The disruption brought on by the COVID-19 pandemic could lead to changes in leases for the commercial real estate industry impacting both tenants and landlords.
Luciano D’Iorio, Managing Director of Quebec for commercial real estate firm Cushman & Wakefield, said anyone who is looking to renegotiate their lease right now or looking into their lease is certainly going to add clauses that will protect them from such an event like the coronavirus crisis.
“These things happen I guess we say every 100 years or so. So some clauses come and go. Speaking from a Quebec perspective, there used to be clauses in leases that discussed Quebec seceding from the rest of Canada. Of course today in 2020 we don’t see those clauses anymore,” said D’Iorio.
“A lease is an evolving document. And so I think we’re going to have some clauses that are going to be included. It’s a document that has to be win-win for both sides. Both from the investor’s perspective and from the occupier’s perspective.
“I’m sure the tenants are going to want to make sure they protect themselves in a similar situation where if the government comes in and decrees a shutdown then there’s a language for that in the lease. And of course landlords who are typically the sandwich in these situations because they are dependent on their tenants paying rent and they are subservient to their lenders where they have to pay the mortgages, they’re going to want some language to protect them from a similar situation.”
For on the street retail in Montreal and Quebec, some retailers have already started to reopen. The Quebec government has let those retailers open. In Quebec, obviously the essential services were open throughout. With the high street retail, it started to open over the last couple of weeks “and we’re still waiting for word on the malls. I believe it’s going to be the middle of the month. So the effects are different,” said D’Iorio.
“The retailers on the street are starting to open up. They’re starting to see some customers come back. We’ve seen lines forming. Some media reports said it looked like a Boxing Day sale was going on at some of these retailers because people were lined up to comply with social distancing issues. They had to line up on the exterior of the store.
“I think there’s some pent-up demand that’s there. Some of the electronic stores or some of the office supply stores these weren’t opened and were only using delivery services, I think people now just want to physically walk into the stores and actually see and touch what it is they need to supply their home office or just to supply themselves.”
There’s no doubt the retail landscape will see some big changes in the near-term. D’Iorio said that until we see a treatment or vaccine it will be difficult to say how long changes in the retail environment will continue such as wayfinding in stores and plexiglass at cash registers.
“I think going forward we’ll probably see more self-service checkouts. We obviously saw that coming in over the last few years. So we may see more of that and maybe more move towards AI (Artificial Intelligence) where there’s less interaction and less touching of surfaces and touching of products. If you’re handling your own checkout, there’s less interaction with a person. So I would see that maybe we’d see more of that in other businesses beside the ones we’re used to,” said D’Iorio.
Retail is such a tactile experience. People need to touch things. They need to try things. In clothing, they try things on. How will that unfold down the road?
“I think the short term it will be a challenge because when we talk about clothing, trying on clothing, and then how do we treat that clothing once somebody has tried that on, does it have to be steam cleaned and does it have to be removed into a separate area of the store and kept in confinement for 24 hours or so. So certainly in the short term the apparel business is going to have some challenges. It will be interesting to see how they deal with that,” said D’Iorio.
“People need to see and touch and feel and experience. We’re moving towards a retail environment that was more experiential and so people want to be part of something. We can get most things online today but yet we still see lineups in front of electronic stores, we still see lineups in front of different stores that weren’t open during this essential services period. I think there’s hope for a long-term play there.”
In the short-term D’Iorio said there will be change in behaviour as people adjust to the current realities. In the medium and long-term, he believes people are looking to interact with others.
“So real estate is going to play a part of that and real estate is a part of our daily lives. What are people saying to us now? People are saying gee I miss having a coffee, going to the local cafe and just sitting and having a coffee with my friend. Or going out and enjoying a meal,” said D’Iorio. “We all have kitchens but we still miss that restaurant, dining and experience. Short-term for sure challenges but medium and long-term we hopefully as a collective will come out of this and of course it will be dependent on a vaccine or some sort of treatment for it.”
