The past year brought unprecedented changes in all aspects of American life. Offices closed, public places shuttered, and collective focus shifted from spaces enhancing social engagement to spaces promoting social distancing. Thus, while one could describe 2020 as many things, predictable is probably not among them. What is clear is that we have witnessed the acceleration of pre-existing conditions, which will likely continue into 2021, as well as the rise of new issues, largely reacting to the COVID-19 pandemic. In the realm of commercial real estate, at least five major trends have emerged.
Enhancements to commercial facilities
The pandemic has placed public health at center stage. As the economy continues to move from lockdown to phased reopening, the commercial real estate community will continue to focus on convincing the public of the safety of their spaces.
Jamie Thalgott
Rebecca Miltenberger
For existing structures, this initially meant distribution of personal protective equipment but quickly morphed into structural changes, as owners and tenants sought, and will continue to seek, improved HVAC systems, touchless access technology and contract-tracing mechanisms. For projects in development, focus has shifted from dense co-working space and indoor communal areas to site plans incorporating outdoor spaces and socially distanced floor plans.
These amenities and enhancements come at a cost, and initially parties turned to their contracts to determine responsibility for implementing such changes. For new buildings, or in circumstances where landlords took on such costs, we will likely see an increase in common area charges and maintenance expenses, which landlords will ultimately pass on to tenants.
Shifts in commercial uses
The year 2020 witnessed the rapid acceleration of the much-discussed decline of brick-and-mortar retail, as government mandates forced stores to close or reduce capacity to a fraction of former levels. Simultaneously, we witnessed a surge in online shopping, which encompassed retail but also grocery and restaurant delivery. This abrupt change in demand resulted in supply chain issues and shortages of common commodities, as the country struggled with disruption of daily travel.
As a result, the industrial and warehousing market continues to skyrocket, with companies seeking distribution outlets for their vast national supply chains. Such facilities traditionally gravitated to Southern Nevada, with our promise of large tracts of vacant land. However, areas such as West Henderson have steadily developed, leaving less undeveloped acreage. As demand for warehousing continues, we likely will see pressure on our land bank and continued requests to the federal government to expand the BLM disposal boundary.
Expansion of contractual protections
The “boilerplate” in real estate agreements has proven vitally important, as parties sort out issues of payment, maintenance and closure. The force majeure clause in particular, which relieves or delays certain contractual obligations due to acts beyond a party’s control, took center stage.
Unfortunately, force majeure traditionally covers “acts of God,” such as natural disasters, and often contains carve-outs for monetary obligations like payment of rent. Absent such a clause, parties justifying a default must rely on common law doctrines such as impossibility and frustration of purpose, the elements of which are narrow and often hard to prove. We have seen an increase in litigation of such common law doctrines this year, and the resolution of such matters in 2021 and beyond will have a lasting impact on contract interpretation.
Hoping for predictability if current directives continue or re-emerge, parties have begun to carefully craft these provisions to encompass events such as pandemics and restrictive governmental regulations. Parties have also begun negotiating for exceptions and contingencies to prevent defaults of monetary obligations in such circumstances, a drafting trend we anticipate to continue.
Governmental revenue issues
State and local governments have suffered as a result of the business closures in 2020 and, creative budgeting aside, the community will likely feel the fiscal impacts of the shutdowns for years to come. According to a National League of Cities survey from July, 74% of municipalities already had started making unavoidable cuts and 65% had delayed or canceled scheduled capital expenditures and infrastructure development.
Governmental entities plan for such projects years in advance, taking into account their anticipated stream of tax revenue. Importantly, private industry often depends on such projects, and economic development teams use such projects as pitches to help further diversify our local economy. The development community will likely feel the tightening of the purse strings as localities ask builders to upfront infrastructure costs for later reimbursement to keep private development on schedule as public projects face delays.
Uptick in evictions and foreclosures
During 2020, most states invoked gubernatorial emergency powers to enact eviction and/or foreclosure moratoria to prevent a real estate crisis. Many such commercial moratoria have now expired. In Nevada, the governor has urged both lenders/borrowers and landlords/tenants to work together to avoid eviction and foreclosure; however, with capacity restrictions in place and patrons still staying home, many businesses are struggling to make rent and loan payments. Further, many loan agreements require landlords to obtain lender approval before signing workouts with tenants. The closures also have resulted in backlogs at the local court level. Ultimately, the convergence of these factors may result in an uptick in evictions and foreclosures in 2021.
Jamie Thalgott and Rebecca Miltenberger are shareholders at Brownstein Hyatt Farber Schreck.