The COVID-19 pandemic is changing the industrial landscape, but some subsectors are getting hit harder than others. Those affected the most are mainly tenants tied to retail, trade show or convention, construction, recreation and entertainment. Day-to-day operations at larger bulk warehouses have not been as drastically altered, as the tenant mix is generally larger companies that are adjusting their businesses to supply products for the fight against COVID-19 or that are tied to e-commerce operations, which are performing well under current stay-at-home orders and required social distancing.

As of this writing, approximately 20 to 30% of our industrial owners have received requests for rent deferral to mitigate the financial ramifications of COVID-19. Sometimes tenants will ask landlords what is available for relief rather than making a request. We have seen that this is less effective than presenting the landlord with a specific request along with reasoning behind it. Tenants that have more success clearly lay out what they are looking for, give background as to why it will help them and share in detail what the changes will mean for their businesses. The most successful discussions include tenants presenting what they can offer in return, such as offering to payback deferrals over the remaining lease terms or offering to extend their leases. We have also seen situations in which tenants are asking for no base rent but are still offering to cover the utilities, taxes and operating expenses associated with their leases.

When considering requests for deferment or rent reduction, landlords that are willing to participate will consider any combination of adding term to the back end of the lease, amortizing any deferment over the remaining lease term (or potentially over a shorter period) and modifying various lease clauses that are more restrictive for the landlord. Examples of lease clause modifications some landlords might pursue are removal or modification of renewal or expansion rights, adding a relocation option for the landlord or requesting an early lease renewal. However, a request does not guarantee concessions will be offered, and all situations have proven to be unique in finding an adequate solution acceptable to both parties.

Landlords that receive requests are asking for more information to demonstrate that a tenant has legitimate need and is not trying to take advantage of the situation. We are seeing landlords reply to requests with questionnaires that vary in depth. Requested information can include recent tenant financial statements, financial projections pre- and post-COVID-19, details of tenant debts, summaries of creditor concessions and governmental relief that tenants have applied for and received and timelines for paying back the deferments. These questionnaires serve to flush out baseless requests. We have noted that approximately half of tenants that request deferment are filling them out, and we estimate that approximately 25% of the respondents are granted relief.

For both tenants and landlords, clear communication and thorough documentation are crucial. As the long-term effects of the pandemic unfurl, we will be watching to see how the concessions tenants and landlords agree on today influence the industrial market in the coming years. It is also expected that COVID-19 will eventually have a significantly positive impact on the overall industrial market by accelerating the growth of online shopping, requiring businesses to expand their warehouse space to support increased inventory levels and nearshoring to protect against future supply chain disruptions.