterm due to uncertainty down the road, but there’s no doubt we’re going to see a disruption in the coworking and the reevaluation.
As far as WeWork themselves, they’ve got some other issues that were happening well before the pandemic. This just compounds the challenge.
All right. So here’s a question, another question, Scott, with respect to an occupant in a building, corporate occupant in a building, we’re advising here today and we’re advising our clients that they should monitor the fiscal health of the building and the landlord behind the building. What steps should a corporate occupant take if they suspect that the building’s financial health may be at risk?
Yeah. I mean, there’s some financial due diligence, some of it’s public, as well as some of the information behind the scenes. So understanding the debt on the building’s probably the first. There are some triggers that may impact how that landlord is performing. So cash sweeps, nonconformance, things like that. So talking to probably someone within real estate capital markets can help educate you about the current fundamentals financially, how sound they are from a landlord’s perspective.
Right. And I think part two of that is trust your instincts. If you see that maintenance isn’t getting done, you see that there’s more and more vacant spaces in the building, if you see that vendors are changing frequently, if you see that the snow is not getting plowed, if you see that the landlord is shifting from one real estate brokerage company to another, any abruptness in the performance or the habits of the building or the landlord should be triggers for you to start asking questions.
If you see other tenants vacating that property, right, that’s going to be a telltale sign potentially as well.
Yeah. Of course. And we have no negative comments to say about the landlord industry in total.
This economic circumstance will put tremendous pressure on the landlord industry across the board. Between rent affirmance, rent delays, and forbearance defaults, tenants reducing space, all kinds of things going on, landlords are already under tremendous pressure. Some will respond well, some are prepared, some are not. And it’s incumbent upon you as a finance executive to make sure that you’re aware, that you’re focused, and that you include monitoring your landlord’s fiscal health and the fiscal health of them building, which could be two separate things, as part of your overall risk mitigation strategy.
Scott, unless you have any closing thoughts, sorry, do you have any closing thoughts before we say goodbye?
Thanks, Andy. For us I think it’s important for our clients to consider being able to adapt quickly, being able to pivot based on the current circumstances, and that’s going to drive success in helping come up with these business continuity plans. So I wish everybody a safe and healthy weekend, and thank you for the opportunity to present today.
Yeah. Thanks very much for listening to us folks. If you have any questions you should reach out to Scott or to me directly. We do ask you to answer one more question before you go, did you find today’s discussion to be beneficial? We always like to know if we’re doing a good job. Certainly if you have ideas for additional topics or guidance in terms of today’s presentation, Scott and I would love to hear from you, Chris Borgese at CFO Studio would love to hear from you as well.
Either way, if you’d like a copy of today’s presentation, if you have questions, or if there’s any way we can be of service to you, by all means, please give us a call. As I reiterate Scott’s comments, have a wonderful weekend, stay healthy, be safe. We hope to actually see you again some time soon, and God bless.