The COVID-19 pandemic has impacted almost every industry – and will continue to do so into the foreseeable future. Corporate real estate and the real estate investment trust (REIT) industry are examples that have gone from fairly predictable scenarios to areas that have been completely upended.
As a result of the coronavirus, many global employers are debating the need to have their employees work in large offices at all. Barclays’ CEO told CNBC that “crowded corporate offices with thousands of employees may be a thing of the past.” Along with Barclays, Mondelēz, Nationwide, and Twitter are talking about a “permanent shift to work from home and reduced office space.” The reasons range from safety to insurance to cost savings. In fact, a Reuters analysis of “quarterly earnings calls over the past week (week of July 15, 2020) revealed that more than 25 large companies plan to reduce their office space in the year ahead, a move designed to reduce the second-largest expense after payrolls.”
A typical REIT company normally holds millions or billions of dollars in assets in office space. They should have a good understanding of which leases are coming up for renewal or expiration, and which buildings will have extra capacity. They look long-term to fill space and maximize revenue opportunities.
Suddenly, as a result of COVID-19, REITs are faced with tenants who are viewing their office space commitments very differently. Many businesses, like retailers and restaurants, have been closed for months. Some are still closed. Some are re-opening slowly. Some face the prospect of future shut-downs. Businesses have asked landlords for rent concessions, and some U.S. cities and states have issued guidelines supporting rent concessions. Regardless of the reason, tenants are now asking for lease modification options. These include partial terminations and reductions in space.
It is possible to “model” real estate assets and leases on spreadsheets, but it is simply not possible to manage this level of complexity, and do so in near real time, with a spreadsheet. In order to truly understand the total impact of rent concessions and lease modifications across multiple buildings, in different states, throughout the nation, a real estate holding company or a REIT requires sophisticated planning software. These firms must be able to do “what-if” scenario modeling. They need to have a clear picture of capacity, in order to move tenants or divest of assets, if needed. They require a solution that is agile, flexible and dynamic.
It’s hard to predict what will happen over the next few months or even the next year, but it’s clear that the real estate industry will see lots of change, fluctuation in leases, and unpredictability.
Read more blog posts about the impact of COVID-19:
FP&A Done Right: The Office of Finance in the COVID-19 Economy
FP&A Done Right: FP&A Tips for Scenario Modeling During COVID-19
FP&A Done Right: Reforecasting in a COVID-19 World – Best Practices You Can Implement Now